Understanding the Negative List Regime in the New Foreign Investment Law Era

Foreign investments in sectors not listed in the Negative List are administrated on the principle of equal treatment between foreign investment and domestic investment

The Negative List Regime and Other Market Access Administrative Measures

When considering investing in a particular sector in China, foreign investors should first look to the Negative List to determine what market access administrative measures may apply to foreign investments in that sector. As provided in Article 34 of the Implementing Regulations, the competent authorities will scrutinize foreign investments according to the Negative List in the course of performing their duties: if any foreign investment involving any sector set out in the Negative List fails to comply with the requirements therein, the competent authorities will not grant any license or approval in relation to the investment and will not handle business registration or other items for the investment and related FIE.

Foreign investments in sectors not listed in the Negative List are administrated on the principle of equal treatment between foreign investment and domestic investment. Such investments may therefore be subject to market access administrative measures that apply equally to foreign and domestic investments.

The respective review processes by the competent authorities can be summarized as follows:

As can be seen from the above, in addition to the Negative List, foreign investment is also potentially subject to: (i) other market access requirements applicable to both foreign investment and domestic investment when applying for industry approvals, licenses or record filing; and (ii) NDRC scrutiny and approval or record filing for a foreign investment project.

Foreign investors should also consult the Negative List for Market Access (2019 Edition) (市场准入负面清单 (2019年版) ) (promulgated by the NDRC and Ministry of Commerce jointly on October 24, 2019), which also sets out industrial sectors in which both domestic and foreign investments are subject to market access administrative measures. The Negative List for Market Access includes two categories: prohibited items and licensed items. However, the Negative List for Market Access is not an exhaustive list. For instance, local competent government authorities may apply implementation measures that are not included in this list to investments in specific areas subject to market access administration.

Chinese government authorities have stated that they will establish a unified Negative List without any other separate market access restrictions for foreign investments…

Negative List Carve-Outs

Chinese government authorities have stated that they will establish a unified Negative List without any other separate market access restrictions for foreign investments, and a number of government departments are in the process of revising relevant market access restrictions or requirements not included in the Negative List. Nevertheless, the restrictions and requirements in the current Negative List are subject to certain carve-outs. The explanatory notes of the Negative List stipulate that measures such as administrative approvals, qualifications and other requirements, and national security, as well as measures applicable to certain sectors (such as the culture or finance sector), which are not stipulated in the Negative List, are subject to separate regulations.

In fact, in addition to the culture and finance sectors, foreign investment in certain other sectors is also subject to market access administrative measures beyond those set out in the Negative List. Take the restrictions on medical institutions for example: the only restriction applicable to the health sector set by the Negative List is investment in medical institutions, which is limited to joint venture and cooperative operation, while according to the Tentative Measures for the Administration of Sino-Foreign Equity/Cooperative Joint Venture Medical Institutions (中外合资、合作医疗机构管理暂行办法), a Chinese shareholder or partner of such a medical institution must hold not less than 30% of the shares or equity interests.

The restrictions set out in the Negative List mainly relate to shareholdings, the form of investment and the requirements for senior management. In contrast, the administrative measures on approval procedures (e.g. pre-establishment approval of foreign investment in telecommunications), approval conditions (e.g. qualifications of shareholders and minimum capital requirements), and national security, are carved out from the Negative List, and are stipulated in industry-specific rules. Such rules include laws and regulations promulgated by the State Council (such as the Regulations for the Administration of Foreign-Invested Banks (外资银行管理条例) and the Provisions for the Administration of Foreign-Invested Telecommunications Enterprises (外商投资电信企业管理规定)), or other rules formulated by competent ministries of the State Council (e.g. the Tentative Measures for the Administration of Sino-Foreign Equity/Cooperative Joint Venture Medical Institutions).

To ensure the national treatment of foreign investment, Article 35 of the Implementing Regulations provides that the competent authorities cannot impose discriminatory requirements on foreign investors with regard to approval conditions, application materials, review procedures, timelines, or other additional requirements, unless otherwise provided in laws promulgated by the National People's Congress or the regulations of the State Council. Accordingly, existing rules formulated by competent ministries of the State Council stipulating additional restrictions or requirements applicable to industry approvals, licenses or record filings for foreign investors may be revised or eliminated in the future to comply with the Implementing Regulations. However, prior to such relevant rules being revised or repealed, foreign investments will still need to satisfy these additional requirements in order to obtain the necessary industry approvals, licenses or record filings.

