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3 August, 2018
On 10 June 2018, the State Council issued a circular focused on actively and effectively using foreign investment to boost economic growth. Among its other measures, the circular shows China’s continued commitment to drive the opening-up of the service sector by abolishing or easing restrictions on foreign investment in transport, trade and logistics, professional services and other areas. The circular also includes measures to ramp up efforts to stress test opening-up other areas to foreign investment, such as telecommunications and culture and tourism, through pilot programmes in free trade zones. Along with the circular, China has recently issued several measures to further open up its service sector.
For more information about the opening-up measure for the financial services sector, please see our previous e-bulletin, China’s New Liberalisation Policies for the Financial Sector.
BACKGROUND
On 1 June 2018, prior to issuing the circular, the State Council laid out its measures to expand the opening-up of the service sector in certain pilot regions in its Official Reply on Agreeing with Deepening the Pilot Program on Innovative Development of Trade in Services.
A two year pilot programme commenced on 1 July 2018 to expand the opening-up of the service sector in 17 provinces and municipalities, namely Beijing, Tianjin, Shanghai, Hainan, Shenzhen, Harbin, Nanjing, Hangzhou, Wuhan, Guangzhou, Chengdu, Suzhou, Weihai, Xiong’an New Area in Hebei, Liangjiang New Area in Chongqing, Guian New Area in Guizhou and Xixian New Area in Shaanxi. These pilot regions will phase in measures to facilitate opening-up the service sector. The pilot proposes broadening the two-way opening-up of emerging service areas, exploring ways of optimising modes of cross-border payment in the service trade market, facilitating overseas consumption and natural person movement, easing or eliminating restrictions step-by-step and making orderly progress in opening-up.
The circular (entitled the Circular on Several Measures Concerning the Active and Effective Use of Foreign Investment to Boost High-quality Economic Growth) was issued on 10 June 2018. It was followed by two sets of implementing measures in late June 2018, both of which reflect the opening-up of the service sector and further lift or remove foreign investment restrictions in that sector. These measures are the Special Administrative Measures for Access of Foreign Investment (2018 Edition) (2018 Negative List) released on 28 June 2018 and the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (2018 Edition) (2018 FTZs Negative List) released on 30 June 2018.
For more information on the foreign investment liberalisation measures in the 2018 Negative List and 2018 FTZs Negative List, please see our e-bulletin, China Further Liberalizes its Foreign Investment Regime.
KEY DEVELOPMENTS ON FOREIGN INVESTMENT IN THE SERVICE SECTOR
1. COOPERATIVE PRODUCTION OF TV PLAYS AND FILMS
Foreign investment in China’s culture and entertainment sectors is generally prohibited. One of the few areas where foreign investment is permitted, with the approval of the competent authorities, is the cooperative production with Chinese parties of TV plays (including TV cartoons) and films.
China operates a license system for such Sino-foreign cooperative production. Although the restriction requiring cooperative production to be approved by the competent authorities has been removed from the 2018 Negative List, the Chinese parties still need to apply for approval from the State Administration of Radio and Television for TV plays and the Publicity Department of the Central Committee of the Communist Party of China for films in accordance with the existing provisions. The completed TV plays or films are subject to examination by the original approval authorities before any licence for their distribution or public showing will be granted.
2. SURVEYING AND MAPPING SERVICES
The 2018 Negative List removes the restrictions on the shareholding limits for foreign investors in surveying and mapping companies. This development means that foreign investors are now permitted to run wholly foreign-owned entities in the surveying and mapping industry. However, prohibitions on foreign investment in a number of specific mapping and surveying services (such as aerial photography for surveying and mapping and administrative region boundary surveying and mapping) remain. In particular, foreign investment in navigation electronic map services, which are critical to the connected and autonomous vehicle industry, remain prohibited. Therefore, foreign investors still need to rely on Chinese parties to provide navigation electronic map services.
3. INTERNATIONAL MARINE TRANSPORTATION AND INTERNATIONAL SHIP AGENCY SERVICES
The 2018 Negative Lists removes the requirement that foreign investment in international marine transportation companies be limited to equity or cooperative joint ventures. This means that foreign investors can now set up wholly foreign-owned entities to carry out international marine transportation services.
Additionally, the 2018 Negative List revises the restriction on vessel agencies which previously applied to both domestic and international vessel agencies. Now, the requirement that a Chinese party must hold a majority of the shares in a vessel agency will only apply to domestic vessel agencies, paving the way for wholly foreign-owned international vessel agencies.
Foreign-invested companies need to apply to the Ministry of Transport for an International Shipping License (for international marine transportation companies) or for an International Ship Agency Qualification Registration Certificate (for international ship agency companies).
4. TELECOMMUNICATIONS SERVICES
The existing regulatory regime restricts foreign investment in telecommunications enterprises. The proportion of shares controlled by foreign investors in a foreign-invested telecommunications enterprise must not exceed 49% for enterprises engaged in basic telecommunications services (other than radio paging services), or 50% for enterprises engaged in value-added telecommunications services (including radio paging businesses provided as part of their basic telecommunications services).
The pilot programme, however, removes the limitation on foreign investment in service outsourcing enterprises providing call centre services which are fully orientated to the overseas market (i.e. where both the service targets and their clients are located overseas).
5. CONSTRUCTION ENGINEERING DESIGN SERVICES
The pilot programme removes the existing requirements for the foreign investor in foreign-invested construction engineering design enterprises to submit details of their engineering design achievements when first applying for approval of engineering designs. The existing regime requires submission of two or more engineering design achievements from outside of China, with at least one from the foreign investor’s local country or region. Under the pilot programme, submitting prior engineering design achievements will not be required.
6. TRAVEL AGENCY SERVICES
On 25 December 2017 , the State Council suspended the implementation of relevant restrictions on foreign-invested travel agencies under the Regulations on Travel Agencies now allowing qualified Sino-foreign equity joint venture travel agencies registered within pilot free trade zones to engage in providing outbound tourism (other than to Taiwan) business services to Chinese mainland residents.
7. OTHER AREAS OF THE SERVICE SECTOR OPENED-UP BY THE 2018 NEGATIVE LIST
The 2018 Negative List removes the requirement for Chinese parties to hold a majority shareholding in railway passenger transport companies and companies engaged in the construction and operation of trunk railway line networks.
The requirement for a Chinese party to be the controlling shareholder has also been removed in respect of foreign-invested companies engaged in the construction and operation of gas stations where more than 30 chain gas stations are funded by the same foreign investors or will be selling oil products of different varieties and brands from multiple suppliers.
OUR OBSERVATIONS
These latest developments to open up the service sector will attract and encourage foreign investment in these areas. However, it should be noted that some measures are currently only available in special regions i.e. the free trade zones or the specified pilot regions. We expect these measures to be rolled out to other regions or to the whole country following the pilot programme once their efficiency has been tested.
The opening-up measures only apply to certain areas of the service sector, with areas connected to publication, culture and entertainment still heavily restricted. For foreign investors interested in these sectors, it remains unclear as to whether such areas will be liberalised in the future. However, the circular and the pilot programme show a continued commitment by China to open up further business sectors to foreign investors which is promising for future liberalisation.
For further information, please contact:
Karen Ip, Partner, Herbert Smith Freehills
karen.ip@hsf.com
