Invest in China (1): What is the Negative List for Foreign Investment?

Intro China is gradually relaxing its restrictions on foreign investors looking to enter the internal market, and recently enterprises from various industry have consulted with us upon expanding their businesses into the territory. it is presumed that, foreign investors seizing this opportunity to enter Chinese markets would acquire major advantages than their competitors while facing the just-updated welcoming policies. In order to help you gain a better understanding of the legal requirements investing into China by whatever means, we plan to publish on our website a series of articles giving an overview of the relevant rules and regulations, as well as the general process involved in it. If you have any further inquiries about the article or our services, please contact us.

For industries not on the negative list, foreign investors shall be treated equally as their domestic counterparts – when accessing the industries, save for record-filing requirements with the relevant authorities. Additionally, all foreign invested enterprises will be required to follow the corporate governance rules under the PRC Company Law. In conclusion, Foreign investors should note the following three points before entering the Chinese market: * the entry permit system for foreign investment is implemented in accordance with the Negative List, and the implementation varies from different business areas, and between the entire country and the Free Trade Zones; * For investment areas that are not listed in the Negative List, foreign investors are now only required to register their investments with the relevant authorities. * All foreign invested enterprises will be required to follow the corporate governance rules under the Company Law of China since 1 Jan 2020. Here we have attached an English version of the 2019 Negative List for your reference. If you are planning to expand your business into China in the foreseeable future, make sure you understand the latest reform of the law. You can keep an eye out for our upcoming articles, or simply contact us via our website. Section 2: the 2019 list Category 1: Agriculture, forestry, animal husbandry, fisheries 1. Chinese companies must have a controlling stake in the selection and seed production of new varieties of wheat and corn. 2. Investment in the development, breeding, cultivation and production of related reproductive materials (including the good genes of the cultivation, animal husbandry and aquaculture industries) of rare and unique Chinese varieties is prohibited. 3. It is prohibited to invest in the selection and breeding of genetically modified varieties of crops, livestock and poultry, and the production of genetically modified seeds (seedlings). Category 2: Mining 1. Investment in rare earths, radioactive minerals, tungsten exploration, mining and mineral processing is prohibited. (Without permission, access to rare earth mining areas or access to mine geological data, ore samples and production technology is prohibited.) Category 3: Manufacturing 1. It is prohibited to invest in the production of traditional Chinese medicine confidential prescription products. 2. The Chinese share of vehicle manufacturing companies, including special and new energy vehicles, should not be less not than 50%. (The limit on foreign shares in commercial vehicle manufacturing will be lifted in 2020. In 2022 the restriction of foreign share ratio in passenger car manufacturing and the restriction of the same foreign company can establish two or less joint ventures in China to produce similar vehicle products will be removed.) 3. It is prohibited to invest in satellite TV broadcast ground receiving facilities and key parts production. Category 4: Electricity, heat, gas and water production and supply 1. Chinese companies must have a controlling stake in the construction and operation of nuclear power plants. 2. Chinese companies must have a controlling stake in the construction and operation of urban water supply and drainage network spree with a population of more than 500,000. Category 5: Wholesale and retail 1. It is prohibited to invest in the wholesale and retail of tobacco leaves, cigarettes, re-baked tobacco leaves and other tobacco products. Category 6: Transport, warehousing and postal services 1. It is required that Chinese companies have a controlling stake in the domestic water transport. Furthermore, it is prohibited to operate or lease a Chinese ship or class of space in disguise to operate domestic waterway transport business and its ancillary business. The waterway transport operator may not use a ship of foreign nationality to carry out domestic waterway transport business, unless they do so with the approval of the Chinese Government, where there are no Chinese vessels in China that can meet the requirements for the requested transportation. In the event that the port or waters of which the ship is docked are open to the outside world, the waterway transport operator may temporarily use a ship of foreign nationality to operate maritime transport and tow between Chinese ports within the time limit or voyage prescribed by the Chinese government. 2. It is required that Chinese companies have a controlling stake in the domestic water transport. Furthermore, it is prohibited to operate or lease a Chinese ship or class of space in disguise to operate domestic waterway transport business and its ancillary business. The waterway transport operator may not use a ship of foreign nationality to carry out domestic waterway transport business, unless they do so with the approval of the Chinese Government, where there are no Chinese vessels in China that can meet the requirements for the requested transportation. In the event that the port or waters of which the ship is docked are open to the outside world, the waterway transport operator may temporarily use a ship of foreign nationality to operate maritime transport and tow between Chinese ports within the time limit or voyage prescribed by the Chinese government. The waterway transport operator shall be controlled by the Chinese side and if the proportion of investment by a foreign investor and its affiliated enterprises shall not exceed 25%, the legal representative shall be a Chinese citizen. Only Chinese public air transport enterprises can operate domestic aviation services and provide regular and irregular international air services as designated carriers in China. 3. The legal representative of non-commercial airlines must be a Chinese citizen, of which agriculture, forestry and fisheries airlines shall be limited to joint ventures and other general-purpose airlines shall be limited to Chinese holdings. 4. Chinese companies must have a controlling stake in the construction and operation of civil airports. 5. Investment in air traffic control is prohibited. 