Movement in the Free Trade Zones Signal Openings

By Owen Haacke

China’s central government offered temporary, moderate market access improvements for foreign companies and simplified filing procedures in China’s free trade zones last month.

The Provisional Adjustment of Administrative Rules and Regulations in Pilot Free Trade Zones (FTZs), released July 19 by the State Council, applies to the Guangdong, Tianjin, Fujian, and Shanghai FTZs, and for a temporary, but unspecified, amount of time allows companies in a number of industries to operate as wholly foreign-owned enterprises and liberalizes foreign ownership restrictions within designated FTZ areas. The regulations also call for a temporary move from an approval process for foreign investment to a simplified filing system for new investments not on the FTZ negative list.

These changes to administrative regulations within the FTZ could make it easier for foreign companies to participate in the China market in select, restricted areas. Though the changes may not prove permanent, some companies are evaluating adjustments to operations in light of these positive signals from the State Council.

Openings

The openings end the quiet period that followed the April 2015 release of a new FTZ negative list that applies to the expanded Shanghai FTZ and covers three additional regions: Fujian, Guangzhou, and Tianjin. The most significant adjustment temporarily allows full foreign ownership in sectors that previously required foreign companies to participate in minority share joint ventures (JV) under China’s 2015 Catalogue Guiding Foreign Investment (CGFI). These openings range from manufacturing to services, and include industries such as high-capacity electric vehicle battery production, motorcycle manufacturing and foreign ownership of entertainment venues.  

Items previously restricted to foreign investment in the 2015 CGFI that are now open to 100 percent foreign-owned investment are:

• Exploration and development of oil and natural gas (including oil shale, oil sand, shale gas, coal bed methane and other non-conventional oil resources); use of mining gas
• Processing edible oils from soybean, rapeseed, peanut, cottonseed, tea seed, sunflower seed, and palm oil
• Manufacture of biofuels (ethanol and biodiesel)
• Manufacture of motorcycles
• Manufacturing of rail equipment
• Construction and operation of gas stations
• Construction and operation of key comprehensive water-conservancy hubs
• Manufacture and R&D of electronic equipment for autos
• Manufacture of energy storage batteries for new energy vehicles

Items previously restricted to foreign investment in the 2015 CGFI that now allow additional foreign ownership, but not complete foreign-owned investment are:

• Selection and breeding of new types of agricultural goods, and production of seeds Removes the requirement that the China partner own a controlling share in joint ventures with foreign companies, though foreign companies still cannot have full ownership of their China ventures.
• Purchase of grain, wholesale of grain and cotton, establishment of large-scale agriculture wholesale markets Removes restriction on ability to operate, but does not indicate full ownership is allowed

Other foreign-ownership restrictions set by industry regulators that were lifted include:

• Accreditation and certification agencies Removal of three-year prior accrediting experience requirement
• Air cargo sales agencies, warehousing, ground services, and food services Allows full foreign ownership, when previously restricted to JVs
• Direct sales Removal of three-year prior direct sale experience requirement
• Steel production Allows controlling stakes by foreign companies

• Performance (entertainment) agent companies Removes language requiring 51 percent domestic stake and allows full ownership
• Marine shipping brokers and management services Allows foreign companies up to a 51 percent ownership stake, when previously restricted to 41 percent
• Marine shipping service providers Allows 100 percent foreign ownership, when previously restricted to a 49 percent stake
• Printing published materials Allows foreign companies to participate, when previously restricted to domestic companies, but does not indicate full ownership is allowed
• Entertainment centers Allows full foreign ownership, when previously limited to domestic JVs or partnerships

Move to filing system to ease administrative processes

Twenty approval items were shifted to the filing procedure as part of a gradual move by the central government to streamline investment management by reducing government scrutiny. Investment not included in the the April 2015 FTZ negative list or the 2013 Catalogue of Investment Projects Subject to Government Approval will be subject to a simplified filing system.

Impact of openings

While the openings signal progress in specific industry areas, the physical location is limited to the FTZs. Because the openings are temporary and apply for an undefined period of time, the move creates uncertainty about future policies.

Though these openings are limited, and do not address many of the more pressing areas where companies are restricted from participation—such as allowing fully foreign-owned banks—they may be indicative of future liberalizations that the Market Access Negative List will usher in.

The FTZ liberalizations are only incremental in the context of broader economic reforms that companies hope to see from China’s leadership. On its own, the overall impact of these specific liberalizations on company operations is likely to be muted. However, FTZ reforms are testing grounds for nationwide reforms and the national Market Access Negative List, and may hint at the market openings on the table in the US-China bilateral investment treaty (BIT) negotiations.