Updates on foreign investment in China (part 2)

Updates on foreign investment in China (part 2) –  The 2019 Negative List and Encouraged Catalogue

On 30 June 2019, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued the 2019 versions of the Special Administrative Measures on Access to Foreign Investment concerning investments in the Pilot Free Trade Zone (FTZ Negative List) and the rest of the country (National Negative List). They also issued the updated Catalogue of Encouraged Industries for Foreign Investment (Encouraged Catalogue). Both the Negative Lists and the Catalogue came into effect a month later on the 30 July 2019.  Collectively, they open up for foreign investment in new sectors and industries, demonstrating China’s efforts to attract more foreign investment.

Earlier in March 2019, China also adopted its new Foreign Investment Law (FIL), replacing a number of foreign investment laws with a single piece of legislation. The new FIL, which comes into force 1 January 2020, introduces significant changes to foreign-invested enterprises and  marks an important step in China’s policy on the protection, promotion and encouragement of foreign investments.

This article provides an overview of the new changes to the Negative Lists and the Catalogue, and considers what these developments mean for foreign investors. For information on the new FIL, including its impact on foreign-invested entities, see here. (link to part 1 article)

The ‘Negative List’

The Negative List sets out the industries, in which foreign investment is restricted or prohibited. They came into force on 30 July 2019, reducing the number of restricted sectors from 45 to 37 sectors in the pilot free trade zone, and from 48 to 40 sectors outside the free trade zone. The changes in the National Negative List mainly concern:

  • Manufacturing: The prohibition on foreign investment in manufacturing Xuan paper (rice paper) and ink ingot has been removed.
  • Mining: The restriction on foreign investment in exploration and development of natural gas and petroleum is removed, as well as the restriction on exploitation of molybdenum, antimony, fluorite and tin. Further, the removal of the foreign shareholding restriction on the exploration and development of petroleum in free trade zones now applies nationwide.
  • Infrastructure: The foreign shareholding restriction concerning construction and operation of gas and heat pipelines in cities with a population over 500,000 has been removed.
  • Transportation: The foreign shareholding restriction on domestic shipping agencies has been removed.
  • Value-added telecommunication: The foreign shareholding restriction on multi-party communication, store-and-forward and call centers has been removed.
  • Entertainment: The foreign shareholding restriction on performance brokering institutions, and the construction and operation of cinemas has been removed. Further, the removal of the foreign shareholding restriction on performance brokering institutions in the free trade zones now applies nationwide.
  • Agriculture: The prohibition on foreign investment in development of wild fauna and flora resources under national protection in China is removed.  

Furthermore, there will be gradual removal of certain restrictions concerning the percentage of foreign ownership and on the number of joint ventures a foreign investor may invest in within certain industries. These mainly concern:

  • Restrictions of foreign shareholding in automobile manufacturing (excluding special-purpose vehicles) and new energy vehicles will be removed in 2020.
  • Restrictions on the number of equity joint ventures manufacturing the same line of automobiles will be removed in 2020.
  • Restrictions on foreign shareholding in securities, futures, or life insurance industries will be removed in 2021.

The changes in the FTZ Negative List mainly concern:

  • Fishery: Foreign investment in fishing of aquatic products in territorial and inland waters of China is now permitted
  • Publishing: The foreign shareholding restriction concerning publication printing has been removed.

These changes only apply to foreign investment in the free trade zones. The zones are often used to test out new policies, which, if successful, are implemented outside the zones. For example, the restrictions lifted in the FTZ in the 2018 FTZ Negative List have been lifted nationally in the 2019 Negative List. The changes in the 2019 FTZ Negative List are therefore worth noting, as they could indicate changes that could be implemented nationally through the next update.

The ‘Encouraged Catalogue’

The 2019 version of the Encouraged Catalogue also includes significant changes. The catalogue, which came into force on 30 July 2019, provides the industries and sectors in which foreign investment is granted preferential treatment, including through exemption of custom duties and reduced corporate income tax. It consists of the National Industrial Guidance Catalogue for Encouragement of Foreign Investment (National Catalogue) setting out 13 sectors in which foreign investment is encouraged nationwide. It also includes the Catalogue of Priority Industries for Foreign Investment in Central and Western China (Regional Catalogue) setting out 22 underdeveloped regions, wherein foreign investment is encouraged.

 

The number of items in the National Catalogue has increased to 415, with 67 new additions and 45 updates. Most of these concern the manufacturing industry, with focus on technology industries, such as artificial intelligence, clean production and carbon capture. The Regional Catalogue has increased to 693 items, with most changes concerning labour-intensive industries, advanced technology industries and supporting facilities industries to encourage development in those areas.

New items in the Encouraged Catalogue include:

  • Development and manufacture of 5G core components, robots and industrial robots integrated systems, new energy and intelligent automobiles,
  • Development and production of new materials for production use, such as therapy medicine, cell culture products and for aerospace use.
  • Development and application of artificial intelligence, and development and service related to clean production energy and recycling technology.

Foreign investors are furthermore encouraged to invest in labor-intensive industries, industries of applied advanced technology and supporting facilities in regions, such as Anhui, Hunan, Sichuan, Henan, Yunnan provinces, and Inner Mongolia.

 

What this means for foreign investment in China

The changes to the Negative Lists and Encouraged Catalogue open up for foreign investment, including in new sectors and industries. Under China’s ‘pre-establishment national treatment and negative list’ management system, foreign investments outside the scope of the ‘Negative Lists’ are entitled to national treatment. It is therefore not required to obtain prior approval for those investments. However, for activities that are covered by the Negative Lists, foreign investment is subject to restrictions and/or prohibition, thus requiring prior notice. The number of restrictions in the 2019 version have decreased, providing broader or new access to foreign investment activities. Similarly, the number of items on the Encouraged Catalogue have increased to attract more foreign investment, and include incentives such as tariff exemptions and reduced corporate income tax – down to 15% for certain industries. The changes concerning foreign investment in the FTZ may further indicate changes that could be rolled out nationwide in the coming years. Together with the new FIL, these changes push forward China’s policy of attracting, promoting and protecting foreign investments. Companies engaged or interested in investment activities in China should therefore consider how these changes impact their current or planned activities, and assess how they can benefit from these developments.

For more information, please contact our China Practice:

Job Bezemer - jbz@kneppelhout.nl  +31 (0) 6 427 813 78

Victor Zheng - vz@kneppelhout.nl   +31 (0) 6 109 893 33