Changes to Shanghai FTZ Negative List Fall Short of Expectations

Matthew Margulies

A recently released revised list of foreign ownership restrictions in the Shanghai Free Trade Zone (FTZ) offers reductions that are an incremental step forward in China’s broad economic reforms, but of little practical use to foreign companies due to the limited number and geographic scope of the openings. While changes to the “negative list” should not be dismissed as meaningless, the limited number of substantive reductions falls short of sending a strong signal to the foreign business community about removing investment barriers and expanding market openings.

China agreed to use the negative list approach during negotiations with the United States for a bilateral investment treaty (BIT) at the 2013 US-China Strategic and Economic Dialogue, a welcome development in the negotiation progress. The subsequent establishment of the Shanghai FTZ and issuance of its negative list in 2013 were highly anticipated and considered barometers of the speed and determination of China’s planned reform efforts. The Shanghai FTZ negative list—which identifies sectors that will retain restrictions on foreign investment—will serve as a model Chinese regulators would be willing to use for a BIT with the United States.

The length of the Shanghai FTZ’s 2013 negative list, which included nearly all of the restrictions outlined in the 2011 Catalogue Guiding Foreign Investment, was a disappointment for foreign companies. Chinese officials acknowledged this view, but said that simply establishing the negative list was a necessary first step, as they planned to issue annual revisions. Early feedback from US-China Business Council (USCBC) members shows that the reductions included in the 2014 negative list are modest and do little to address broader concerns about the speed of China’s reforms to its restrictive investment regime.

Limitations of the revised negative list

The revised negative list includes 139 restrictions, down from 190 restrictions in 2013. Around one-third of the reductions, however, are largely a result of re-classification of categories rather than reduction in the number of restrictions. Twenty-eight negative list sectors from the 2013 list have been removed outright. Other changes to this list include re-categorizing multiple restrictions into one. For example, in the 2013 negative list “legal services” included two restrictions. The 2014 negative list combines these two restrictions into one, keeping the restrictions the same in practice while shortening the list.

Several industries that were eliminated from the negative list are industries in which foreign companies would be unlikely to invest in the Shanghai FTZ. For example, smelting of rare earth and non-ferrous metals, investment in railway cargo transport companies, and construction of coal-fired power plants have all been removed from the 2014 negative list. But these areas were never likely to attract investment in the Shanghai FTZ, so their removal does little to immediately expand market access. However, these areas may be of interest if subsequently rolled out nationally.

Positive changes

Thirty-three sectors will have openings due to their deletion or modification in the 2014 revisions of the Shanghai FTZ negative list, including: 

  • Investment in companies engaged in certification services for imported and exported goods
  • Production of over 20 pharmaceutical drugs and vitamins that were restricted in the 2011 Catalogue Guiding Foreign Investment
  • Investment in land development
  • Production of all types of ordinary level bearings and parts (steel balls, retainers)
  • Production of wheeled or crawler cranes
  • Development and application of new technologies to improve oil recovery

Some items on the 2013 negative list have been revised for 2014 to loosen existing restrictions, clarify language on existing restrictions, or apply new restrictions. The following list includes some key restrictions from the 2013 negative list that have been altered on the 2014 revised list.

  • On the 2013 list, foreign companies were prohibited from manufacturing hydraulic excavators less than or equal to 30 tons and wheeled loaders less than or equal to 6 tons. The 2014 list reduces that scope by forbidding the manufacture of hydraulic excavators between 15 and 30 tons and wheeled loaders between 3 and 6 tons.
  • On the 2013 list, foreign companies were restricted to joint ventures with a minimum of 50 percent Chinese ownership in motorcycle manufacturing. The 2014 list has reduced restrictions by requiring Chinese ownership of at least 50 percent only in the manufacturing of motorcycles with engine displacement greater than 250 milliliters.
  • On the 2013 list, foreign investment in shipping agencies was restricted to companies whose equity was controlled by a Chinese party. The 2014 list reduces restrictions by allowing foreign companies to own a less than 51 percent stake in international shipping agencies.
  • The 2013 list prohibited foreign companies from wholesale and distribution of vegetable oil, sugar, and tobacco. The 2014 list has eliminated vegetable oil and sugar from this list of items.

Negative list items related to financial services, agricultural processing, and key manufacturing industries such as automobiles were largely unchanged in the revised list.

China’s internal revision process and future benchmarks

USCBC has learned through discussions with official sources that the Shanghai leadership made more significant reductions to the initial 2014 negative list before sending it to central government officials for review. The central government then deleted several of the proposed reductions. According to sources, the sectors that have been opened in the 2014 negative list are areas in which the central government believes Chinese industry is relatively mature. In other cases, the government is still looking to attract more advanced foreign technologies to those sectors.

In addition, USCBC member companies in China have noted that the National Development and Reform Commission (NDRC) has begun outreach for comments on revisions to the next edition of China’s Catalogue Guiding Foreign Investment, which applies to foreign investment nationwide. The catalogue is usually revised once every 3-4 years, with the last revision being released in late 2011. The release of the next edition of the catalogue will also be an important barometer for the Chinese government’s willingness to push forward broader reforms to open their national investment regime and allow the benefits of greater competition in what are currently closed sectors of the economy.