China overhauls investor access with negative list fix

It provides the same template as the negative list of the FTZs, but whether it will replace the latter with a more obstructive or relaxed list remains to be seen.

Some practitioners say that the market access list could widen entry, as Han Kun Law Offices' David Tang noted, “The overall trend is liberalization and moving toward market-oriented policies.”

Sun Hong of Norton Rose Fulbright in Shanghai said, however, that there is a chance it could go the other way: “The new list could be more restrictive than that for the FTZs, since it covers a wider region and the regulators may take a more cautious approach.”

The two-year scheme allows regulators to test the waters and revise the list if needed before the full-fledged national market access negative list is unveiled in 2018.

The actual pilot list, along with its implementing rules, is yet to be released.

Foreign Investment Law

The nationwide implementation of the negative list will also see a separate negative list for foreign investment. The latter will accompany the PRC Foreign Investment Law, which is expected to be passed by legislators in 2018, and replace the Foreign Investment Industrial Guidance Catalogue (Catalogue) (the current 2015 edition will be the last).

From 2018, the national market access negative list and the foreign investment negative list will coexist. One will cater to all investors, while the other will only pertain to those from overseas and contain features relevant to FDI like key sensitive sectors, national security and competition, said Hong. “This will take into account various treaties and free trade agreements signed with other countries,” she said.

“It will also probably combine the policies in particular industries as well as those China has agreed to as per the WTO,” said Tang. He said the list will most likely detail specific criteria such as participants' qualifications and equity/ownership ratios.

The foreign investment negative list will also omit the “encouraged” category as currently provided in the Catalogue, as the idea is for the regulators to open the gates, step back and only monitor or block access to restricted or prohibited areas. “The government is trying to implement national treatment for all market players, so there is no need for this category,” said Tang, adding that tax treatment and incentives like subsidies will be carried out at the local level.

However, lawyers who China Law & Practice spoke with in January, when the draft Foreign Investment Law was released, raised the question of whether foreign companies will receive equal treatment in practice.

Transparency and investment

The goal of the market access list is to identify the open industries and push domestic businesses – especially SMEs and entrepreneurs – to invest, said Norton Rose Fulbright's Hong. “The overall market entry policy will ease access and align with last year's changes in the PRC Company Law, which relaxed capital requirements, to create a friendlier regime,” she said.

With its increased transparency and organization of sectors, the list also comes at a time when the government is pushing for economic diversification and inviting private investment in businesses trimmed off from sprawling state-owned enterprises (SOEs).

“It's the first time domestic players will have a comprehensive negative list to refer to,” said Tang. “Previously most Chinese companies thought they could invest only if the government said yes,” he said.

More monitoring

While the two negative lists will offer both domestic and foreign investors a clearer regime for market access, practitioners said that regulators must step up monitoring and inspection, as well as establish and implement an effective credit system.

“If the entry rules are made easier for everyone, there will need to be a transparent system enabling authorities to penalize violators and to allow society to know what is going on,” said Hong.

This means further developing infrastructure, such as the online platform of the SAIC [State Administration for Industry and Commerce], through which enterprises are required to file their annual reports and disclose information including shareholder capital and structure, registered IP, administrative approvals and penalties.

The platform began with the SAIC's Tentative Regulations for the Publication of the Information of Enterprises, which came into effect on October 1 2014 but still requires full integration with, and implementation by, other government bodies.

By Katherine Jo

China's new regime for guiding investment involves a unified negative list for market access, with a separate list specifically for foreign investors expected to be released in 2018.

On October 27, the State Council issued the Opinions on Implementing a Negative List System for Market Access, which present transparency as the running theme and also emphasize market innovation, competition and industry upgrades.

The negative list will apply to both foreign and domestic parties, and will be implemented on a trial basis in all of Shanghai, Guangdong, Fujian and Tianjin – the municipalities/provinces where the four pilot Free Trade Zones (FTZs) are located – from December 1 this year to December 31 2017.

The scheme will be officially rolled out on a national scale in 2018.

Free Trade Zones

The pilot list will consist of two categories: “restricted”, meaning investments in these industries are subject to approval, and “prohibited” containing sectors that are off limits.

It provides the same template as the negative list of the FTZs, but whether it will replace the latter with a more obstructive or relaxed list remains to be seen.

Some practitioners say that the market access list could widen entry, as Han Kun Law Offices' David Tang noted, “The overall trend is liberalization and moving toward market-oriented policies.”

Sun Hong of Norton Rose Fulbright in Shanghai said, however, that there is a chance it could go the other way: “The new list could be more restrictive than that for the FTZs, since it covers a wider region and the regulators may take a more cautious approach.”

The two-year scheme allows regulators to test the waters and revise the list if needed before the full-fledged national market access negative list is unveiled in 2018.

The actual pilot list, along with its implementing rules, is yet to be released.

Foreign Investment Law

The nationwide implementation of the negative list will also see a separate negative list for foreign investment. The latter will accompany the PRC Foreign Investment Law, which is expected to be passed by legislators in 2018, and replace the Foreign Investment Industrial Guidance Catalogue (Catalogue) (the current 2015 edition will be the last).

From 2018, the national market access negative list and the foreign investment negative list will coexist. One will cater to all investors, while the other will only pertain to those from overseas and contain features relevant to FDI like key sensitive sectors, national security and competition, said Hong. “This will take into account various treaties and free trade agreements signed with other countries,” she said.

“It will also probably combine the policies in particular industries as well as those China has agreed to as per the WTO,” said Tang. He said the list will most likely detail specific criteria such as participants' qualifications and equity/ownership ratios.

The foreign investment negative list will also omit the “encouraged” category as currently provided in the Catalogue, as the idea is for the regulators to open the gates, step back and only monitor or block access to restricted or prohibited areas. “The government is trying to implement national treatment for all market players, so there is no need for this category,” said Tang, adding that tax treatment and incentives like subsidies will be carried out at the local level.

However, lawyers who China Law & Practice spoke with in January, when the draft Foreign Investment Law was released, raised the question of whether foreign companies will receive equal treatment in practice.

Transparency and investment

The goal of the market access list is to identify the open industries and push domestic businesses – especially SMEs and entrepreneurs – to invest, said Norton Rose Fulbright's Hong. “The overall market entry policy will ease access and align with last year's changes in the PRC Company Law, which relaxed capital requirements, to create a friendlier regime,” she said.

With its increased transparency and organization of sectors, the list also comes at a time when the government is pushing for economic diversification and inviting private investment in businesses trimmed off from sprawling state-owned enterprises (SOEs).

“It's the first time domestic players will have a comprehensive negative list to refer to,” said Tang. “Previously most Chinese companies thought they could invest only if the government said yes,” he said.

More monitoring

While the two negative lists will offer both domestic and foreign investors a clearer regime for market access, practitioners said that regulators must step up monitoring and inspection, as well as establish and implement an effective credit system.

“If the entry rules are made easier for everyone, there will need to be a transparent system enabling authorities to penalize violators and to allow society to know what is going on,” said Hong.

This means further developing infrastructure, such as the online platform of the SAIC [State Administration for Industry and Commerce], through which enterprises are required to file their annual reports and disclose information including shareholder capital and structure, registered IP, administrative approvals and penalties.

The platform began with the SAIC's Tentative Regulations for the Publication of the Information of Enterprises, which came into effect on October 1 2014 but still requires full integration with, and implementation by, other government bodies.

By Katherine Jo