China’s Foreign Investment Law and Updated Investment Negative List: New Opportunities for Foreign Investment in China | Womble Bond Dickinson

Dayana Jones

On December 27, 2021, China’s National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) published an updated Negative List for foreign investment in China (the “2021 Negative List”).  The 2021 Negative List reduces the number of restricted or prohibited sectors from 33 to 31 and allows foreign investors to form wholly foreign-owned enterprises for vehicle manufacturing, including special purpose vehicles, new-energy vehicles, commercial vehicles, and passenger vehicles. It also removes the restriction in connection with investment in the manufacturing of satellite television broadcast ground receiving facilities.  In addition, the 2021 Negative List now requires any Chinese domestic companies in businesses prohibited by the Negative List to obtain relevant government approval before pursuing an IPO outside of China.  

Under the 2021 Negative List, there are currently 31 restricted and prohibited industries in China for foreign investment: 

  1. Restricted: the domestic Chinese party shall own at least 34% of a company in the business of selection and cultivation of new varieties of, and production of the seeds of, wheat.  Company in the business of selection and cultivation of new varieties of, and production of seeds of, corn, must be controlled by a domestic Chinese party.
  2. Prohibited: research, development, breeding and planting of China’s rare and unique precious quality varieties and the production of relevant breeding materials (including quality genes of planting, animal husbandry and aquaculture).
  3. Prohibited: selection of genetically modified varieties and the production of genetically modified seeds (fingerlings) in connection with crops, breeding stock and poultry, and aquatic fingerlings is prohibited.
  4. Prohibited: fishing for aquatic products in sea areas within Chinese jurisdiction and China’s inland waters 
  5. Prohibited: rare earths, and the reconnaissance, mining and beneficiation of radioactive minerals and tungsten 
  6. Restricted: Investment into publication business must be controlled by a domestic Chinese party.
  7. Prohibited: Application of steaming, stir-frying, burning, calcination and other processing technologies of Chinese medicine and the production of confidential prescription products for proprietary Chinese medicines.
  8. Restricted: Construction and operation of nuclear power plant shall be controlled by a domestic Chinese party.
  9. Prohibited: wholesale and retail of leaf tobacco, cigarettes, re-dried leaf tobacco and other tobacco products.
  10. Restricted: Domestic waterborne transportation companies shall be controlled by Chinese parties.
  11. Restricted: A public airline transportation company must be controlled by a domestic Chinese party, and the investment made by a single foreign investor together with its related-party enterprises in such company shall not exceed 25%, and such company’s legal representative must be a Chinese citizen. Legal representative of general aviation companies must be a Chinese citizen, of which, those for the agriculture, forestry and fishery industries are limited to joint ventures only, while others shall be controlled by Chinese parties.
  12. Restricted: investment in the construction and operation of civil airports must be controlled by a Chinese party. Foreign parties are not allowed to participate in the construction and operation of airport towers.
  13. Prohibited: postal service and the business of domestic  mail delivery service 
  14. Restricted: Telecommunications companies – subject to China’s WTO accession commitments; the shareholding ratio of foreign investment in a value-added telecommunications business (excluding e-commerce business, domestic multi-party communications, store-and-forward and call centers) shall not exceed 50%; the basic telecommunication business must be controlled by the Chinese party.
  15. Prohibited:  internet news services, online publishing services, online audio-visual program services, internet culture operation (excluding music), and internet public-oriented information releasing services (excluding services that is permitted under China’s WTO accession commitments). 
  16. Prohibited: Chinese legal business (except for providing information relating to the impacts of China’s legal environment); becoming the partner of a domestic law office. 
  17. Restricted: market surveys business is limited to joint ventures; broadcasting and television listening and rating surveys must be controlled by a domestic Chinese party.
  18. Prohibited: social surveys.
  19. Prohibited: development and application of technologies of human stem cell and gene diagnosis and treatment. 
  20. Prohibited: humanistic and social science research institutions. 
  21. Prohibited: geodetic surveying, hydrographic surveying and charting, surveying and mapping via aerial photography, ground mobile surveying, surveying and mapping of administrative area borders, compiling of topographical maps, world administrative maps, national administrative maps, administrative maps at the provincial level or below, national school maps, local school maps and true three-dimensional maps, compiling of navigation electronic maps and regional investigations in terms of geological mapping, mineral geology, geophysics, geochemistry, hydrogeology, environmental geology, geological disasters and remote sensing geology (Mining right owners working within the scope of their mining rights will not be subject to this special administrative measure).
  22. Restricted: pre-school institutions, senior high schools and institutions of higher education shall be jointly run by China-foreign entities; such schools must be dominated by the Chinese parties (principals or major administration heads in charge of such schools shall be of Chinese nationality, and Chinese members shall constitute at least half of the council, board of directors or joint management committee).
  23. Prohibited: Mandatory education institutions and religious education institutions. 
  24. Restricted: Investment in medical institutions shall be limited to joint ventures.
  25. Prohibited: news agencies (including but not limited to press agencies). 
  26. Prohibited: editing, publishing and production of books, newspapers, periodicals, audio-visual products and electronic publications. 
  27. Prohibited:  all levels of broadcasting stations, television stations, radio and television channel and frequency, radio and television transmission networks (including radiating stations, rebroadcasting stations, broadcasting and TV satellites, satellite uplink stations, satellite signal receiving and rebroadcasting stations, microwave stations, monitoring stations and cable broadcasting and television transmission network, etc.) and engagement in the video on demand business of radio and TV and in the provision of services of installation of the ground receiving facilities for satellite television broadcasting. 
  28. Prohibited: radio and television program production and operation (including introduction). 
  29. Prohibited: film production companies, distribution companies, cinema companies and the introduction of films.
  30. Prohibited: selling cultural relics by auction, cultural relic stores and state-owned cultural relic museums. 
  31. Prohibited: cultural and artistic performance groups.

Foreign investment in sectors not included on the 2021 Negative List are subject to the same administrative approval requirements as Chinese domestic investments.

NDRC and MOFCOM also maintain a separate Free Trade Zone Negative List which is only applicable to foreign investment in designated Free Trade Zones. 

According to a recent report prepared by the US International Trade Administration, despite the increasing geopolitical tensions between the US and China, the vast size of the market, the continued growth of the middle and upper class, changing demographics, and the prolonged economic transformation of China, continue to create market opportunities for well-prepared U.S. companies and American products continue to be viewed favorably by Chinese consumers. Particularly, the International Trade Administration has identified the following industry sectors as the leading sectors for US exports and investments: agriculture, aviation, automotive (including recreational vehicles and motorcycles), cosmetics and toiletries, design and construction services, education, energy (including clean technologies, natural gas, energy efficient manufacturing, carbon capture, utilization, and storage, and green building (a broad concept of environmental friendly building processes and technology)) environmental technology, and healthcare (including medical devices, diagnostic imaging, implants, in-vitro diagnostics, and orthopedics). 

Taking advantage of these opportunities without proper experience (knowledge of local law and regulations) or resources (including language capability and cross cultural communication skills) can be challenging.  Therefore, it is important to work with professionals with China experience to help you explore and make the most of the vast market opportunities that exist in China.  

https://www.jdsupra.com/legalnews/china-s-foreign-investment-law-and-1426435/

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