China Updates its Negative Lists, Dropping Restricted Categories by Nearly 25%

In late June, China provided its 2020 updates to its Special Administrative Measures on Access to Foreign Investment (the “Negative List”), which outlines the economic sectors where foreign investment is prohibited or limited in some way. These 2020 updates were jointly issued by the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) and took effect on July 23. The Negative List also includes a related but separate list specifically applicable to free trade zones (the “FTZ Negative List”).

Generally speaking, the Negative List updates (Chinese here, and English here) and the FTZ Negative List updates (Chinese here, and English here) are significant for several reasons.

Economic and Covid rationale. The government cited both the effect of Covid-19 and the ongoing easing of the general business environment for foreign businesses as reasons for dropping the Negative List from 40 to 33 and the FTZ Negative List from 37 to 30. This reasoning tracks with recent statements by the CCP’s Li Keqiang, who is a Member of the Standing Committee of the Political Bureau (Politburo) Central Committee and Premier of the State Council (the #2 leader in the CCP after Xi Jinping).

Premier Li chaired an economic symposium on July 13 with Chinese economic experts and business leaders, stressing the need to firm up confidence in China’s domestic economic development and revitalize the market in part through reforms and opening up. One part of this process includes easing financing difficulties faced by SMEs, such as making financing more inclusive and lowering overall financing costs.

As you can imagine, the CCP is concerned with ensuring recent graduates and other displaced workers have gainful employment. Li Keqiang even mentioned improving the business environment so the market can play a more decisive role in allocating resources so the government can perform its duties more effectively. Entrepreneurship and innovation continue to be a focus, as well as general business “openness.” China also needs to expand its domestic consumption to try to replace the ongoing drop in international demand for its products and services.

China’s economy is hurting. Even if the official numbers are accurate, even a modest economic downturn could significantly impact the perceived legitimacy of the CCP’s governance of China. This means the CCP will be motivated to continue to make China an attractive market by reducing the Negative List. I recently confirmed this opening up trajectory with Xu Xueyuan, China’s Minister at the Chinese Embassy in Washington, D.C., who responded:

You can see that even amid the COVID-19 pandemic and China’s economy facing severe challenges, China does not stop its efforts to further open up the economy and improve its business environment. The lists are revised every year. I believe you’ll see them shorter and shorter in the years to come.

List categories are now open or more open. The industry areas that are now open (or more open) will be significant to those involved in those industries who want to break into the China market:
Foreign companies can now invest in companies managing:

  • Nuclear fuel production and radioactive minerals processing
  • Urban water supply and drainage networks in large cities of 500,000 or more
  • Tobacco products. Note that cannabis is not mentioned because it is still very much on the periphery of acceptance in Chinese society because of it is viewed by the CCP as having potential for misuse. See International and China Cannabis Look to U.S. Market for Growth
  • Air traffic control

Foreign companies can now fully own these finance sector companies:

  • Securities companies
  • Securities investment fund management companies
  • Futures companies
  • Life insurance companies

Foreign companies can now own a larger share in joint ventures with Chinese investors in the following industries:

  • Agriculture: the selection and breeding of wheat, corn, and other types of seeds (up to 66% ownership)
  • Manufacturing: commercial vehicles (up to 50%)

Too little too late? Not everyone is optimistic about this opening up round because they see China as ensuring  its homegrown companies establish market dominance prior to permitting foreign companies to compete.

Getting ahead of the curve? The Negative List update includes the possibility of case-by-case review and approval by the State Council for areas currently closed or limited to foreign investment.

Foreign Investment Law implications. It is important to understand the interplay between the Negative List and FTZ Negative List and the concept of national treatment under China’s foreign investment law (“FIL”), which was implemented earlier this year. In How China’s New Foreign Investment Law Affects You (Or Not), we previously wrote:

National treatment is one of those phrases that sound good but is meaningless without context. Under the FIL, “national treatment” does not mean any changes will be made to the negative list, nor that discriminatory rules will be repealed in industries that aren’t on the negative list. It just means Chinese government agencies cannot officially discriminate against foreign-owned entities because they are foreign-owned. But Chinese agencies are masterful at unofficial discrimination, as any foreign entity that has tried to get an arbitral award enforced in China can attest. Without meaningful instructions and followup from the national government, nothing will change and many of the attractive sectors will remain closed or highly restrictive to foreign investment.

Getting your Arm twisted? It is also important to understand that even when Chinese “law” is on your side, the actual application of that law may not be on your side or it may take too long to enforce the law, as UK Chip designer Arm is learning in its current spat regarding its China joint venture.

Whether your brand of optimism regarding China is trust but verify or distrust and verify, make sure you are going into your China business deals well-equipped to thrive and protect your interests.