China – The Catalogue For The Guidance Of Foreign Investment Industries (Revised In 2017).

 

21 August, 2017

 

 

On June 28, 2017, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") jointly issued the Catalogue for the Guidance of Foreign Investment Industries ("2017 Catalogue"), which came into effect on July 28, 2017. 

 

Compared with the Catalogue for the Guidance of Foreign Investment Industries (Revised in 2015) ("2015 Catalogue"), the 2017 Catalogue launches a negative list of foreign investment for the first time nationwide except the Free Trade Zone. The 2017 Catalogue keeps the overall stability of policies on encouraged investment, opens up more sectors and further relaxes restrictions for foreign business. 

 

Negative List 

 

The Special Administrative Measures for Admission of Foreign Investments (Negative List for Admission of Foreign Investments) (“Negative List”) introduced by the 2017 Catalogue sets out the restricted and prohibited sectors or business and the ones contained in the encouraged Guidelines with special requirements such as the equity requirements, senior management personnel requirements, etc. There is also an Explanation on the front page of the Negative List, the following aspects of which require our attention:

 

Where a domestic company, enterprise or natural person establishes or controls a company overseas legitimately, and uses it to acquire a connected domestic company, the foreign investment and enterprise establishment and any change of their matters (“Connected M&A”) shall be handled pursuant to the prevailing provisions (namely follow the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, “M&A Provisions”). In other words, any non-connected merger and acquisition of domestic company by foreign investor which does not involve in the access restrictions sectors or business under the Negative List can be established directly via record-filing procedure. The reform will reduce institutional transaction costs and make domestic business environment more conducive to attracting foreign investment. Having said that, there are uncertainties in relation to the procedural requirements for Connected M&A. According to the M&A Provisions, Connected M&A shall be subject to approvals by MOFCOM. On July 30, 2017, the MOFCOM issued the Decision on Amending the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises (“Decision”) and the Announcement on Relevant Matters concerning the Administration of the Record-filing of the Incorporation and Change of Foreign-invested Enterprises ( “Announcement”). The Decision and the Announcement confirm that M&A in domestic listed or non-listed enterprise by foreign investors would no longer be subject to the MOFCOM’s approval. Instead, they only need to undergo the record-filing procedure with MOFCOM, unless the business of the target enterprise is specified in the Negative List. It is not entirely clear whether the Decision and the Announcement would serve to  dispense with the MOFCOM’s approval requirement for Connected M&A under the original M&A Provisions. The market will need further clarification of relevant regulations and practice in this regard.

Restrictive measures which had been consistently applied to domestic investments and foreign investments, as well as restrictive measures which do not fall under the admission scope, are deleted from the 2017 Catalogue.

 

This includes  construction and operation of large theme parks, military, police, politics, party and other educational institutions in special fields, construction and operation of golf courses and villas, projects endangering the safety and performance of military facilities, gambling and lottery industry (including horse race tracks for gambling purposes), pornography industry, ivory carving, tiger bone processing, etc. These are listed in the Draft Market Access Negative List (for Pilot Use) promulgated on 2 March, 2016. Obviously, such restrictions or prohibitions are still in place, but they are now dealt with mainly under laws and regulations which apply to both domestic and foreign invested enterprises.

The management of news and cultural services in China (including Internet-related news and cultural services) are tightened, which are required to satisfy or obtain the relevant examination and approval, security assessment, and senior management personnel requirements. Some of them are added to the Negative List as off-limits, such as editing of books, newspapers and periodicals, editing of audio-visual products and electronic publications, radio and television video on demand business, satellite television broadcasting ground receiving facilities installation services, internet public information service, research institutes of humanities and social sciences, etc.

The Explanation specifies the scope of application of the Negative List, namely, if the Closer Economic Partnership Arrangement (CEPA) and their related agreements, the Cross-Straits Economic Cooperation Framework Agreement (ECFA) and subsequent agreements, the Free Trade Agreements and Investment Agreements entered into between China and the relevant countries, the international agreements to which China is a participant, and where the laws and regulations of China provide otherwise, such provisions shall prevail. This specification replaces the miscellaneous provisions “Other Industries Prohibited by the Laws and Regulations of the State or International Treaties that China Has Concluded or Acceded to” stipulated in the 2015 Catalogue.

 

Further Open-up 

 

The 2017 Catalogue further cut down the restrictive sectors or business to 63 items (35 restricted items and 28 off-limits items), compared with 93 items (19 encouraged items with equity proportion requirements, 38 restricted items and 36 off-limits items) in the 2015 Catalogue, which relaxes the barriers to foreign investment. Changes in the open-up measures, which focus on the service sectors, manufacturing industry and the mining industry, are summarised below.
 

