USCBC Recommendations for Revisions to the China (Shanghai) Pilot Free Trade Zone Negative List and Other Reforms

The US-China Business Council (USCBC) represents nearly 220 US companies with significant investments and operations in China and with strong interests in the development of China’s economy and foreign investment regime. We are pleased with the establishment of the China (Shanghai) Pilot Free Trade Zone (FTZ) as a testing ground for further reform in many areas. In particular, the adoption of the negative list approach to regulate foreign investment is a positive move in line with international best practice.

There have been a number of recent positive developments to expand market access in the zone and improve the operational environment for companies. These include the January 6 MIIT Opinions on Further Opening up Value-added Telecommunication Services in the China (Shanghai) Pilot FTZ, which recommends removing some restrictions in value-added telecom services. In addition, steps in 2013 to decentralize, streamline, and limit new administrative approvals are important in helping companies save costs and launch new operations that contribute to China’s economy. The Shanghai FTZ should continue to test these reforms and launch new ones that will broaden market access and provide a more open operating environment for all companies, both domestic and foreign. Such changes will ultimately benefit China’s economy as a whole, not just Shanghai’s.

At the same time, we are concerned that the current negative list retains nearly all of the investment restrictions included in the 2011 Catalogue Guiding Foreign Investment in Industry and other investment-related regulations. These restrictions make it difficult for foreign companies to contribute fully to China’s economic modernization plans and discourage foreign investment into China. Foreign investment plays a critical role in promoting innovation and industrial upgrading, spurring economic growth, and creating high-quality, high-paying jobs in the Chinese economy. An open investment environment without pre-conditions for access in the Shanghai FTZ (and ultimately throughout China) would allow all companies to equally contribute their experiences and best practices to the country’s economic development. Removing current restrictions on foreign investment will help China’s policymakers develop Shanghai into an international financial hub, increase the number of companies relocating their Asia headquarters to Shanghai, and transition China into a leading services economy.

As an example of current negative list practice, USCBC has prepared a summary of US “negative list” in its bilateral investment treaties (Appendix, Page 9-11), covering all restrictions that US maintains or impose potentially in foreign investment. We hope this will be useful as China’s government revises the Shanghai FTZ negative list and considers what it may include in the US-China bilateral investment treaty.

Government policymakers have made great strides over the years in guiding the Chinese economy to achieve sustained growth and development. During President Xi Jinping’s June 2013 visit to the United States, China and the United States reaffirmed the importance of open trade and investment in fostering economic growth, job creation, innovation, and prosperity, and stated their commitment to further liberalize global trade and investment. The Shanghai FTZ and related reforms present an important opportunity for China to harness that momentum by allowing increased access for foreign investment across sectors. USCBC respectfully requests that officials follow the below principles as they draft and revise regulations on foreign investment, make changes to the negative list, and propose and enact additional reforms related to the Shanghai FTZ and the broader Chinese economy:

• Substantially reduce investment restrictions  Allow companies to select the investment vehicle of their choosing by removing all existing ownership restrictions except those absolutely necessary for national security. This would encourage more foreign companies to import capital and technology, to create employment opportunities, and to share international best practices to further develop China’s economy. Following this principle would also be in line with China’s economic development goals. Finally, reducing investment restrictions would encourage governments to make market-driven regulatory decisions that will allow foreign companies to grow and better serve Chinese businesses and consumers.
• Encourage a vibrant services sector through fair and open market competition  Remove ownership restrictions, high capital requirements, and licensing barriers in key sectors, especially in the construction, finance, healthcare, legal, media, and telecom services sectors. This would allow an influx of investment and expertise that could help China reach its goals of increasing the services sector share of GDP, creating jobs, and developing “greener” industries. China’s manufacturing sector became a world leader by opening to global competition in the 1980s. Allowing fair and open competition would similarly encourage China’s service economy to grow and thrive today.
• Equal treatment for foreign and domestic enterprises  Eliminate terminology such as “foreign invested enterprises” to allow all companies to participate in the market under the same conditions. This would help China’s central government more quickly reach its goal of building targeted industries and deploying innovative technologies in the market.

USCBC respectfully submits the following specific changes for consideration, both during the 2014 negative list revision and after, as China’s policymakers pursue deeper reform in the Shanghai FTZ and expand these reforms across China.