More Favorable Market Access Measures

With respect to the Negative List, Article 4 of FIL provides that if more preferential treatment concerning access is offered to a foreign investor under any international treaty or agreement that the PRC concludes or is a party to, the relevant provisions in such treaty or agreement prevail.  Such international treaties and agreements include, for example, the Closer Economic Partnership Arrangement between Mainland China and Hong Kong (内地与香港关于建立更紧密经贸关系的安排), the Closer Economic Partnership Arrangement between Mainland China and Macao (内地与澳门关于建立更紧密经贸关系的安排), and their respective follow-up agreements; the Cross-Strait Economic Cooperation Framework Agreement (海峡两岸经济合作框架协议) and its follow-up agreements; free trade zone agreements and investment treaties entered into by and between China and other relevant countries, such as the newly entered Economic and Trade Agreement Between the Government of People's Republic of China and the Government of the United States of America (中华人民共和国政府和美利坚合众国政府经济贸易协议); and international treaties to which China is a party.

It is widely known that the Negative List for Pilot Free Trade Zones may offer more preferential market access measures to eligible investors. Moreover, in certain other pilot zones, some administrative measures in the Negative List may be reduced or removed. For example, in the Beijing National Music Industry Park, the China Beijing Publishing Creative Industry Park and the Beijing National Digital Publishing Base, foreign investors may cooperate with Chinese partners in audio-visual products production business on condition that the Chinese partner has control over business operations and the right to final content review. Under the Negative List, foreign investment in production of audio-visual products is prohibited (see the State Council, Reply on Approving Temporary Adjustments to the Implementation in Beijing Municipality of Relevant Administrative Regulations and Departmental Rules Approved by the State Council (国务院关于同意在北京市暂时调整实施有关行政法规和经国务院批准的部门规章规定的批复) (the Reply of the State Council), promulgated on Nov. 12, 2019, which adjusted the application or implementation of certain requirements in the Negative List).

Interpretation and Implementation of the Negative List

Industry regulators will implement and enforce the Negative List in the course of their reviewing applications for industry approvals, licenses or record filings. In practice, industry regulators may liberally interpret and even broaden the scope of items in the Negative List. For example, according to the Negative List (both the 2018 and 2019 versions), the prohibited sectors in the crop seed industry include two items: (1) investments in R&D and breeding or planting of Chinese rare and unique precious quality varieties, as well as the production of relevant breeding materials (including quality genes in planting, animal husbandry, or aquaculture); (2) investments in the selection and cultivation of genetically modified varieties and the production of genetically modified seeds (fingerlings) in respect of any crop, breeding stock and poultry, and aquatic fingerlings. In a press conference held on Nov. 26, 2018 by the Ministry of Agriculture and Rural Affairs, the official expressly stated that "foreign investment in the seed industry for rice and soybeans is still prohibited at present". Such restrictions are beyond the express language of the relevant items in the Negative List.

For the past three years, the Negative List has been updated each year by removing some restrictions or prohibited or restricted sectors from the previous version. In order to reflect and implement such opening-up measures, the relevant industrial specific laws, regulations and other rules need to be amended or revised accordingly.

… investors might need to consult with the competent industry regulator for window guidance on the implementation of the Negative List

In some cases, such legislative amendments have proceeded on a step-by-step basis. For example, pursuant to the Negative List, performance brokerage agencies are no longer required to "be controlled by Chinese shareholders", but the relevant provisions in the current Regulations for the Administration of Commercial Performances (营业性演出管理条例) have yet to be amended (see the second paragraph of Article 10 of the Regulations which provides that: "In a performance brokerage agency or an entity operating performance venues in the form of Sino-foreign equity joint ventures, the Chinese party to the Sino-foreign equity joint venture shall hold at least 51% of the investment…"). However, pursuant to the Reply of the State Council, the implementation of relevant provisions in the Regulations for the Administration of Commercial Performances is temporarily adjusted in the Beijing Municipality so that investors can set up wholly foreign owned performance brokerage agencies within certain pilot areas to provide services across the country.

In other cases, investors might need to consult with the competent industry regulator for window guidance on the implementation of the Negative List. For instance, the nationwide Negative List provides that the call center business is no longer subject to foreign shareholding restrictions. Currently, the relevant provisions in the Provisions on the Administration of Foreign-Invested Telecom Enterprises (外商投资电信企业管理规定) requiring that foreign shareholding not exceed 50% have yet to be revised. According to consultations with the Ministry of Industry and Information Technology, only offshore call center businesses are free from the foreign shareholding restriction, and domestic call center businesses are still subject to the previous shareholding restriction.

Keeping a close eye on future legislative activities

While the Negative List Regime makes a significant contribution to creating a fairer and more transparent foreign investment environment by consolidating many of the applicable market access measures in a single document, in practice, foreign investors still need to understand and be mindful of the various market access regulatory issues that may apply to their investments. At the same time, foreign investors should keep a close eye on future legislative activities implementing the new legal framework as the Chinese government works towards cleaning up existing administrative measures that are not included in the Negative List, and thereby reducing the regulatory burdens for foreign investors setting up business in China.