Industry	Restrictive items in the 2015 Catalogue	Changes in the 2017 Catalogue
Mining	Exploration and development of oil and natural gas (including unconventional oil gas, such as oil shale, oil sand, shale gas and coal-bed gas) and utilization of mine gas (limited to Chinese-foreign equity or contractual joint ventures)	Exploration and development of oil and natural gas (except for coalbed gas, oil shale, oil sands, shale gas etc.) (only in the form of equity joint venture or cooperative joint venture) Note: Exploration and development of oil and natural gas is still encouraged with equity proportion requirements  Equity proportion requirements of coalbed gas, oil shale, oil sands and shale gas cancelled  Equity proportion requirements of shale gas and coal-bed gas cancelled
	Exploration and exploitation of noble metals (gold, silver, and platinum group)	Changed from restricted to allowed
	Exploitation and ore dressing of lithium	Changed from restricted to allowed
	Smelting of rare metals including but not limited to tungsten, molybdenum, tin (excluding tin compounds), and antimony (including antimony oxides and antimony sulphides)	Changed from restricted to allowed Retain tungsten smelting as restrictive item
Manufacturing	Manufacturing and research and development of automobile electronic devices: automobile electronic bus network technologies (limited to Chinese-foreign equity joint ventures); electronic controllers for electric power steering system (limited to Chinese-foreign equity joint ventures)	Equity proportion requirements cancelled Changed to encouraged
	Manufacturing of key parts and components of new energy automobiles: high energy power batteries (energy density ≥ 110Wh/kg, cycle life ≥ 2,000 times, and the proportion of foreign investment not exceeding 50%)	Equity proportion requirements cancelled Changed to encouraged
	Manufacturing of whole automobiles, special cars and motorcycles: The proportion of shares of the Chinese party shall not be lower than 50%, the same foreign investor may establish no more than two joint ventures in China that undertake the production of the same kinds (the classes of passenger cars, commercial cars and motorcycles) of whole automobile products. If the foreign investor merges other automobile producers in China together with the Chinese joint venture partner, it may not be restricted by the said two joint ventures	Delete restriction on manufacturing of motorcycles. Changed to allowed Add “establishment of equity joint venture enterprises to engage in manufacturing of pure electric cars” as restricted item
	Track transportation equipment (limited to Chinese-foreign equity or contractual joint ventures)	Changed from restricted to allowed
	Manufacturing and repair of marine engineering equipment (including modules) (Chinese parties as controlling shareholders)	Changed from restricted to allowed
	Manufacturing of low and medium-speed diesel engines of vessels and bent axle (Chinese parties as controlling shareholders)	Changed from restricted to allowed
	Design and manufacturing of civil satellites, and manufacturing of civil satellite payloads (Chinese parties as controlling shareholders)	Equity proportion requirements cancelled Changed to encouraged
	Processing of edible oils and fats from soybean, rapeseed, peanut, cottonseed, camellia seed, sunflower seed, palm, etc. (Chinese parties as controlling shareholders) processing of rice, flour and raw sugar, and deep processing of corn	Changed from restricted to allowed
	Production of biological liquid fuels (fuel ethanol and biodiesel) (Chinese parties as controlling shareholders)	Changed from restricted to allowed
Service	Scheduled or non-scheduled international marine transportation services (limited to Chinese-foreign equity or contractual joint ventures)	Changed from restricted to allowed
	Road passenger transport companies	Changed from restricted to allowed
	Water transport companies (Chinese parties as controlling shareholders)	Changed to “Domestic waterway transport companies (controlling stake to be held by Chinese party), and international maritime transport companies (only in the form of equity joint venture or cooperative joint venture)”
	ocean shipping tally companies (limited to Chinese-foreign equity or contractual joint ventures)	Changed from restricted to allowed
	Credit investigation and rating service companies	Changed from restricted to allowed
	Accounting and auditing (the chief partner shall have Chinese nationality)	Changed from restricted to allowed
Others	Construction and operation of comprehensive water control projects (Chinese parties as controlling shareholders)	Changed from restricted to allowed
	Purchase of grains; wholesale of grains and cotton; and construction and operation of large-scale agricultural product wholesale markets	Change “Purchase of grains; wholesale of grains and cotton” to “Acquisition and wholesale of rice, wheat and corn” Delete “construction and operation of large-scale agricultural product wholesale markets”, changed from restricted to allowed

 

 

Myles Seto, Partner, Deacons

myles.seto@deacons.com.hk