Foreign Investment Reform Brings No New Openings

By Jake Parker and Anna Ashton

In a public setback for China’s Ministry of Commerce (MOFCOM), a touted foreign investment reform reflects the continued use of the National Development and Reform Commission’s (NDRC) approach to managing inbound foreign investment and fails to include even the limited openings that MOFCOM advocated. Delayed more than a week after the planned October 1 implementation date, the measures are an additional signal of China’s sputtering economic reform progress and bureaucratic infighting.

MOFCOM had announced in mid-September that a new system for managing foreign investment incorporating the Free Trade Zone (FTZ) “negative list” would be rolled out nationwide on October 1. The “negative list” approach allows investment in all sectors except those designated as off-limits or with conditions that apply to foreign investors. China has required all foreign investment projects to obtain government approval and has a long list of sectors subject to foreign ownership restrictions in manufacturing, services, and agriculture  

The measures, jointly announced by NDRC and MOFCOM on October 8, will simplify the new foreign investment registration process for many types of projects, and ostensibly introduce a “negative list” approach nationwide for the first time. However, implementation is based on the existing 2015 Catalogue Guiding Foreign Investment (CGFI) favored by NDRC, not the FTZ negative list, which would have liberalized foreign ownership restrictions in a handful of areas such as oil seed processing, gas stations, biofuel production, and shipping agencies.  

In use since 1995, the CGFI places prospective investments into three categories:

• Encouraged  Foreign companies that invest in encouraged industries may receive preferential terms, such as discounted land prices and tax rates. Some “encouraged” sectors have foreign ownership limitations.
• Restricted  Foreign companies that invest in restricted industries may be subject to extra steps in the approval process or restrictions on their operations, as well as ownership limitations.
• Prohibited  Foreign companies are not permitted to invest in industries listed in the prohibited category.

Investments in the restricted and prohibited categories of the CGFI, as well as investments in the encouraged category that are subject to foreign equity and executive management restrictions, will continue to require government review and approval. All other foreign investments will now generally be subject to a simplified registration process that does not require explicit government approval. Companies may obtain a business license from the local Administration of Industry and Commerce and notify the local commerce department of the investment. The commerce department must inform the investor within 15 working days if the filing is incomplete, inaccurate, or requires additional explanation, such as information addressing national security concerns.

In line with a proposed Foreign Investment Law that was released for comment in 2015, investment regulators will have broad authority to question any investment that might affect Chinese security interests. However, no information is provided in the measures on what constitutes a national security risk, or how a security review is managed.

Before the release of the measures, a MOFCOM spokesman confirmed in a widely covered September 20 media briefing that a “national negative list management system” would be rolled out after October 1, based upon the list in use in China’s Free Trade Zones. The US-China Business Council (USCBC) learned that this approach faced internal resistance from other government regulators, with strong NDRC opposition. MOFCOM lost the internal debate and failed to enact its favored system.  

Although the measures fall short of meaningful liberalizations, a concurring announcement indicates NDRC will work with other foreign investment regulators to “continue to revise the CGFI, gradually expand foreign openings, and continue to create a more open and transparent investment environment.” The announcement does not offer a timeline, but USCBC conversations with NDRC indicate a shortened investment catalogue may be released before the end of the year. Based on past experience, such changes are likely to be incremental rather than substantial.

About the authors: Jake Parker is the vice president of China operations with the US-China Business Council and Anna Ashton is the director of Business Advisory Services for USCBC.