China continues its paced but steady easing of official barriers to foreign investment. Two important steps in this direction took effect this July: an updated negative list regulating foreign investment within free-trade zones (the FTZ Negative List) and a new version of the Foreign Investment Catalogue that regulates investment on a national scale (the Catalogue).
Both updates intend to attract and streamline foreign investment in specific industries at a time of rising uncertainty and falling cost competitiveness in China. Several market access barriers remain, but businesses should closely analyse the recent reforms to identify new investment opportunities in liberalised sectors.
The FTZ negative list
Since China’s first FTZ was established in Shanghai in 2013, a negative list created by the State Council regulates the industries where foreign investment is restricted or forbidden within these zones. In any industry that does not appear on the List, foreign companies should receive the same treatment as domestic ones.
This year’s update eliminated 27 out of the 122 restrictions contained in the 2015 version of the list. Positively affected sectors include high-end manufacturing, transportation, mining, IT, and financial and insurance services. These are some of the changes introduced this year across China’s 11 FTZs:
- Rail transport:
- Equipment manufacturers are no longer required to enter into a joint venture (JV) with a domestic partner
- Urban rail transit projects are no longer required to use a minimum of 70% locally-made equipment
- Automotive: restrictions on branding and ownership of IP rights have been eased for new electric car manufacturers
- Shipbuilding and aeronautical manufacturing: JV equity caps have been removed for specific product types
- Pharmaceuticals: investing in the processing of Chinese herbal medicines is no longer prohibited
The foreign investment catalogue
The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) released a new version of the Catalogue regulating foreign investment on a national scale. The new Catalogue is important for two reasons:
- It establishes the first nationwide negative list system. This means that only those industries mentioned in the list require pre-approval from MOFCOM, while the rest can proceed directly into the registration process. Previously, even projects that fell into the “encouraged” category could be subject to pre-approval. For foreign investors, the new system means more clarity and, in some cases, simpler procedures.
- It reduces the number of “restricted” and “prohibited” items from 93 to 63 and adds new sectors to the “encouraged” category. Restrictions in high-tech and green-tech industries have been noticeably eased. This is an encouraging sign that the government acknowledges the role of foreign enterprises in helping China achieve the ambitious goals set forth in the “Made in China 2025” plan.
Positively affected industries include the following:
– Foreign manufacturers of pure electric vehicles are now allowed to establish more than two equity JV enterprises in China
– Equity ratio caps for JVs manufacturing motorcycles and electronic automotive devices have been removed
– Restrictions on highway passenger transport services have been lifted
- Med-tech: The manufacturing of smart first aid medical equipment, and the re-manufacturing of key parts for medical imaging equipment, are now encouraged
- High-tech: The development and manufacturing of augmented and virtual reality devices and of 3D printing equipment components is now encouraged
- Entertainment: The construction and operation of large theme parks and golf courses is no longer prohibited