China opens up further to foreign investments

China has shortened the two “Negative Lists” which enumerate the industries where foreign investment will either be prohibited or restricted.

On 23 July 2020 the updated Negative Lists came into effect and replaced their 2019 versions. The update signals further opening-up of the Chinese market to foreign investors.

Sectors now further opening up include service sector such as financial services, as wells as manufacturing and agriculture. Whilst sectors that remain unavailable includes oil and gas exploration, pipe network etc.

A non-Chinese investor or company must check its contemplated China business strategy or investment against the Negative Lists. As long as the Negative Lists remains, certain areas will remain either prohibited from investing in or restricted. Nordic companies may note that some relevant areas that remain restricted include publication printing, telecommunication, oil and gas exploration, and pipe network facilities.

Sectors marked as "prohibited" means that foreign investments cannot be directly involved. For some of those sectors, certain ownership structures through other Chinese entities might be possible or contractual arrangements can be explored.

Other sectors listed as "restricted" often involve a requirement to establish a joint venture with a Chinese company. Some – albeit not all – of the "restricted" areas also contain a requirement that the Chinese company must be the majority shareholder. In a joint venture with a majority Chinese shareholder, it remains possible to include corporate regulations whereby increasing the minority shareholder’s impact, e.g. important decisions remain reserved matters requiring unanimous vote by all investors, veto by one investor, implementing operational decisions to general manager appointed by one investor etc.

For more general information about the Negative Lists please see our informative video here. Norwegian version of the video is available here.


THE UPDATE

During Two Sessions in May this year, which is China’s annual parliamentary meeting and important for understanding China’s future development, indications were made that further opening up of the Chinese market was being planned. Shortening of the Negative Lists forms part of the efforts to further open up the Chinese economy and improve the business environment amid the COVID-19 pandemic.

In 2017 the combined restrictions for the Negative Lists were 158. During the last four years, restrictions continue to be reduced. Following the update, the total number is now down to 63. Out of the two Negative Lists, the Free Trade Zones related list is the shortest with 30 active restrictions, indicating that special economic zones remain instrumental to Chinese efforts to welcome foreign investors. The National Negative List is down to 33 restrictions.


2020 NATIONAL NEGATIVE LIST

The 2020 National Negative List aims to further reduce the restrictions on foreign investments across all of China. The key reductions can be summarized as follows:

Financial sector
Restrictions on foreign ownership in securities company, fund management company, futures company and life insurance company are eased. Now foreign shareholders are entitled to hold more than 50% of the shares in the aforesaid joint ventures or establish wholly foreign owned company. Removal of equity cap restrictions on the ratio of foreign capital in the financial services does open China’s financial sector further up, which is in-line with China’s obligation under phase I of the China – US trade deal.

Infrastructure sector
Foreign investors are now allowed to be majority owner in joint ventures engaged in construction and operation of urban water supply and drainage pipelines for cities with a population of more than 500,000. Whilst foreign investors are no longer prohibited from investing in Chinese air traffic control systems.

Manufacturing sector
The restriction on foreign ownership in commercial vehicle manufacturers is lifted. Whilst the prohibition on foreign investment in melting and processing of radioactive minerals and production of nuclear fuel is abolished.

Agricultural sector
The requirement that the Chinese joint venture party must be the controlling investor in joint ventures involved in the selection and breeding of new wheat varieties and the production of seeds is loosened. The Chinese now only has to hold no less than 34% of the registered capital in such joint ventures.


2020 FTZ NEGATIVE LIST

The Chinese Free Trade Zones have historically been pilot areas to further test and develop China’s reform and opening-up. Naturally, foreign investor enjoy more liberty in such Free Trade Zones than other places in China.

In the updated list, there is no prohibition on foreign investment in fishing of aquatic products in Chinese oceans or inland waters, publication printing, and investing in developing new corn varieties and seed productions. Subject to Chinese joint venture party holding no less than 34% of the registered capital instead of the previous requirement of a majority position.

CONCLUSION

It remains beneficial to Nordic investors and companies that China continues its trend in easing restrictions on foreign investments. Even if the sectors on the Negative Lists are reducing, requirements on licenses and permits may in practice still restrict investments in sectors that are considered open.

You can discuss your Chinese business plan with our Wikborg Rein Shanghai office.

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