The new and improved bible for foreign direct investment (FDI) has consolidated several traditional industry restrictions and opened up key areas for innovative growth. The Foreign Investment Industrial Guidance Catalogue (Amended in 2017) (2017 Catalogue), issued by the National Development and Reform Commission and the Ministry of Commerce on June 28, 2017, entered into force on July 28, replacing the 2015 Catalogue.

The Negative List system

The 2017 Catalogue brings a key structural change. While the 2015 Catalogue was divided into three categories: encouraged, restricted and prohibited, the 2017 Catalogue has only two: encouraged, and the Special Administrative Measures for Foreign Investment Access (Negative List). The Negative List is further divided into the restricted and prohibited categories.

The Negative List borrows and integrates terms listed in the 2015 Catalogue. The 2017 Catalogue places all restrictions on foreign investment access in China in the Negative List, including those on equity ratios and senior executives. However, restrictions that apply to both domestic and foreign investments and are irrelevant to market access are not included in the Negative List.

This is the first time China comprehensively utilizes a “pre-establishment national treatment (PENT) plus Negative List” management model for foreign investment nationwide (excluding the free trade zones). On top of specific items, the Negative List also lists several “remarks” that apply to all industries and foreign investors, including:

1. Entity type restrictions. “Foreign investors may not engage in business activities as sole/family proprietors, investors in wholly individually-owned enterprises or members of farmers' cooperatives.” This means that, for the most part, foreign investors must engage in business as companies or partnership enterprises. The restricted category, which applies the foreign capital ratio requirement, does not allow the form of a partnership enterprise.
2. Dual compliance. Foreign investors in areas listed both in the encouraged category and the Negative List will enjoy the incentives for encouraged industries, but must simultaneously comply with the relevant market access restrictions. This means that such foreign investments will enjoy preferential policies such as tax deduction and exemption, but still need to strictly comply with restrictions like equity ratio or senior management. For example, despite being in the encouraged category, general airlines for agricultural, forestry and fishing industries are still “limited to equity joint ventures” and subject to certain restrictions such as “the legal representative shall be a Chinese national”.
3. Offshore M&A. Where a domestic company, enterprise or natural person uses an overseas company it/he/she has established or controls legitimately, to acquire an affiliated domestic company, the foreign-invested project/enterprise establishment and relevant changes must be handled according to existing provisions. Specifically, this type of related party M&A must be filed with the Ministry of Commerce for examination and approval pursuant to Provisions for the Acquisition of Domestic Enterprises by Foreign Investors (Revised) (Order of the Ministry of Commerce [2009] No.6).

Opening the gates

The 2017 Catalogue reduces the number of restrictive measures for foreign investment access from 93 to 63, and prioritizes several industries, including services, manufacturing, and mining, to further open them up to foreign investment. The 2015 Catalogue consists of 38 items in the restricted category, 36 items in the prohibited category, and 19 items in the encouraged category with specific restrictions, whereas the 2017 Catalogue contains only 35 restricted items and 28 prohibited items.