New market access negative list consolidates policy trend

The draft negative list contains 232 'restricted' (i.e. subject to approval) and 96 'prohibited' (i.e. off limits) industries. The 2015 Catalogue contains 38 restricted and 36 prohibited categories (down from 79 and 38 in the previous 2011 version, respectively), while the 2015 negative list for all four FTZs has 122 items (down from 139 in the 2014 Shanghai FTZ list).

“The approval requirements for the 232 restricted sectors are already enforced in practice,” said Lixin Wang, an FDI partner at King & Wood Mallesons in Shanghai. Take, for example, food processing: it is restricted under the new list, but you always needed a permit to operate in the industry anyway, he explained. The foods sector is absent from the 2015 FTZ negative list, as well as the 2015 Catalogue (though it lists certain products including agricultural and infant foods as being encouraged), meaning that it is permitted yet still subject to regulatory approval procedures.

“The same goes for the rest of the industries in the restricted category—nothing really comes as a surprise as this consolidation was just the next step,” Wang said.

According to the draft negative list, some restricted investments include the production, sale, export or import of commercially encrypted products, the sale of products designed for the security of internet information systems, telecom businesses and equipment manufacturing, civil aircrafts and agrichemicals. Online financial services including P2P financing and payment processing have also been labeled restricted. All of these currently require a license to operate.

Any new projects that use obsolete technology or pollute the environment, such as dye manufacturing, as well as several areas in coal and steel, are among the 96 prohibited items.

The draft list has also narrowed the scope of some financial institutions, as it forbids commercial banks from offering trusts and securities businesses and cracks down on insurance organizations. This compartmentalization of financial services could limit product diversity as well as mergers within the industry, and also conflicts with the reasoning behind the rumored integration of China's securities, banking and insurance regulators (CSRC, CBRC and CIRC, respectively). See this law digest for more on the categories.

“But overall, the contents and structure of this new list are generally consistent with China's investment policies,” said Yuhua Yang, a partner at Llinks Law Offices, adding that the list lays out target industries in a more transparent and organized manner.

Lawyers China Law & Practice spoke to when the Opinions were issued said this also provides domestic companies wishing to make cross-industry investments with a more convenient and standardized reference.

Meanwhile, foreign investors will need to check this new negative list as well as the Catalogue for whether they are permitted to enter a specific market.

Article 7 of the Opinions states that companies can refer to other laws and regulations for specifics such as qualifications, equity percentages, business model and scope, operations, geographical distribution and land development requirements.

Inbound investors looking at the FTZs in particular must comply with both the FTZ and market access negative lists. The NDRC confirmed this in a press conference Q&A on April 13.

Under the current regime, a foreign company setting up in the Shanghai FTZ will need to apply for the business license at the local Administration for Industry and Commerce (AIC). The investment is green-lit if the authorities conclude that none of the planned business activities fall under the FTZ negative list.

The online application page of the Shanghai FTZ clearly indicates a “negative screening” step in the foreign-invested enterprise (FIE) set up process. The next page is dedicated to “matching” the industry of the proposed investment to those on the FTZ negative list.

This new roadmap to penetrable markets sets the stage for the implementation of the new FDI regime in 2018. A separate foreign investment negative list, which will strictly cater to companies coming from overseas and complement the PRC Foreign Investment Law (more on that here), will be released that year alongside the national negative list for market access. The two will coexist.

When the foreign investment negative list was first announced, lawyers debated whether it would be more restrictive—as China takes a more cautious approach—or relaxed—as the country simultaneously pledges to liberalize the market—than the FTZ list.

“It will take into account the terms under various treaties and free trade agreements China has signed with other countries,” said Donald Chen of King & Wood Mallesons. “The bilateral investment treaty that is being negotiated with the U.S. right now will also have a big impact on the result of the list,” he said.

By Katherine Jo

China's top economic planner, the National Development and Reform Commission (NDRC), and trade authority, the Ministry of Commerce (MOFCOM), have unveiled the Draft Negative List for Market Access (Trial Version), the new bible of industries that are off limits or subject to approval for investment.

This was released by order of the State Council, which detailed plans for the list in its October 2015 Opinions. They proposed that in working towards a unified negative list for market entry, China will first run a trial program in four areas: the cities of Shanghai and Tianjin and the provinces of Guangdong and Fujian. These are also where the pilot Free Trade Zones (FTZs) are located.

