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16 July, 2018
The Chinese Government has issued three new regulations to further liberalize and transform its foreign investment regime.
The regulations further open the Chinese market to foreign investment, particularly in the financial services sector and manufacturing sector, and streamline filing and registration procedures for foreign investment projects.
BACKGROUND
The three new regulations are:
Measures for the Record-filing of the Incorporation and Changes of Foreign-invested Enterprises, issued by the Ministry of Commerce (MOFCOM) on 29 June 2018, effective 30 June 2018;
The 2018 version of the Foreign Investment Market Entry Special Management Measures (National Negative List) issued by the National Development and Reform Commission (NDRC) and MOFCOM on 28 June 2018, which will take effect on 28 July 2018; and
The 2018 version of the Free Trade Zone Foreign Investment Market Entry Special Management Measures (FTZ Negative List) issued by NDRC and MOFCOM on 30 June 2018, which will take effect on 30 July 2018.
These regulations replaced or will replace earlier versions when effective. The 2017 versions of the regulations are covered in our previous e-bulletin, China Advances Its Foreign Investment Regime.
HIGHLIGHTS
The new filing measures
The new filing measures simplify the procedures for a foreign investor establishing a foreign invested enterprise (FIE), or when a non-FIE is converted into an FIE, for instance through a merger or an acquisition.
Previously investors had to follow two separate procedures to file with MOFCOM and register with the Administration for Industry and Commerce (AIC).
Investors will now be able to submit the information required for MOFCOM filing when they apply to the AIC for the establishment of the FIE, with their application handled through “one window, one application form”.
However, the above “one window, one application form” measure does not apply to any change of filing for existing FIEs. Existing FIEs must still apply for MOFCOM filing and AIC registration separately.
2018 National Negative List
The 2018 National Negative List includes 48 industries in 14 sectors in which foreign investment is restricted or prohibited, a reduction by 15 items from 2017.
Market access to 22 new sectors has also been liberalised and the list set outs the timetable for further opening up of the automobile and the financial sectors.
No update has been made to the encouraged sectors published in the 2017 version of the Foreign Investment Industrial Guidance Catalogue, which still applies.
This year’s changes are mainly in the services, manufacturing, agriculture, energy and resources sectors, as summarised below.
Financial and other services
The 2018 National Negative List reflects the liberalisation timetable for the financial sector announced by Yi Gang, the governor of People’s Bank of China, in April this year. (Please see our previous article China’s New Liberalisation Policies for the Financial Sector).
Foreign banks are now permitted to establish branches and subsidiaries simultaneously and foreign invested banks are permitted to carry out operations in China under the same regulatory regime as domestic banks.
In other financial sectors, foreign investors can hold up to a 51% shareholding in security companies, fund management companies, futures companies and life insurance companies. The maximum foreign shareholding restrictions in all these sectors will be lifted in 2021.
Restrictions have also been lifted in railway passenger transportation, international maritime transportation, international shipping agencies, construction and operation of petrol stations, procurement and wholesale of grain, venues to provide internet access, and surveying and mapping.
Manufacturing
In the automobile sector, foreign shareholding restrictions are lifted from the manufacturing of special purpose motor vehicles and new energy automobiles.
The foreign shareholding restrictions on the manufacturing of commercial vehicles and passenger vehicles will be lifted in 2020 and 2022 respectively. In 2022, the restriction that a foreign investor may set up no more than two joint ventures in China to manufacture the same type of vehicles will also be lifted.
These liberalisation measures are in line with the opening-up timetable announced by NDRC in April this year.
Foreign shareholding restrictions are also lifted from the ship and aircraft industries.
Infrastructure
In the infrastructure sector, foreign shareholding restrictions are lifted from the construction and operation of trunk railway networks and power grids.
Agriculture
In the agriculture sector, foreign shareholding restrictions are lifted from the breeding of new varieties and production of crop seeds, except for wheat and corn in which foreign investors may have up to 49% shareholding.
Energy and resources
In the energy and resources sector, foreign shareholding restrictions are lifted from the exploration and exploitation of special and rare coal resources, exploration and exploitation of graphite, smelting and separation of rare earth, and smelting of tungsten.
2018 FTZ Negative List
The 2018 FTZ Negative List covers 45 industry items in 14 sectors, a reduction by 50 items from the 2017 list.
The 2018 FTZ Negative List applies in the 12 pilot free trade1 zones in China (while the 2018 National Negative List applies outside those zones).
The two negative lists are substantially the same, although the 2018 FTZ Negative List has further opened up additional sectors, as summarised below.
Services
While foreign investment in art performance groups is prohibited under the 2018 National Negative List, the 2018 FTZ Negative List permits foreign investors to invest in such groups, provided that the Chinese party holds the controlling shareholding.
The 2018 National Negative List requires that the Chinese party must have a controlling shareholding in performance agencies, but this restriction is lifted in the 2018 FTZ Negative List.
In the value-added telecom services sector, the opening-up measures previously applicable to the Shanghai Pilot Free Trade Zone only will be rolled out to all FTZs in China. Foreign shareholding restrictions are lifted in storage and forward services, call centres, domestic multi-party communication services and provision of internet access services. Foreign investors are also permitted to hold no more than a 50% shareholding in domestic internet virtual private network services providers.
Agriculture
In the agriculture sector, the 2018 FTZ Negative List has raised the permitted foreign shareholding ratio to 66% for the breeding of new varieties and production of the seeds of wheat and corn, although the 2018 National Negative List limits this ratio to 49%.
Energy and resources
In the energy and resources sector, restrictions are lifted from the exploration and exploitation of petroleum and natural gas, smelting and processing of radioactive mineral resources, and the production of nuclear fuel.
OUR OBSERVATIONS AND LOOKING FORWARD
The “one window, one application form” reform was piloted in a number of Chinese cities in 2017. Earlier this year, MOFCOM and AIC jointly stated that the reform would be rolled out nationwide by 30 June 2018. While the “one window, one application form” procedure only applies to the establishment of new FIEs, it is expected that MOFCOM and AIC will issue more measures in the near future to truly achieve “one window, one application form” for the entire FIE filing and registration regime.
That being said, it remains to be seen how these reform measures will be implemented in practice. Local practice may vary from place to place, with some cities or provinces having already rolled out unified online platforms and others not. Foreign investors should reach out to the local authorities early to understand the local process.
The two new negative lists are considerably shorter than their 2017 versions, which demonstrates the Chinese government’s commitment to opening up its market to foreign investors step by step. Foreign investors will want to consider more investment opportunities in the newly liberalised sectors, particularly in the services and manufacturing sectors.
It is also expected that more implementation rules will be issued in the next few months to implement these new opening-up measures. Local governments are also issuing local versions of liberalization measures. For example, shortly after the issuance of the new negative lists, the Shanghai municipal government introduced a total of 100 measures in a bid to further expand the city’s opening-up. Foreign investors should keep an eye on regulatory developments in this respect.
1 The 12 pilot free trade zones are: Shanghai, Tianjin, Fujian, Guangdong, Liaoning, Zhejiang, Hubei, Henan, Chongqing, Sichuan, Shanxi and Hainan pilot free trade zones.
For further information, please contact:
Nanda Lau, Partner, Herbert Smith Freehills
nanda.lau@hsf.com
