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Negative List for market access identifying likely no-go business areas

Florian Hirschmann and Siling Zhong-Ganga, Reed Smith

On 9 October 2021 China’s top economic planning body, the National Development and Reform Commission (NDRC), published its annual update of the Negative List for Market Access (the “Negative List 2021“) for public comments. 

Once made legally binding, it would be the fourth Negative List for Market Access with nationwide effect, by which both domestic and foreign investors should abide. The implementation of the Negative List 2021 and its previous versions reflects the efforts of the Chinese government to further liberalize the market with less administrative intervention. For both domestic and foreign investors, the Negative List 2021 offers greater investment potential and more business opportunities for the latter. 

Major difference between negative and positive lists

A Negative List for Market Entry, as the name suggests, is a catalogue containing detailed business areas in which investments are prohibited or only possible with specific approval and admission. China had a long-standing practice of market regulation with a positive list for market entry until 2015. Contrary to a negative list, a positive list decides in which business fields investments are permitted. In 2015 the “Negative List for Market Entry” was introduced as a pilot project in Tianjin, Shanghai, the Fujian Province and the Guangdong Province. Feedback from the market and the outcome was quite positive. Thus, a nationwide “Negative List for Market Entry” was implemented three years later in 2018.  

While there were 328 business fields listed in the initial Negative List for Market Entry in 2018 (96 as prohibited, 232 as approval and admission required), the Negative List 2021 will be much shorter with 117 business fields (6 as prohibited, 111 as approval and admission required). Listed as “prohibited” remain, among others, certain business activities in the area of financial services, internet operational services and publishing.

Since cryptocurrency trading and mining were already banned by the regulators earlier this year, the Negative List 2021 proposes to include cryptocurrency trading and mining into its sub-list of prohibited items. Listed as “eligible for approval and admission” are particular business activities in what the country considers the most important economic sectors such as agriculture, manufacturing, energy infrastructure, transportation, hotel business, information technology and software services, and real estate business.

Compared to 2020 Negative List, this year’s list lifts approval and admission requirements for specific business activities such as:

  • Provision of security training
  • Engaging in business of radiological medical products
  • Provision of non-domestic statistic and survey services
  • Engaging in merger and acquisition or restructuring projects of certain listed companies

By doing so, the Chinese government encourages entrepreneurs in the mentioned sectors to enter the Chinese market in order to develop such sectors further. There are also areas in which new restrictions have been posted, for example the provision of news services, operation of social media platforms, production and transportation of certain chemicals. 

The Negative List for foreign investments 

Ancillary to the scheme of Negative List for Market Access, the Chinese government has also introduced a negative list for foreign investments. When considering an investment in Mainland China, foreign investors should pay special attention to the most up-to-date negative list for foreign investments, which bans or imposes restrictions on market entry in further business areas, such as the requirement of establishing a Sino-foreign joint venture when investing into medical institutions and telecom services. The negative list for foreign investments will be reviewed and updated annually. The latest negative list for foreign investments was issued shortly before the end of 2021 and has been in effect as of January 1, 2022

As envisaged by the regulatory body, the latest list lifted the joint venture requirements for foreign investors when investing into the automobile industry. A larger scale of investment in this sector by foreign car manufacturers can be expected in the near future. Limitations for foreign investments in manufacturing of ground receiving facilities and key components for satellite television broadcast have as well been deleted from the current effective negative list for foreign investments.     

Parallel to the Negative List for Foreign Investments, a more liberal negative list for foreign investments is tailor-made for and applies in more than 20 Pilot Free Trade Zones across 21 provinces in China. As a cherry on top, the whole Hainan Island was designated as a special Pilot Free Trade Zone in 2018. There is a negative list for foreign investments applied only to Hainan Pilot Free Trade Zone (the “Hainan Negative List“), which lifts even more curbs for foreign investors. For example, the currently effective Hainan Negative List provides a higher level of relaxation for foreign investment in the areas of mining, manufacturing, telecom services, business services (including legal advisory services, market research services and social research services) and education. 

Opportunities and challenges for European investors 

The implementation of the N scheme demonstrates the commitment of the Chinese government to intensify their efforts to open the domestic market, to offer more legal certainty and a leveled playing field for both domestic and foreign market players. As supporting measures, the administration has been working on streamlining administrative processes, to ensure investments can be brought forward smoothly, whether they are subject to the negative list or not. For foreign investors the Negative List 2021 offers more market access opportunities, enabling the entry into the world’s second largest economy with an enormous customer base of more than 1.4 billion people. 

Investors from around the world have the chance to expand their business in China, especially for those whose business matches the economical hot spots. In the next five years (2021 to 2025), China aims to upgrade the economic structure within the fourteenth ‘Five-Years Plan for the National Economic and Social Development’. In the light of tackling climate change challenges and building up a digitalized society, the focus has been put on digitalization and development of ‘green’ technology to achieve the goal of carbon neutrality. Foreign investors are most welcome as they could bring along advanced technology and management experience. Comprehensive and substantive reforms of the legal system have been reinforced to enhance the protection of intellectual property (IP), which will provide more comfort for foreign investors who have concerns about safeguarding of their own IP rights. 

As a further incentive, the Chinese government has also introduced a Catalogue of Industries for Encouraging Foreign Investment (the “Encouraged Industries Catalogue“). In the currently effective version, as amended in 2020, there are 480 business fields across 13 industrial sectors that the foreign investors are encouraged to participate in nationwide. The Encouraged Industries Catalogue also includes a list with additional encouraged business fields for foreign investments in Middle and Western China. Favorable conditions under the framework of the Encouraged Industries Catalogue include:

  • Tariff exemptions on imported own-used equipment
  • Tax rate reduction for Company Income Tax from 25% to 15%
  • discounted price for acquiring the right for use of industrial lands in China.  

However, challenges for foreign investors still exist, especially for those who have limited experience in doing business in China. Despite the government’s efforts to provide more comfort to foreign investors, the Chinese legal rules and regulations on investments are still quite complicated for new comers, not to mention the language barriers and the cultural differences. Understanding the local culture plays an important part in market penetration and cooperation with the Chinese counterparts. Attention should also be paid to the market research regarding Chinese rivals. After years of development, many Chinese companies have already gathered enough business power to challenge their foreign peers. It is therefore very advisable to engage experienced and knowledgeable professional advisors to support the envisaged market expansion.  

Conclusion and outlook  

China has already been on a fast track of development and its government has been working on adapting and optimizing policies to support the economy boom. Although there are still quite a lot and comprehensive off-limits and restrictions for investing in China, the market is expected to continue to liberalize in the coming years. The market entry regulations, including the Negative List for Market Access and the encouraged industry catalogue, should be monitored thoroughly by foreign investors in order to seize future business potential.  

Reed Smith is a dynamic international law firm with more than 1,700 lawyers in 30 offices across Europe, the US, the Middle East and Asia. For more information, please visit www.reedsmith.com. Florian Hirschmann advises clients on corporate law, in particular on domestic and international private equity and M&A transactions, venture capital and joint ventures. Siling Zhong is a paralegal in the Munich office and a member of the Global Corporate Group and the Reed Smith China Desk Team.

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