The four local governments will submit their comments to the State Council so as to tailor their own versions of the implementing rules to supplement the list, which will be applied in these designated areas until December 31 2017. The national rollout is planned for 2018.

Like the Foreign Investment Industrial Guidance Catalogue (Catalogue) and the FTZ negative list, the market access negative list must be referred to in order to check whether a proposed business falls under one of the categories. But unlike the former two, it caters to all investors, Chinese or foreign.

The draft negative list contains 232 'restricted' (i.e. subject to approval) and 96 'prohibited' (i.e. off limits) industries. The 2015 Catalogue contains 38 restricted and 36 prohibited categories (down from 79 and 38 in the previous 2011 version, respectively), while the 2015 negative list for all four FTZs has 122 items (down from 139 in the 2014 Shanghai FTZ list).

“The approval requirements for the 232 restricted sectors are already enforced in practice,” said Lixin Wang, an FDI partner at King & Wood Mallesons in Shanghai. Take, for example, food processing: it is restricted under the new list, but you always needed a permit to operate in the industry anyway, he explained. The foods sector is absent from the 2015 FTZ negative list, as well as the 2015 Catalogue (though it lists certain products including agricultural and infant foods as being encouraged), meaning that it is permitted yet still subject to regulatory approval procedures.

“The same goes for the rest of the industries in the restricted category—nothing really comes as a surprise as this consolidation was just the next step,” Wang said.

According to the draft negative list, some restricted investments include the production, sale, export or import of commercially encrypted products, the sale of products designed for the security of internet information systems, telecom businesses and equipment manufacturing, civil aircrafts and agrichemicals. Online financial services including P2P financing and payment processing have also been labeled restricted. All of these currently require a license to operate.

Any new projects that use obsolete technology or pollute the environment, such as dye manufacturing, as well as several areas in coal and steel, are among the 96 prohibited items.

The draft list has also narrowed the scope of some financial institutions, as it forbids commercial banks from offering trusts and securities businesses and cracks down on insurance organizations. This compartmentalization of financial services could limit product diversity as well as mergers within the industry, and also conflicts with the reasoning behind the rumored integration of China's securities, banking and insurance regulators (CSRC, CBRC and CIRC, respectively). See this law digest for more on the categories.

“But overall, the contents and structure of this new list are generally consistent with China's investment policies,” said Yuhua Yang, a partner at Llinks Law Offices, adding that the list lays out target industries in a more transparent and organized manner.

Lawyers China Law & Practice spoke to when the Opinions were issued said this also provides domestic companies wishing to make cross-industry investments with a more convenient and standardized reference.

Meanwhile, foreign investors will need to check this new negative list as well as the Catalogue for whether they are permitted to enter a specific market.

Article 7 of the Opinions states that companies can refer to other laws and regulations for specifics such as qualifications, equity percentages, business model and scope, operations, geographical distribution and land development requirements.

Inbound investors looking at the FTZs in particular must comply with both the FTZ and market access negative lists. The NDRC confirmed this in a press conference Q&A on April 13.

Under the current regime, a foreign company setting up in the Shanghai FTZ will need to apply for the business license at the local Administration for Industry and Commerce (AIC). The investment is green-lit if the authorities conclude that none of the planned business activities fall under the FTZ negative list.

The online application page of the Shanghai FTZ clearly indicates a “negative screening” step in the foreign-invested enterprise (FIE) set up process. The next page is dedicated to “matching” the industry of the proposed investment to those on the FTZ negative list.

This new roadmap to penetrable markets sets the stage for the implementation of the new FDI regime in 2018. A separate foreign investment negative list, which will strictly cater to companies coming from overseas and complement the PRC Foreign Investment Law (more on that here), will be released that year alongside the national negative list for market access. The two will coexist.

When the foreign investment negative list was first announced, lawyers debated whether it would be more restrictive—as China takes a more cautious approach—or relaxed—as the country simultaneously pledges to liberalize the market—than the FTZ list.

“It will take into account the terms under various treaties and free trade agreements China has signed with other countries,” said Donald Chen of King & Wood Mallesons. “The bilateral investment treaty that is being negotiated with the U.S. right now will also have a big impact on the result of the list,” he said.

By Katherine Jo