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Published: 07 January 2019

Negative list for FDI in China and

M S Siddiqui

China started reform and open up their economy in 1978 and thereafter the volume of foreign
investment in China has increased exponentially in the last 40 years. In recent years, the central
government continues to release strong and firm signals to attract foreign investment. According to a
report by the United Nations Conference on Trade and Development, China has for a few years
maintained its position as the world's second-most attractive investment destination. The FDI in
China was USD131.04 billion in 2017 and USD126 billion in 2016.

The investment growth was more than 4% from last year. On the other hand, Chinese news agency
Xinhua reported that at the end of November, 2018, a total of 950,000 foreign-funded companies
became registered in China in line with current laws and brought in more than 2 trillion U.S. dollars,
performing as a major driving force in China's economic and social development. Bangladesh can
attract FDI around 5 b per annum. Despite the huge amount of investment, China has taken special
measure to increase FDI.

Interestingly, China still does not have the same openness to foreign investment seen in advanced
economies such as the United States. All industry sectors are not open to FDI. Since 1995, every
two to five years, the PRC government has been publishing the catalogues for the guidance of
foreign investment, which list the specific industrial sectors in which foreign investors could operate
within. In the Catalogues, industry sectors are grouped into four categories: "encouraged",
"permitted", "restricted" and "prohibited" to foreign investment.

As for the industries listed as "encouraged" investments, the foreign investor could operate at the
same conditions of a domestic company; as for industries listed as "restricted" investments, the
foreign investor could perform the investment under certain conditions and limitations, e.g. in terms
of foreign share limitation; lastly, the industries listed as "prohibited" were totally forbidden to foreign
investors. Any industry not expressly mentioned in the catalogue would fall into the "permitted"

The New National Negative List pares down the special measures for foreign investment from 63
items to 48 items. The further opened up industrial sectors include financial services, transportation
and logistics, commercial and trading, professional services, manufacturing, infrastructural, energy
and resources and agriculture.

As early as 2017 as shown in the "Report on the Work of Government," the central government
emphasized that "the door of China would only be opened wider and wider," and stated that the
government would continue to promote the liberalization and facilitation of international trade and
investment. The Chinese authority understands the trade liberalization is one of the major reforms
for local and foreign investment.

The 2017 version of the Catalogue, whilst keeping the previous categories of "encouraged",
"permitted", "restricted", and "prohibited" industries, merged the industries under the restricted
category and the prohibited category into a section called "special management measures for the
market entry of foreign investment", to create a "negative list" to guide foreign investors on market
access policies.

Foreign investors can therefore refer to the list to determine whether an investment project is subject
to MOCOM's traditional examination and approval procedure or instead can benefit from MOCOM's
new record-filing regime. Recently, it has made significant improvements in the past three years,
with positive results for foreign companies. For one, it has moved from a "positive" to a "negative" list

Chinese National Development and Reform Commission (NDRC) and the Ministry of Commerce
(MOCOM) jointly promulgated the 2018 version of the Special Management Measures for the Market
Entry of Foreign Investment. In order to simplify the regulatory procedures for foreign investment has
been a focus of the Chinese government amid a series of regulatory reforms in recent years.

China has given a national treatment to overseas investment. Effective from 30 June 2018, the
previous two steps i.e. filing with MOCOM (MOCOM Filing) and registration with the State
Administration for Market Regulation (SAMR) (the AMR Registration) or their respective local
counterparts in respect of foreign investment related matters have been consolidated into one single
submission procedure.

On the contrary, in the various Free Trade Zones established in China, a "Negative list" approach
was adopted towards FDI management: in fact, within the FTZ's territory, foreign investment is
allowed in all sectors which are not prohibited or restricted under the "FTZ Negative List".

On 30 June 2018, the NDRC and MOC also issued the revised 'negative list 2018' for FTZs will take
effect from 30 July 2018. Compared to the FTZ Negative List 2017, the number of the items in the
FTZ Negative List 2018 has been reduced from 95 to 45. The interested business fields mainly
include agriculture, mining and the cultural industry.

