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Shanghai FTZ Unveils 2014 Version of "Negative List"

July 2, 2014

 

On June 30, 2014, the Shanghai Municipal Government promulgated the Special Administration Measures on Foreign Investment Access to the China (Shanghai) Pilot Free Trade Zone (2014 Amendment) (中国(上海)自由贸易试验区外商投资准入特别管理措施(负面清单)(2014年修订)) (the “2014 Negative List”) to further liberalize foreign investment in the China (Shanghai) Pilot Free Trade Zone (the “FTZ”).

The 2014 Negative List is a list of industries where foreign investment is restricted or prohibited from the perspective of China’s national security and other national sensitivities. The first “negative list” was published in September 2013 in conjunction with the official launch of the FTZ. Foreign investors proposing to invest in industrial sectors identified on the negative list are subject to close scrutiny, and prior government approval would be required before any investment may take place.

Compared to the 2013 version, the 2014 Negative List has reduced the number of industries on the list from 190 to 139 (of which 29 industries are per se off-limits for foreign investors while 110 are categorized as restricted for foreign investors). Most removals from the list are, not surprisingly, related to the manufacturing and service sectors. Some sectors (such as, the education sector, which attracts a lot of attention from foreign investors) have not seen substantive removals.

A few other sectors of interest to foreign investors, such as real estate, medical services, and financial services, appear to be seeing some incremental changes, but significant questions are awaiting answers or clarifications. For example:



  • Real Estate: foreign investment in the real estate agency sector has been removed from the list. In addition, 100% foreign ownership is now allowed for foreign-invested project companies engaged in master development of land; unfortunately it is not clear whether such project companies in the FTZ may develop projects outside the FTZ.


  • Medical Services: foreign investment in medical institutions are no longer subject to prior explicit restrictions on minimum investment amount (of RMB20 million) and on the maximum operation period (of 20 years),. The prior prohibition on medical institutions from having operating branches remains in force. Since the reference to foreign investment in medical institutions remains on the negative list, however, it is not clear whether such investment (even without any operating branch) would still be subject to approval by the FTZ Administrative Committee (as opposed to just a filing) .


  • Financial Services: prior restrictions on foreign investment in banks, financing companies, trust companies, currency brokers, small loan companies, and financing guarantee companies have now been replaced by a statement that “investment in financial institutions engaged in banking businesses must comply with existing regulations”; it is, however, not clear whether or not the new reference to “financial institutions engaged in banking businesses” would cover financing companies, trust companies, small loan companies, and/or financing guarantee companies which may also engage in businesses similar to businesses undertaken by banks, e.g., lending. 


  • Entertainment: restrictions on foreign investment in Internet cafes have been eliminated, but it is not clear whether such foreign-invested Internet cafes may have operating outlets outside the FTZ.

Notably, the 2014 Negative List clarified certain restrictions which were not apparent in the 2013 version. For example, the 2013 version only provided that “direct sales” were restricted, but did not specify the detailed restrictions. The 2014 Negative List clarified such restrictions by imposing specific requirements for minimum capital and the track record of the potential foreign investor.

With respect to an industrial sector that is not on the list, foreign investors are presumed to enjoy national treatment in terms of market entry in the FTZ; technically, however, it does not automatically mean that such businesses would now be allowed in the FTZ. For example, while restrictions on certain industries, e.g., gambling and pornographic industries, have been removed from the 2014 Negative List, such businesses are still prohibited in the FTZ - they were removed only because the prohibitions on such businesses apply to both Chinese and foreign investors equally under the principle of national treatment for foreign investors. Therefore, a foreign investor should not presume that a particular business is allowed in the FTZ simply because it is not on the 2014 Negative List; such foreign investor would be well advised to seek additional professional advice on whether a proposed business activity is restricted under any PRC laws and regulations applicable to both foreign and Chinese investors.


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