Since July 2013, when China and the United States resumed negotiations on the substantive issues of the Bilateral Investment Agreement (BIT), further expansion of China's openness to foreign investment and reduction of controls in the field of foreign investment have been the key issues for both sides. In this international environment, the Shanghai Free Trade Zone (SFTZ) has taken the lead in formulating the Special Administrative Measures for Foreign Investment Entry (i.e., the Negative List) to replace the Investment Catalog by making reference to the international practice of the Negative List, in which restrictive or prohibitory measures for foreign investment projects within the zone are set out.When the Negative List was first released in 2013, it covered almost all the restrictive policies for foreign investment in the Investment Catalog in 2011. When the Negative List was first released in 2013, it covered almost all of the restrictions on foreign investment in the 2011 Investment Catalog, and while foreign investors were slightly disappointed, the Shanghai FTZ revised the Negative List again in July 2014, reducing the number of restricted and prohibited industries from 190 to 139. But because of the limited liberalization and the fact that the negative list only applies to the Shanghai FTZ, the market has been expecting further in-depth reforms in the area of foreign investment access.
The consultation draft seems to have answered the market's expectations. Although the negative list format has not yet been adopted, the Investment Catalog's liberalization of foreign investment access areas far exceeds that of the Shanghai FTZ's negative list. This revision encourages foreign investment in advanced manufacturing, modern services, science and technology R & D and other areas, for the industry does not involve national economic security or public **** interests tend to rely on government regulation to the market hand regulation. Overall, encouragement of the project deletion and adjustment is not large, restricted entries significantly reduced (from 79 to 35), and many areas of liberalization of foreign equity ratio restrictions ("cooperation", "joint venture" entries from 43 to 11, "Chinese party holding" entries to 11, and "the Chinese party holding" entries to 11. The number of entries of "Chinese party holding" was reduced from 44 to 32). Among them, some of the noteworthy changes in foreign investment access policies are as follows:
Manufacturing industry
In this consultation draft, the opening up of the manufacturing industry is more significant. The existing "Investment Catalog" in the restricted category of manufacturing entries have been significantly reduced, including beverage manufacturing, chemical raw materials and chemicals manufacturing, chemical fiber manufacturing, general equipment manufacturing, special equipment manufacturing (except for weapons and ammunition manufacturing, belonging to the prohibited category), transportation equipment manufacturing, communications equipment, computers and other electronic equipment manufacturing, including the entries have been almost completely deleted. The aforementioned industries will thus be adjusted to the permitted category, foreign investors will be able to invest in these areas, and their investment methods and shareholding ratio are not restricted.
Pharmaceutical and medical industry
There are also major changes in the pharmaceutical industry policy in the consultation draft, as the production of pharmaceuticals with overcapacity (such as multivitamins and calcium) and the production of raw materials for narcotic drugs and a class of psychotropic drugs listed in the restricted category of the Investment Catalog in 2011 have been deleted and reclassified as permissible, which is a manifestation of the government's desire to regulate the industry's development independently through the market. The government's desire to regulate the development of the industry through market autonomy is also reflected.
But on the other hand, we notice that the government's regulation of medical institutions has tightened. In the 2007 Investment Catalog, medical institutions were a restricted industry, and the form of investment was limited to joint ventures and cooperation, which was subsequently adjusted to the permitted category in the current 2011 Investment Catalog. However, in practice, the establishment of wholly foreign-owned medical institutions remains difficult. Although the Shanghai Free Trade Zone has a breakthrough in this area, allowing the establishment of wholly foreign-owned medical institutions, and the industry to liberalize the restrictions on foreign investment in medical institutions, the current revision of the "Investment Catalogue" will once again be included in the restricted category of medical institutions, and will be limited to the form of investment in the form of cooperation, which means that the restrictions on foreign-invested health care institutions will not be liberalized in the short term.
Automotive industry
In the current 2011 Investment Catalog, the manufacturing and R&D of automotive electronic devices mostly belong to the encouragement category, but certain investments are limited to joint ventures or cooperation, such as automotive electronic bus network technology, electronic controllers for electric power steering systems, and embedded electronic integration systems. The current draft has been removed from the aforementioned industries on the investment mode of restrictions, that is, foreign investors can be set up in the above areas of wholly foreign-owned enterprises or joint ventures, there is no longer a Chinese equity participation or participation in cooperation requirements.
