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INVESTMENT: Negative List Reform
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Negative List Reform
By Diane Grant

BT 201902 investment 04负面清单改革




BT 201902 investment 01China continues to open up its market to foreign investors and it made another very important step on the 25th of December, 2018, when a reform of Negative List was created by the National Development and Reform Commission (NDRC). The latest Negative List was released on the 40th anniversary of China's economic reform and liberalization, and can be considered as demonstrating China's sustained willingness to gradually open up its market to foreign investors.

This document is in essence an institutional innovation, which is meant to override local regulations and to be applied across the entire country, in comparison to the previous list which was limited to certain areas. Negative list is meant to further simplify and make it easier to invest in China. It elaborates which sectors are restricted or unavailable for investment. This measure is intended as a step to standardize rules for all interested parties.

BT 201902 investment 02According to the 83 pages long document, there are 151 sectors listed. Four of them are prohibited and they are focused on the following: the illegal financing, harmful internet activities, industries where Chinese law prohibits the participation and projects explicitly banned under the Catalogue for Guiding Industry Restructuring. Analysts assume that prohibition list was updated as a government’s response to scandals in 2018, where peer-to-peer internet platforms were involved as well as illegal financial activities.

There are 18 sectors that require approval of the Government,including agriculture, construction, transportation, utilities, whole and retail trade, warehousing and postal services, financial, accommodation, information technology and software, environmental, education, scientific research, health and social work, sport, culture and entertainment industries. Industries which are not listed are open to all investors. However, they will be under government’s supervision.

In addition to sectors, there are also 581 rules that are also listed in the updated version of the negative list. It is important to note that prohibited sectors that have been removed from the Negative List, are not necessarily sectors that are now entirely open to foreign investment without restrictions. Perfect example of that is film production which is removed from the Negative List. Despite that, there are industry specific regulations that are still enforced. Foreign investors are not allowed to produce films themselves and they must be granted approval to do so with in cooperation with a Chinese partner.

BT 201902 investment 03he History of the Negative List

Trading partners of China complained that China is free to invest in their countries, but not vice versa. Therefore, China tried to show that it welcomes global investors, and in 2013 it allowed Shanghai to open the country’s first free-trade zone. But the free trade zone did not attract foreign funds as expected due to of rigid restrictions and a complex approval processes.

Realizing what undermined the potential of free trade zone, China published its Negative List, which is a list of industry sectors in which foreign investment is either restricted or prohibited. Restrictions revolve around shareholding limitations and requirements regarding the component of high-ranking executives.

The first version of the List was published in 2016. This version applied in four provincial regions including: Shanghai, Guangdong, Tianjin and Fujian, with free trade zones and it was on trial basis. In 2017, the list encompassed another 15 provinces and cities.

According to the words of the director of Economics System Reform at National Development and Reform Commission, Xu Shanchang, the latest List, published on Christmas in 2018, is different from the list issued by the Ministry of Commerce in June last year. In comparison, previous version of the Negative List had 177 more items and 288 more rules, which makes the new list significantly reduced.

However, certain things remained unchanged from earlier lists on sectors closed to private and foreign firms. For example, the processing and distribution of edible salt is one of the industries where no changes were made. Furthermore, in vehicle manufacturing and finance, the involvement of foreign businesses remains under lengthy and convoluted approval process, although the government recently rose the cap on how much of a joint venture with a local Chinese partner a foreign investor can now own.

BT 201902 investment 05Conclusion

The release of the new, updated List enhances the influence of the market in resource allocation, while at the same time enabling more stable and transparent environment for everyone. This new Negative List aims at encouraging investors, especially foreign ones, to carefully study new items and rules, which should help them decide whether investing in China is viable business decision.

For companies and investors that are interested in investing into restricted markets, negative list sums up important procedures, standards and necessary approvals in order to be granted access to desired market. However, it remains to be seen in the current and upcoming years how things will go in practice and how foreigners will cope with industry specific laws and regulations. The latest efforts by the government in making it more attractive for foreign investors to invest in China clearly demonstrate their willingness to make the treatment for foreign and domestic firms be more fair.

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