The application of management system of Negative List in foreign-funded enterprise establishment

The National Development and Reform Commission and the Ministry of Commerce jointly issued the Special Administrative Measures for Access of Foreign Investment (Negative List) (2020 Edition) (Order Nos. 32) on 23 June 2020. This negative list took effect on 23 July 2020 and superseded the previous list.

Under the management system of negative list for foreign investment, the Ministry of Commerce of the PRC implements a principle, that any foreign investment and domestic investment shall be treated uniformly. The Special Administrative Measures for Access of Foreign Investment (2020 Edition) (“Negative List”) is currently applied in establishing foreign-funded enterprise. The local Administration for Market Regulation manages the foreign-funded enterprise establishment.

The new Negative list (2020 Edition) is aimed at easing curbs on foreign investment and widening access for foreign investment to agriculture, mining, manufacturing and service industries.

Compared with the 2019 Editions, the 2020 negative lists are much shorter and feature further opening up in the services, manufacturing and agriculture sectors. The negative list of foreign investment access nationwide has been reduced from 40 items to 33.

The items are divided into prohibitions and restrictions. Prohibitions refer to the foreign investment in certain industry sectors shall be prohibited. For example, investment in postal companies and domestic express mail business shall be prohibited. Restrictions refer to certain industry sectors would be invested by foreign investors under certain condition. There are 6 conditions in the Negative List: 1. The controlling stake shall be held by the Chinese Party, such as construction and operation of nuclear power plants; 2. The comparative controlling stake shall be held by the Chinese Party, such as construction and operation of civil airports; 3. The Chinese Party shall hold no less than 34% of the shares, such as the selection of new wheat varieties and seed production; 4. The Chinese Party shall hold no less than 50% of the shares, such as complete automobile manufacturing (except for special purpose vehicles, new energy vehicles and commercial vehicles); 5. The investment is limited to the form of equity joint venture, such as medical institution; 6. The legal representative shall be a Chinese citizen, such as public air transport companies. China will apply national treatment to the investment beyond the Negative List.

For the establishment of foreign-funded enterprise, the implementation of Negative list is reflected in 2 requirements: 1. Foreign investor commitment; 2. Formal examination by registration authority.

Foreign investor commitment means that foreign investor shall promise the establishment of the foreign-funded enterprise meets the requirement of the Negative List. Take Beijing as example, for establishing foreign-funded enterprise, the foreign investor shall fill in the application form of enterprise establishment, sign in the column of Foreign Investor Commitment in the form, and promise that the application conforms to the Negative List.

Formal examination by registration authority means that the local Administration for Market Regulation will review the administrative formalities by reference to the Negative List. For different industry areas, according to the Negative List, foreign investors may face one of the following 3 results: 1. For the investment beyond the Negative List, the local Administration for Market Regulation will register under the principle that domestic investment and foreign investment shall be treated uniformly; 2. For the investment in any field restricted by the Negative List, the local Administration for Market Regulation will register if foreign investors conform to the investment conditions of ratio of shares, the nationality of legal representative and other conditions; 3. For the investment in any field prohibited by the Negative List, the local Administration for Market Regulation will not register.

Published at the same time were two other indicators of China’s opening-up: The Special Administrative Measures for Access of Foreign Investment in Pilot Free Trade Zones (Negative List) (2020 Edition), this list for pilot free trade zones has been reduced from 37 items to 30.

Compared with the national negative list, the FTZ negative list usually has a higher degree of opening up to foreign investment. For example, in 2019, the 2019 FTZ Negative List already allowed foreign investors to invest in the fishing of aquatic products in sea areas and inland waters governed by China, and that businesses engaging in the printing of publications were no longer required to be controlled by Chinese investors. However, the prohibition and restriction over these areas are still not relaxed under the 2020 National Negative List.

Following are some of the specific measures/major principles that might interest you:

1. Accelerating the opening up of key areas of the services industry. In the financial sector, foreign ownership caps are removed on securities, securities investment and fund management, futures and life insurance companies.

2. Easing access restrictions on manufacturing and agriculture, such as those related to commercial vehicle manufacturing and radioactive mineral smelting

3. Continuing the pilot programmes in the pilot free trade zones. In the pharmaceutical sector, the foreign investment ban on prepared decoction pieces of herbal medicine will be removed. In education, wholly foreign-owned institutions providing vocational education will be allowed.

This article is only an overview of China’s latest negative lists for foreign investment access. When investing, foreign investors may also need to consider the additional access requirements equally applicable to Chinese and foreign investment, the further preferential policies in specific regions, and so forth. Should you require further information, please do not hesitate to contact us.

View more details, please visit http://www.oelawfirm.com or contact:

Ms. Su Yan via suyan@oelawfirm.com

Ms. Luo Chengjie via luochengjie@oelawfirm.com

Ms. Jiang Deyu via jiangdeyu@oelawfirm.com

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