But for the first time, the draft clearly lists automobile, special-purpose vehicle and motorcycle manufacturing as a restricted category, and stipulates that the share ratio of the Chinese side shall not be less than 50%, and that the same foreign investor may set up two (including two) or less joint ventures in the country to produce the same kind of (i.e., passenger car, commercial vehicle, and motorcycle) automobile, but may not be subject to the limit of two (including two) in the case of a joint venture with the Chinese joint venture partner to merge with other domestic automobile manufacturing enterprises. However, in case of merging with the Chinese joint venture partner to take over other domestic automobile manufacturers, the limit of two is not applicable. The restrictions in the draft are almost identical to those in the "Automobile Industry Development Policy" issued in 2004, but do not include the manufacture of agricultural vehicles in the restricted category.
Automobile vehicle manufacturing was listed as an encouraged foreign-invested project in the 2007 Investment Catalog, while it has been moved out of the encouraged category to become a permitted project in the 2011 version of the Investment Catalog, which is managed under the Automobile Industry Development Policy. And this time it will be clearly categorized as restricted category, reflecting the trend of regulators to gradually tighten foreign investment in vehicle manufacturing industry and the support for the development of independent brand automobile industry. On the other hand, the much-anticipated issue of liberalizing the joint-venture share ratio restriction on vehicle manufacturing in recent years will probably be put on hold for the time being, judging from the exposure draft.
Communications, Internet
Overall, the country is encouraging the development of new businesses in the communications and Internet sectors. The current consultation draft eliminates the restriction on the equity ratio of e-commerce in value-added telecommunications, which may be related to the state's policy of promoting the development of e-commerce. At present, the Shanghai free trade zone negative list of foreign investment in the field of e-commerce up to 55%, Shanghai free trade zone outside the region will also comply with the 55% foreign equity ratio ceiling or the full liberalization of foreign investment restrictions have yet to be "investment directory" formally promulgated and implemented after the test.
At the same time, the emerging Internet of Things (IoT) business, namely IoT technology development and application, has also been included in the encouragement category. Such modifications are in line with the policy orientation of the Chinese government to gain a leading position in IoT-related technologies in the mobile Internet era. For technologies that may fall under the IoT domain, such as the Internet of Vehicles, wearable mobile technologies and smart grid technologies, foreign investors investing in the development and application of these technologies in the future will likely enjoy facilitated investment approvals and preferential policies in terms of taxation.
On the other hand, in line with the previous policy on foreign investment in the publishing industry, online publishing services have been explicitly listed as a prohibited category in the consultation draft. Such adjustments are not surprising, as the "Opinions on the Introduction of Foreign Investment in the Cultural Sector" issued by the Ministry of Culture and the Press and Publication Administration in 2005 also explicitly prohibited foreign investment in Internet publishing.
Infrastructure, real estate
Compared with the 2011 Investment Catalog, the draft removes restrictions on foreign investment in metro and real estate. Specifically, the construction and operation of urban metro, light rail and other rail transportation in the encouraged category no longer has the restriction of Chinese party holding, if this adjustment is finally implemented, foreign investors are expected to build and operate metro and light rail lines in China on a wholly-owned basis. In addition, the draft will adjust the real estate industry from a restricted category to a permitted category, no longer restricting foreign investors in China to carry out piecemeal development of land and the construction and operation of high-grade hotels, office buildings, international conference and exhibition centers.
Education
Contrary to the trend of liberalization in other sectors, the overall education sector is more tightly restricted for foreign investment in this consultation draft. Higher education institutions and childcare institutions have been added to the restricted category, and the investment model is limited to cooperation and led by the Chinese side; while the investment model of general high school education institutions, which was originally in the restricted category, is also required to be led by the Chinese side. Compulsory education institutions have been listed as a prohibited category, and it will be difficult for foreign investment to enter China's basic education in the future.
Services
Accounting and auditing, one of the encouraged categories, was "limited to cooperation and partnership" in the 2011 Investment Catalog, but the requirement has been deleted in the draft. This means that foreign investors will be able to set up wholly-owned accounting firms in China to provide accounting and auditing services.
Restrictions on the entertainment industry have also been further liberalized. The operation of performance venues in the encouraged category is no longer subject to restrictions on Chinese control, while the construction and operation of large-scale theme parks and the operation of entertainment venues have also been removed from the restricted category and become permitted items.
But foreign investment policies in some service sectors, such as legal counseling and cultural relics auctions, show the opposite trend. In the 2011 Investment Catalog, legal consulting belonged to the restricted category; while in this revised draft, China's legal affairs consulting is explicitly listed as a prohibited category, clarifying China's WTO accession commitments and the provisions in the regulations on the supervision of foreign law firms' representative offices in China. In addition, the operation of cultural relics auction auction enterprises, cultural relics store is also clearly listed as a prohibited category.