What is the “Encouraged Catalogue” and “Negative List”?
Foreign investment in China is subject to regulatory approval and registration procedures. In this regard, reference should be made to China’s Foreign Investment Law (“FIL”), Market Access Negative List 2019 (“Market Access 2019”), Foreign Investment Industrial Guidance Catalogue (“Catalogue“), Special Management Measures for the Market Entry of Foreign Investment (“Negative List”), Catalogue of Industries for Encouraged Foreign Investment (“Encouraged Catalogue”) and to sector-specific regulations. According to the FIL, Encouraged Catalogue and the Negative List, foreign investment projects in the PRC are classified as “prohibited”, “restricted” “permitted”, or “encouraged”, as follows:
- Prohibited – sectors that are prohibited by the Negative List: foreign investors shall not invest;
- Restricted – sectors that are restricted by the Negative List: foreign investors shall meet the investment conditions stipulated under the negative list;
- Permitted – sectors that are not included in the Negative List: foreign investors are permitted to invest and can enjoy equal access as Chinese domestic investors; and
- Encouraged – sectors that are included in the Encouraged Catalogue: foreign investors are encouraged to invest and can enjoy preferential policies from the government.
The Negative List comprehensively and uniformly applies to all areas in China, with one exception being the free trade zones (“FTZs“), where the Special Management Measures for the Market Entry of Foreign Investment in Pilot Free Trade Zones (“FTZ Negative List”) specifically made for the FTZs shall apply within the FTZs.
On June 30, 2019, MOFCOM and NDRC jointly issued the updated Negative List 2019 and FTZ Negative List 2019 and the Encouraged Catalogue 2019, all of which take effect on July 30, 2019.
Overall, there are fewer sectors where foreign investment are restricted or prohibited, and more sectors where it is encouraged. For example, foreign know-how is welcome according to the Encouraged Catalogue 2019. The encouraged foreign investment catalogue is also reinforced by the new FIL.
What is included in the Negative List?
Specifically, the Negative List integrates the following sectors for foreign investment:
- restricted sectors with constraint on nationality of senior management personnel;
- restricted sectors with constraint on foreign shareholding percentage; and
- prohibited sectors.
Several reasons can justify why an investment sector appears in the Negative List:
- there is already an overcapacity of this kind of investment, or
- the technologies used are considered as outdated or are already mastered by China, or
- the technologies are protected by the government from foreign competition, or
- sensitive sectors such as news, publication, media, education, etc. on which Chinese authorities want to keep full control.
What is encouraged by the Encouraged Catalogue?
– Encouraged Sectors
According to the latest Encouraged Catalogue 2019, foreign investment in modern agriculture, advanced manufacturing, high-tech, energy conservation and environmental protection, modern service industries and other fields nationwide which promotes industrial upgrading are encouraged. Specifically, manufacturing sector is a key sector for encouraged foreign investment, and the State supports more foreign investment in high-end manufacturing, intelligent manufacturing, and green manufacturing, including 5G core components. Encouraged investments may enjoy preferential policies in accordance with specific laws and regulations.
– Encouraged Regions
Foreign investors are encouraged to invest in specific regions, which mainly refer to central and western regions and the northeastern region in China, to transfer foreign-invested sectors to promote regional development.
The updated Encouraged Catalogue and the Negative List mark another step towards the further opening of certain sectors of the Chinese economy to foreign investment, and the Negative List will serve as a reference for foreign investors to determine which sector to invest and whether their investments shall meet the investment conditions for market access.
Foreign investors investing in China are regulated not only by the negative lists addressing foreign investment access, but also by other negative lists applicable to domestic enterprises. For example, the Negative List for Market Access 2019, which categorizes “prohibited” and “restricted” industries for all foreign and domestic investment.
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