Among the other modifications, foreign investors will be allowed no more than a 66-percent stake in
breeding new wheat and corn varieties and their seed production, compared with a cap of 49
percent in the previous list.

Restrictions on joint ventures or foreign cooperation in exploration and exploitation of petroleum and
natural gas will be removed. The list also eased restrictions in the cultural sector, as foreign
investors will be allowed to own a majority stake in performing arts agencies.

In particular, the new version of the Special Administrative Measures for Foreign Investment Access
("Negative List 2018") which was released on 28 June 2018 by the NDRC and the Ministry of
Commerce, with the aim to further ease the current restrictions on foreign investments. The length of
the Negative List has been further shortened from 63 items to 48 items and market access in 22
industry sectors has been liberalized.

The other reform includes the withdrawal of the restriction on foreign shareholdings in the banking
industry and in special purposes, motor vehicles and new energy automobiles. Moreover, the new
Negative List directly and uniformly lists the special administrative measures on foreign investment
access (e.g. shareholding requirements).

The 2018 National Negative List comprehensively relaxes market access in primary, secondary as
well as tertiary industries, detailing the opening-up measures in 22 sectors including finance,
infrastructure, transportation, trade and commerce, culture, agriculture, energy and related areas.

In addition, it has also set a transition period for certain industries and clarified the corresponding
timetable. Such list will take effect from 28 July 2018, and will apply to mainland China except for
China's free trade zones (FTZ).

This negative list is a document applicable to the whole of Continental China and it includes sectors
of activity in which foreign investment is prohibited or restricted. Sectors of activity with restrictions
generally require any investment to be made through "joint ventures" with Chinese companies,
including, in most cases, restrictions on their shareholder structure.

In other sectors with restrictions, prior approval of foreign investment by MOFCOM is also required.
For unlisted sectors, foreign investment can be made under the same rules as Chinese investment.

In contrast with these Lists with restrictions/prohibitions on foreign investment, there are lists of
preferential activities for investment, which aim to encourage foreign investors with tax incentives
and economic benefits.

The changes indeed represent a big step forward and show the commitment of Chinese government
to further open up the market access to foreign investors step by step. The negative list also has
clear road map for further reform to give a clear understanding to the foreign investors.

It has out a roadmap and timetable for yet further opening-up of the financial services and
automobile sectors in the next few years. According to these provisions, all foreign shareholding
restrictions in the financial services sector will be lifted in 2021.

Foreign shareholding restriction on the manufacturing of commercial vehicles and passenger

vehicles will be lifted in 2020 and 2022 respectively. The current restriction that a foreign investor
may establish no more than two joint ventures that manufacture the same category of whole vehicle
products will also be removed in 2022.

Sectors not included in the New Negative Lists will be regulated under the principle of identical
treatment for both domestic and foreign investment, i.e. no special restrictions should be imposed on
foreign investment in those sectors.

The State Administration for Market Regulation (SAMR) or its local counterpart will serve as a one-
stop shop window for AMR Registration and MOCOM Filing in respect of foreign investment related
matters, which means that going forward foreign investors will only need to submit one set of
application documents to SAMR or its local counterpart, instead of undertaking two separate
regulatory procedures.

This new administrative measure will enhance the efficiency of AMR Registration and MOCOM
Filing and is another meaningful step in the Chinese government's endeavor to simplify the
regulatory regime of foreign investment.

The negative lists released this time have greatly reduced the restrictions on foreign investment
access. It is believed that with further implementation of the policies, foreign investment will enjoy
more equity in business environments and improved policy treatments in China. Bangladesh use to
give special treatment but failed to attract desired FDI.

Recently a draft law on foreign investment has been submitted to a bimonthly session of the National
People's Congress (NPC) Standing Committee. Once adopted, the unified law will replace three
existing laws, namely the laws on Chinese-foreign equity joint ventures, non-equity joint ventures (or
contractual joint ventures) and wholly foreign-owned enterprises. The existing Bangladesh policy of
inviting overseas investors will not give positive result. Bangladesh should reform own investment
and trade policy and improve ease of doing business.

The writer is a Legal Economist. Email: