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published on 3 February 2022 | reading time approx. 3 minutes
by Christina Gigler
China generally has three negative lists, one of which is applicable to both Chinese and foreign investment (namely the Negative List for Market Access, “Negative List”) and two, which are applicable to foreign investment only, namely the Special Administrative Measures (Negative List) for Foreign Investment Access (“FDI Negative List”) and the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (“FTZ FDI Negative List”).
The negative lists are usually updated on an annual basis and determine which industry sectors are prohibited or restricted for foreign investments in China. All industry sectors not mentioned in the lists are in general permitted.
The FDI Negative List in principle applies nationwide, whereby the FTZ FDI Negative List only applies with respect to investment activities in free trade zones in China, which usually offer broader investment access.The draft version of the Negative List for Market Access has been unveiled in October 2021 and solicited public comments. For more information, take a look at our last update here.
The FDI Negative List and the FTZ FDI Negative List were both published on 27 December 2021, and have now been in force since 1 January 2022. At the same time as the entering into effect of the FDI Negative List 2021 and the FTZ FDI Negative List 2021, the previous lists were repealed and became invalid.
In the previous FDI Negative List 2020 and FTZ FDI Negative List 2020 it was stated that, with the exception of special purpose vehicles, new energy vehicles and commercial vehicles, the Chinese shareholder shall have no less than 50% of the shares in automobile whole vehicle manufacturing, and one foreign investor may establish only maximum two joint ventures in China to manufacture the same type of whole vehicles. Such restrictions have been abolished. This means that, starting from 1 January 2022, foreign investors are now allowed to establish wholly foreign-owned enterprises ("WFOE") for whole vehicle manufacturing (including special purpose vehicles, new energy vehicles, commercial vehicles and passenger vehicles), and are no longer required to cap the number of joint ventures in China for the same type of whole vehicles.
The manufacturing of ground receiving facilities and key parts for satellite television broadcasting has been deleted in the FDI Negative List 2021 and the FTZ FDI Negative List 2021. However, it remains on the Negative List for Market Access, meaning that both Chinese and foreign investors are required to receive regulatory approval to invest in this sector.
Thus, the manufacturing industry has been completely deleted in the FTZ FDI Negative List 2021, whereas there remain two entries concerning the manufacturing industry in the FDI Negative List 2021, namely the printing of publications and the production of certain Chinese medicines.
In the FTZ FDI Negative List 2020 it had been clarified that market surveys shall only be limited to the form of joint ventures, and that for radio and television listening and rating surveys, the controlling stake had to be held by the Chinese party. Now, the requirement to set up a joint venture with regards to foreign investment in market research has been abolished.
The prohibition to invest in social surveys has been deleted for foreign investment in pilot free trade zones, but it is required that the proportion of Chinese shares in social surveys shall not be less than 67%, and the legal representative shall have Chinese nationality. The prohibition still exists in the FDI Negative List 2021, which is applicable outside of pilot free trade zones. In radio and TV polls and audience rating surveys, the Chinese side of the joint venture still has to hold the majority of shares, so nothing changes in this respect.
It is clarified that domestic and foreign investors are uniformly subject to the relevant provisions of the Negative List for Market Access. Also, it is stated that foreign-invested enterprises ("FIEs") shall comply with the relevant provisions of the FDI Negative List 2021 and the FTZ FDI Negative List 2021 when investing within the territory of China. In fact, this is not new and has already previously been implemented by the Chinese authorities in practice. Although FIEs are actually regarded as domestic companies, they still fall under the FDI Negative List and the FTZ FDI Negative List.
Furthermore, domestic enterprises engaged in businesses in areas prohibited by the FDI Negative List 2021 or the FTZ FDI Negative List 2021 that issue shares overseas and are listed and traded overseas shall be reviewed and approved by the relevant competent Chinese authorities. Overseas investors purchasing shares in overseas IPOs of Chinese companies in sectors prohibited for foreign investment may not participate in the operation or management of these companies and their equity ratio shall comply with restrictions set forth in relevant regulations governing securities investments in domestic companies by foreign investors.
Whether the FDI Negative List 2021 and the FTZ FDI Negative List 2021 have any impact on overseas listings of VIE-structured companies is not fully clear for the time being.
The negative lists in the past have already shown that China tends to shorten the negative lists step by step. In the new FDI Negative List 2021 and FTZ FDI Negative List 2021, too, prohibitions and restrictions have been lifted in certain industry sectors.
The FDI Negative List 2021 has been reduced by two entries (from 33 to 31) in the manufacturing industry, whereas the FTZ FDI Negative List 2021 has been reduced by three entries (from 30 to 27) in the manufacturing industry and in the leasing and business services industry.
This can be considered as a positive sign. However, there is still a long way to go until national treatment will be achieved, not only with regards to the negative lists, but also regarding other regulatory and bureaucratic hurdles.
Sebastian Wiendieck
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