The 2020 Foreign Investment Negative List: Changes and Challenges

30th June 2020
Advocacy, Chamber News

Urban planning, financial services, nuclear and automotive sectors among the sectors opened by the 2020 Foreign Investment Negative List.
Foreign businesses can now apply for an exemption to Negative List restrictions, although no details are given on the requirements or process.
The reductions are welcome, but the government must continue to address wider challenges in obtaining business licences.

The 2020 version of the Special Administrative Measures on Access for Foreign Investment (Foreign Investment Negative List) was released jointly by National Development and Reform Commission and the Ministry of Commerce last week.

The Foreign Investment Negative List is one of the lists in the ‘Negative Lists’ system governing the industries in China in which private and foreign companies can or cannot invest in. A separate and shortened Foreign Investment Negative List applicable to free trade zones was also released on the same day.

The government has cited both the impact of COVID-19 on the economy and long-term plans to reform the business environment for foreign companies as the main impetuses for updating the list this year. It remains to be seen, however, if foreign businesses feel it is the right time to enter a new market in the face of significant global uncertainty.

More industries open for investment…

Seven items have been removed from the Foreign Investment Negative List. Companies can now fully invest in companies managing:

Nuclear fuel production and radioactive minerals processing
Urban water networks in large cities
Tobacco products
Air traffic control

Restrictions on financial services companies have now been completely removed and foreign companies are now able to fully own:

Securities companies
Futures companies
Life insurance companies

Foreign investors can also gain a larger share in joint ventures with Chinese investors in:

The breeding of wheat, corn and other types of seeds (up to 66%)
Commercial vehicles (51% or more)

… but challenges remain

There are concerns that many of these areas already contain strong domestic players. As such, areas of opportunity for British companies may be limited to more specialised areas. Businesses may also continue to face challenges actually obtaining the licences they need despite of openings in the 2020 list, including opaque decision-making processes and difficulties meeting unreasonable licence requirements or standards.

Furthermore, 33 areas remain on the Foreign Investment Negative List, hampering the ability of foreign firms in the creative, IT and telecommunications, automotive, education and other industries from offering a full range of products and services to market or fully controlling the operations of their company.

Restricted companies able to apply for exemptions

The 2020 list contains a new provision that allows foreign companies to apply for an exemption to its investment restrictions. If implemented transparently and equally, this could open significant opportunities for British businesses currently unable to enter the market. It can also be interpreted as a signal of the government’s interest in slowly admitting foreign investment into all the industries currently accessible for private domestic companies.

The Article is vague, however, mentioning only that companies must be examined by the relevant department responsible for the task and that the application must be approved by the State Council. More detail is needed on the application process, including the transparency of decision-making, if it is to be an avenue for British businesses to enter the market. Regulators must also continue to sustain opening up, in order to create a fair and competitive environment in these industries and avoid allowing a small number of companies from dominating the market.

**More clarity as Foreign Investment Law replaces previous laws**

The 2020 list adds more clarity to certain aspects of foreign investment into China. For example, in the case of mergers and acquisitions, the stipulation that it is carried out according to “current regulations” has been changed to “regulations on investment from foreign enterprises, overseas investment and foreign exchange”. This should limit the potential of decisions to grant or deny companies access to the market to be based on unrelated legislation, making the process more transparent.

The option for British and Chinese companies to form contractual joint ventures partnerships in some industries have also been removed this year, in accordance of the replacement of the Sino-Foreign Contractual Joint Ventures Law with the Foreign Investment Law. However, contractual joint ventures formed before 2020 can retain their original form for another five years.

Final thoughts

With the list due to be implemented on the 23^rd July, there are reasons to be optimistic. Clear actions to improve the investment environment for foreign businesses are necessary to stabilise business confidence and increase foreign investment inflows. However, the uncertainty in the global economy and relative strength of domestic companies may limit the immediate opportunities for British companies.

Going forward, British businesses encourage a review of the necessity of the ‘Negative Lists’ system and a continued reduction to the number of sectors on the lists, with the eventual aim of a complete abolishment of the system itself. Free and open markets are essential for innovative growth and the further development of China’s economy, particularly as it recovers from the impact of COVID-19. Only sustained reform and opening up can address their confidence in the China market.