October 2022
GREENFIELD INVESTMENT IN CHINA: WHAT RULES TO FOLLOW
Roughly speaking, a foreign company considering investing in China needs to pay attention to Chinese regulations concerning foreign investment, both regarding (i) the industry in which the company considers developing its activity in China and (ii) the rules applicable to the entity set-up itself.
1. Chinese regulations applying to market access
Three different so-called “negative lists” may be applied to foreign investment in China: The Market Access Negative List (2022) (the “Market Access Negative List”), the Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2021) (the “FDI Negative List”) and the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (Edition 2021) (the “FTZ Negative List”). In addition, foreign investors will enjoy preferential benefits in the sectors covered by the Catalogue of Industries for Encouraging Foreign Investment (2020 Version) (“Encouraged Industries Catalogue”).
The negative lists and Encouraged Industries Catalogue perform the functions of prohibiting and restricting foreign investment in certain sectors and providing incentives for foreign investment in other fields.
The FDI Negative List was promulgated on the 27th of December 2021 by the National Development and Reform Commission and the Ministry of Commerce and took effect on the 1st of January 2022, replacing the 2020 edition, while the Market Access Negative List for 2022 was promulgated on the 12th of March 2022 and took effect on the same day.
The Market Access Negative List includes sectors prohibited (which amount to 6 items) or restricted (e.g., subject to licensing by Chinese authorities – which amount to 111 items) for investment from both Chinese and foreign companies. The FDI Negative List applies only to foreign investors and includes additional sectors which are prohibited or restricted to foreign investment in China. The FTZ Negative List applies to foreign investments where such investment takes place in free trade zones existing in China, such zones aiming at offering more favorable investment conditions to foreign investment. Sectors which are not listed in these lists are open to foreign investment.
These negative lists are regularly updated. Compared to its 2020 edition, the FDI Negative List reduces the number of sectors restricted or prohibited to foreign investors from 33 to 31. The two sectors removed in the last edition are automobile manufacturing (meaning that foreign companies are no longer subject to a 50% investment cap on the manufacture of all complete passenger vehicles, including internal combustion engine vehicles, and there is no restriction anymore on the number of joint ventures to be founded by foreign investors in China to manufacture the same type of vehicles, while in the past, one foreign investor may only establish up to two such joint ventures); and Satellite Television Broadcast Ground Receiving Facilities (however, while this sector no longer appears on the FDI Negative List, it remains on the Market Access Negative List, and both Chinese and foreign investors are required to receive regulatory approval to invest in the manufacturing of these facilities and components).
Beyond the list of sectors provided for in the Market Access Negative List (which, as mentioned before, apply to both domestic and foreign investors), sectors still specifically restricted or prohibited to foreign investment in the FDI Negative List are certain activities in the fields considered as critical to China’s national security or public interest which include: agriculture, forestry, animal husbandry and fishery; mining; manufacturing (printing of publications and Chinese medicine related products); power, heat, gas and water production and supply; wholesale and retail of tobacco products; transportation, warehousing and postal services; certain information transmission, software and information technology services; certain leasing and business services; certain scientific search and technical services; certain activities in education; medical institutions; certain activities in the culture, sport and entertainment areas[1].
Therefore, with the removal of nearly all restrictions on the manufacturing sector, the main remaining restrictions on foreign investments concern the services sectors of telecom services, market surveys, entertainment, and vocational education. Some of these restrictions have been relaxed in free trade zones on a pilot basis and similar relaxation of the rules may follow at the national level.
Not only foreign companies, but also foreign-invested enterprises in China (meaning the companies invested and established by foreign investors in China) are requested to comply with the FDI Negative List.
Foreign investors targeting the Chinese market should pay close attention to the negative lists and Encouraged Industries Catalogue in order to select suitable sectors and locations for their China investments and should negotiate with their Chinese counterparts and local authorities to maximize the available preferential benefits. It is also to be borne in mind that even for sectors considered as free from restrictions because they are not mentioned in the negative lists, there can exist some non-public quota controls for foreign investors where authorities limit de facto access to foreign investors.
2. Chinese regulations applying to the setting-up of a company
Whereas previously three specific Chinese laws regulated the setting-up of joint-ventures and wholly owned foreign enterprises in China, imposing specific requirements on corporate formation, foreign ownership ratios, corporate governance and operational management of these foreign-invested companies, the PRC Foreign Investment Law and its implementing regulations (the “Foreign Investment Law”), which took effect on the 1st of January 2020 as a single unified body of law, has repealed such derogatory laws and regulations. Since then, foreign-invested companies are subject, just like purely domestic companies, to the PRC Company Law and Partnership Law, which stipulate different rules on corporate governance, voting, share transfers, profit sharing and so forth. The principle of equal treatment with domestic companies regarding access to government funds, land supply, tax exemptions, licensing, project applications and so on is expressly provided by the Foreign Investment Law.
In addition, the Foreign Investment Law provides that a foreign investment security review system shall be established to conduct a security review of foreign investment that impacts or may impact the national security. The Measures for the Security Review of Foreign Investment have come into effect on the 18th of January 2021. These measures describe types of foreign investment subject to security review, the bodies tasked with performing a security review examination, the appropriate scope of examination, the examination procedures, and sets guidelines for the implementation of examination decisions and the handling of irregularities. In particular, foreign investments in areas that are considered strategically important to national security are subject to security review.
Contact
As a full-service Chinese law firm, DHH Law Firm is at your disposal to help you deepen your reflections concerning your current or future investments or legal matters in China and Chinese policies and regulations. We are used to assisting foreign companies in the setting-up of their local presence in China. Please feel free to contact Christine Miles at [email protected].
[1] Please refer to the text of the FDI Negative List for exact list and wording.