China Updates Negative Lists for Foreign Investment

On December 27, 2021, the National Development and Reform Commission and the Ministry of Commerce jointly released the Special Administrative Measures for Foreign Investment Access (Negative List) (2021 Edition) (hereinafter referred to as the “Negative List 2021”), as well as the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List) (2021 Edition) (hereinafter referred to as the “FTZ Negative List 2021”, together with the Negative List 2021, the “Negative Lists”), which will replace their respective predecessors and will come into effect on January 1, 2022.

Previously on January 1, 2020, the Foreign Investment Law established administration system of foreign investment access in China by introducing the pre-establishment national treatment policy plus negative list policy as well as eliminating the outdated case-by-case approval policy. Explicitly, under the Foreign Investment Law, the foreign investors are restricted or not permitted to invest in the fields restricted or prohibited by the Negative Lists, as updated from time to time; as for the fields not regulated by the Negative Lists, both domestic and foreign investments would be administrated under the principle of consistency.

The Negative List 2021 and the FTZ Negative List 2021 here provide the most updated road map for such “special administrative measures”[1]. The items subject to “special administrative measures” in the Negative List 2021 have been reduced from 33 to 31 compared to its 2020 edition, and such items in the FTZ Negative List 2021 have been reduced from 30 to 27 compared to its 2020 edition. Compared to their respective predecessors, the Negative Lists have adopted the following updates:

I.  New Requirements on Note

First, according to the Negative List 2021 and the FTZ Negative List 2021, for those domestic enterprises engaging in business in fields prohibited by the Negative List 2021 or the FTZ Negative List 2021 to issue shares and be listed and traded abroad, it shall be approved by the relevant state authorities; also, foreign investors shall not participate in the management of such enterprises, and their shareholding ratio shall refer to the relevant provisions of domestic securities investment management for foreign investors.

According to the officer in the Ministry of Commerce, this provision is intended to improve the accuracy of the Negative Lists. It provides more possibility in policy aspect for domestic enterprises engaging in business in the fields prohibited by the Negative Lists to be listed abroad to meet their diversified financing needs. On the other hand, it helps to broaden the investment channels for foreign investors.

The officer further explains the requirement that “foreign investors’ shareholding ratio shall refer to the relevant provisions of domestic securities investment management for foreign investors” as such foreign investors’ shareholding ratio shall be the same as those foreign investors investing in domestic securities market through the Qualified Foreign Institutional Investors (QFII), Renminbi Qualified Foreign Institutional Investors (RQFII), the interoperability mechanism for stock market transactions and etc., which means, the investment ratio of a single foreign investor and its affiliates shall not exceed 10% of the total number of shares of the company, and the total investment ratio of all foreign investors and their affiliates shall not exceed 30% of the total number of shares of the company. The China Securities Regulatory Commission will take the lead in establishing an inter-departmental regulatory coordination mechanism for overseas listing of enterprises, and is currently pushing forward the revision of the relevant system and rules for overseas listing.

It is also noteworthy that for enterprises engaging in businesses in the fields prohibited by the Negative Lists and being listed both domestically and internationally, the foreign investors’ domestic and foreign listed shares in the same enterprise will be calculated accumulatively. In addition, those existing foreign-listed enterprises who have broken the foreign shareholding ratio regulations before the introduction of the Negative Lists would not be required to reduce the foreign investors’ shareholding ratio according to the Negative Lists.

Second, both the Negative List 2021 and the FTZ Negative List 2021 stipulate that relevant provisions of the Negative Lists will uniformly apply to both domestic and foreign investors. Also, they respectively require that foreign-invested enterprises shall comply with the relevant provisions of the Negative List 2021 when investing in China, and the FTZ Negative List 2021 when investing in Pilot Free Trade Zones in China.

Third, the provision that “the negative list sets out a transition period for the cancellation or relaxation of access restrictions in some fields, which will be cancelled or relaxed on time after the expiration of the transition period” has also been deleted in both the Negative List 2021 and the FTZ Negative List 2021, since such transition period has expired.

II.  Relaxed Requirements on Measures

Both the Negative List 2021 and the FTZ Negative List 2021 have relaxed the regulation in the following manufacturing fields:

First, the restriction on the shareholding ratio of foreign investment in passenger car manufacturing company and the restriction that one foreign company may establish no more than two joint ventures in China for the production of the same type of vehicles have been lifted. Hence, according to the Negative List 2021 and the FTZ Negative List 2021, foreign investors are allowed to hold more than 50% shares in a passenger car manufacturing company; also, one foreign company is allowed to establish more than two joint ventures to manufacture the same type of vehicles in China.

Second, the field of manufacture of satellite television broadcast ground receiving facilities and key components thereof has been open to foreign investment, according to both the Negative List 2021 and the FTZ Negative List 2021.

Besides the relaxed requirements discussed above, the FTZ Negative List 2021, adopts the following additional relaxed measures applicable to Pilot Free Trade Zones:

u  Market surveys is no longer limited to the form of equity joint venture, while the requirement that “for radio and television ratings survey, controlling stake shall be held by the Chinese party” remains. Therefore, foreign investors may invest in the market surveys independently in the Pilot Free Trade Zones.

u  The absolute prohibition of foreign investment in social surveys has been lifted, while it is also required that the share ratio of the Chinese party shall not be less than 67%, and the legal representative shall have Chinese nationality.