China reduces restrictions and prohibitions on foreign investment

16 July 2020

On 23 June 2020, the National Development and Reform Commission and the Ministry of Commerce of the People’s Republic of China jointly issued the Special Administrative Measures for the Access of Foreign Investment (Negative List) (2020 Version) (“Negative List 2020”). The Negative List 2020 will take effect, and replace the 2019 version, on 23 July 2020. The number of sectors which are restricted or prohibited to foreign investment will be reduced from 40 to 33.

Further, the Special Administrative Measures for the Access of Foreign Investment in Free Trade Pilot Zones (Negative List) (2020 Version) (“FTZ Negative List 2020”) will likewise be updated from 23 July 2020 with the number of industries restricted or prohibited to foreign investment set out therein reduced from 37 to 30.

Background

By way of background, China’s Foreign Investment Law (“FIL”), which came into effect on 1 January 2020, highlights the principle of national treatment and equal protection of foreign investment, and seeks to attract foreign investors into the country.

Pursuant to the FIL, China implements a system of “pre-establishment national treatment and negative list”. This system is intended to create an environment where all foreign investments will be treated the same as domestic investments, other than foreign investments into industries that are listed on the Negative List. The Negative List sets out special management measures restricting or prohibiting foreign investment in specific sectors. Foreign investors enjoy free and equal access to any sectors outside of the Negative List.

Main changes in Negative List 2020

The Negative List 2020 has reduced the number of restricted or prohibited areas for foreign investment to 33 from 40 in its 2019 version. The following is a summary of the key revisions compared with the 2019 version.

No	Sector	Revision in Negative List 2020
1	Financial services	Removed foreign ownership restrictions in securities, securities investment fund management, futures and life insurance companies
2	Agriculture, forestry, animal husbandry and fishery	Changed the cap on foreign ownership in companies involved in the selection and cultivation of new wheat varieties and production of seeds to 66% (from 49%)
3	Manufacturing	Abolished the prohibition of foreign investment in the smelting and/or processing of radioactive minerals and the manufacturing of nuclear fuels
		Removed foreign ownership restrictions in manufacturing of commercial vehicles
4	Electric power, heat, gas and water generation and supply	Removed foreign ownership restrictions in the building and operation of an urban water supply and drainage pipeline network in cities with a population of more than 500,000
5	Transportation	Abolished the prohibition of foreign investment in air traffic control (except that foreign investors are still prohibited from participating in the building and operating of airport traffic control tower)

FTZ Negative List 2020

While the above revisions apply to all free trade pilot zones in China (“FTZs”), two additional prohibitions have been abolished by the FTZ Negative List 2020. Foreign entities will be allowed to invest in the application of processing technology of Chinese medicinal herbs or to set up an occupational training institution within the educational system in any FTZ after the FTZ Negative List 2020 takes effect on 23 July 2020.

First introduction of exemption from Negative List

Both the Negative List 2020 and the FTZ Negative List 2020 provide that special foreign investments may be exempted from the provisions of the relevant Negative List where approval is obtained from the State Council. This is the first time we see such language in a Negative List or any of the Foreign Investment Industry Guidance Catalogues (the predecessor of the Negative List). The Chinese government is trying to be flexible and nimble, and appears to be opening the door to the possibility of foreign entities being able to invest in restricted or even prohibited sectors, considering the challenges brought about by the Covid-19 pandemic and the complicated foreign direct investment (“FDI”) situation posed this year.

The global economy has been seriously affected by Covid-19, and cross-border investment has not been spared. In the course of combating the pandemic, the Chinese government has sent a strong signal to the world that it is determined to continue opening up, even as many other countries appear to be moving towards unilateralism and trade protectionism. Along with the implementation of the FIL and the 2020 version of the Negative Lists, and the recovery of its economy, it is believed that China will continue to attract foreign investors and FDI in the country will be stable and may even increase in the coming years.