In accordance with the State Council's Opinions on Implementing a Negative List System for Market Access (国务院关于实行市场准入负面清单制度的意见) issued in October 2015, the contemplated negative list system consists of:

• a negative list for market access which equally applies to both domestic and foreign investors (Market Access Negative List); and

• negative lists for foreign investment that set out special administrative measures specifically applicable to foreign investment (Foreign Investment Negative Lists).

The first Market Access Negative List in the name of the Draft Negative List for Market Access (Trial Version) (市场准入负面清单草案（试点版）) was issued in March 2016 and has been implemented on a trial basis in four provinces/municipalities (Shanghai, Tianjin, Fujian, and Guangdong) for a given period—until the end of 2017. This is likely to be expanded nationwide after 2017 if the trial turns out to be successful.

The Foreign Investment Negative Lists have two forms including:

• the FTZ Negative List which applies only to the pilot free trade zones; and

• the negative list in the latest edition of the Foreign Investment Industry Guidance Catalogue (Amended in 2017) (外商投资产业指导目录) (2017 Foreign Investment Catalogue), which applies to foreign investment on a nationwide basis except in the pilot free trade zones.

Both the FTZ Negative List and the 2017 Foreign Investment Catalogue contain special administrative measures applicable to foreign investors. As the pilot free trade zones serve as experimental fields for regulation in all areas including foreign investment, many of the advancements in the FTZ Negative List appear to have been adopted in the 2017 Foreign Investment Catalogue. For example, the 2017 Foreign Investment Catalogue similarly adopts a negative list that includes prohibited and restricted industries (including some encouraged ones that have foreign shareholding restrictions in the preceding 2015 version) and excludes content that has specifically been carved out by the 2017 FTZ Negative List.

It is expected that the FTZ Negative List will continue to serve as guidance for the negative list in future versions of the Foreign Investment Catalogue. The ultimate goal is to consolidate both lists to produce a single Foreign Investment Negative List applicable to all foreign investment in China, when the market access policies for foreign investment within and outside the pilot free trade zones are made uniform.

More zones

Unlike its previous editions, the 2017 FTZ Negative List governs all pilot free trade zones across the country. Following the establishment of the first pilot free trade zone in Shanghai in 2013, the State Council approved the second cohort of four zones in 2014 and the third group of seven zones in 2016.

The 2017 FTZ Negative List now applies to all 11 pilot free trade zones located in the municipalities and provinces of Shanghai, Guangdong, Fujian, Tianjin, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shaanxi.

The progress achieved by the 2017 FTZ Negative List is illustrated in the table below:

Fewer restrictions

The 2017 FTZ Negative List contains only 95 items of special administrative measures, which is roughly half of the 190 items in the first version of the FTZ Negative List four years ago.

Compared with the preceding 2015 version of the FTZ Negative List, 27 special administrative measures have been removed from 19 sectors in eight categories. The removal of certain sectors is mainly due to three reasons:

• they have been further opened up for foreign investment in the pilot free trade zones. Relevant sectors include, but are not limited to, aviation manufacturing, rail transportation equipment manufacturing, road transportation, banking services, insurance business, accounting and auditing, and other commercial services;

• they have been consolidated with other similar sectors, such as mineral smelting and rolling processing; or

• the relevant prohibitions/restrictions equally apply to both domestic and foreign investors and are to be covered by a more general negative list.

Putting aside any deletions from a drafting perspective, the removal of special administrative measures in the high-end manufacturing (e.g. aviation and automotive manufacturing) and financial (e.g. banking and insurance) industries is largely policy driven and brings new opportunities for foreign investors. These relaxations can attract more foreign investment in smart and innovative product manufacturing in the pilot free trade zones, as well as promote participation in the Chinese financial sector and enhance the connection between domestic and international financial markets.

Relaxed M&A approvals

The special administrative measures in the FTZ Negative List include both industry-specific measures and general restrictive measures applicable to all industries. The general restrictive measures under the 2017 FTZ Negative List only include the following three items:

• foreign investors must not engage in business activities in the capacity of sole proprietors, investors of sole proprietorship enterprises, or members of specialized farmers' cooperatives;

• foreign investors must not circumvent any foreign investment prohibitions or foreign shareholding restrictions by way of establishing foreign-invested partnership enterprises; and

• matters relating to the merger and acquisition of affiliated domestic enterprises by overseas companies established or controlled by any domestic company, enterprise or natural person (Round-trip M&A) will be governed by currently applicable regulations.

The key amendment is that only Round-trip M&As will be subject to the special administrative measures (i.e. regulatory approvals), which is different from the 2015 FTZ Negative List where items that were subject to the special administrative measures included all M&As of domestic companies by foreign investors, strategic investments in domestic listed companies by foreign investors, and capital contributions by way of injecting increased equity interests into domestic companies. The 2017 Foreign Investment Catalogue adopts the same approach towards acquisitions of domestic targets by foreign investors. Only Round-trip M&As will be subject to regulatory approvals going forward.

This change is an important advancement in the foreign investment regulatory regime. M&As of Chinese targets that are not in any restricted or prohibited industries by unrelated foreign investors will only be subject to a straightforward filing formality. This is similar to the regulatory formalities currently applicable to the establishment and other corporate changes of foreign-invested enterprises. The move will greatly simplify regulatory procedures for M&A transactions, reduce transactional costs for parties, and allow for more flexibility in deal structures and terms.

Other rules may apply

The 2017 FTZ Negative List does not purport to be an exhaustive source of all restrictions or special administrative measures applicable to foreign investors. Other regulations should be referred to when assessing any potential foreign investment to the extent applicable.

As previously mentioned, the 2017 FTZ Negative List no longer lists any prohibitions/restrictions that equally apply to both domestic and foreign investors. Items removed for this reason include:

• Prohibition on investments in the processing of Chinese medicines that are listed in the Regulations for Administration of the Protection of Wild Medicinal Material Resources (野生药材资源保护管理条例) and the List of Chinese Rare and Endangered Protected Plants (中国稀有濒危保护植物名录).

• Prohibition on investments in education institutions that provide military, police, political and communist education as well as education in other special fields.

• Qualification accreditation requirements for foreign-related survey agencies and approval requirements for foreign-related social investigation projects.

• Restriction on the construction and operation of large theme parks.

The 2017 FTZ Negative List does not include any special administrative measures relevant to national security, public order, public culture, financial prudence, government procurement, subsidies, special procedures, non-profit organizations and taxation. These will be governed by existing provisions in other specific regulations. For example, any foreign investment in the pilot free trade zones involving a national security issue will be subject to security review in accordance with the Measures for the National Security Review of Foreign Investment in the Pilot Free Trade Zones (Trial for Implementation) (自由贸易试验区外商投资国家安全审查试行办法).

Investors from Hong Kong, Macau and Taiwan should refer to the 2017 FTZ Negative List. However, to the extent that there are more favorable measures in cooperation agreements between these regions and mainland China (i.e. the Mainland and Hong Kong Closer Economic Partnership Arrangement, the Mainland and Macau Closer Economic Partnership Arrangement and the Cross-Straits Economic Cooperation Framework Agreement), those more favorable measures will apply.

Moreover, free trade agreements concluded by China with other countries will also prevail if their relevant measures are applicable to the pilot free trade zones and prove more favorable to qualified foreign investors.

Lynn Yang, Partner, and Tony Zhong, Of counsel
Norton Rose Fulbright
Shanghai