6. It is prohibited to invest in the domestic express services provided by postal companies (and to operate postal services) and letters. Category 7: Information transmission, software and information technology services 1. Pursuant to China’s commitment to open telecommunication sector to foreign investment, companies may have a value-added telecommunications business with no more than 50% of the shares belonging to foreign companies (except e-commerce, domestic multi-party communications, storage and forwarding categories, call centers). Basic telecommunications business must be controlled by the Chinese partner and the operator must be established in accordance with the law specializing in basic telecommunications business companies. The pilot policy of the original area of the Shanghai Free Trade Test Zone was extended to all pilot FTZs. 2. The pilot policy of the original area of the Shanghai Free Trade Test Zone prohibits the investment in Internet news information services, internet publishing services, network audio-visual program services, Internet cultural operation (except music), and Internet public information services (except for the contents already opened in China’s WTO accession commitments). Category 8: Finance 1. The ratio of foreign shares in securities companies shall not exceed 51%, and the ratio of foreign shares in securities investment fund management companies shall not exceed 51%. (Elimination of the foreign-equity ratio limit will take place in 2021) 2. The ratio of foreign shares in futures companies shall not exceed 51%. (Elimination of the foreign-equity ratio limit will take place in 2021) 3. The ratio of foreign shares in life insurance companies shall not exceed 51%. (Elimination of the foreign-equity ratio limit will take place in 2021) Category 9: Leasing and business services 1. Investment in Chinese legal affairs (except for information on the environmental impact of Chinese law) is prohibited to partners of domestic law firms. (Foreign law firms may only enter China as representative bodies, and may not employ Chinese practicing lawyers. Furthermore, the assistants employed may not provide legal services to their clients. If foreign firms establish a representative office or presence in China, they must obtain the permission of the judicial administration of China. 2. Market research involving radio and television listening and viewing surveys is limited to joint ventures in which the Chinese company owns a controlling stake. 3. Investment in social surveys is prohibited. Category 10: Scientific research and technology services 1. Investment in human stem cell, gene diagnosis and therapeutic technology development and application is prohibited. 2. Investment in humanities and social science research institutions is prohibited. 3. It is prohibited to invest in geodesy, marine mapping, surveying and aerial photography, ground movement surveys, administrative area boundary mapping, topographic maps, maps of world political areas, maps of national political areas, maps of provincial and below political areas, national teaching maps, local teaching maps, true 3D maps and navigational electronic maps, regional geological mapping, mineral geology, geophysics, geochemistry, hydrogeology, environmental geology, geological disasters, remote sensing geology, etc. Category 11: Education 1. Pre-school, ordinary high schools and higher education institutions are limited to Sino-foreign cooperative running of schools and shall be controlled by the Chinese side (the principal or principal administrative officer shall have Chinese nationality and live in China). Board members should be Chinese, and the board of directors or joint management committee shall not have a ratio less than 1/2. (Foreign educational institutions, other organizations or individuals may not set up separate schools and other educational institutions with Chinese citizens as the main target of enrollment (excluding non-academic vocational skills training), but foreign educational institutions may, in cooperation with Chinese educational institutions, organize educational institutions with Chinese citizens as the main target of enrollment. ) 2. Investment in compulsory education institutions and religious educational institutions is prohibited. Category 12: Health and social work 1. Medical institutions are limited to joint ventures and cooperation. Category 13: Culture, sports and entertainment 1. Investment in news organizations (including but not limited to news agencies) is prohibited. Foreign news organizations must be approved by the Chinese government for the establishment of permanent news organizations in China and the dispatch of permanent correspondents to China. The news services provided by foreign news agencies in China must be approved by the Chinese government. Business cooperation between Chinese and foreign news organizations must be led by the Chinese side and subject to the approval of the Chinese Government. 2. Investment in the editing, publication and production of books, newspapers, periodicals, audio-visual products and electronic publications is prohibited. With the approval of the Chinese government, however, Chinese and foreign publishing units may carry out joint publishing projects in press and publishing under conditions that ensure that the Chinese company has a controlling stake and that all materials comply with Chinese law and receive the approval of the Chinese Government.) The provision of financial information services in China is prohibited without the approval of the Chinese government. 3. It is prohibited to invest in radio stations, television stations, radio and television channels, radio and television transmission coverage networks and related infrastructure. It is prohibited to engage in radio and television video-on-demand services and to install services at satellite television broadcast ground receiving facilities. (The approval system shall be implemented for overseas satellite channels.) 4. It is prohibited to invest in the production and operation of radio and television programs (including the introduction of business) companies. The introduction of overseas film and television dramas and the introduction of other overseas television programs by satellite transmission shall be declared by units designated by the General Administration of Radio and Television. A licensing system shall be implemented for the co-production of TV dramas and cartoons between China and foreign countries. 5. It is prohibited to invest in film production companies, distribution companies, academic media companies and film introduction business. With special approval, Chinese and foreign companies can co-produce films. 6. Auction companies, cultural relics stores, and state-owned cultural relics museums prohibit investment in auctions of cultural relics. (The transfer, mortgage and lease of non-movable cultural relics and cultural relics prohibited by the State from leaving the country shall be prohibited.) It is prohibited to set up and operate an investigation body on intangible cultural heritage, and the investigation, exploration and excavation of intangible cultural heritage by overseas organizations or individuals in China shall take the form of cooperation with China and be subject to special approval and approval. 7. A Chinese partner must have a controlling stake in arts and cultural performance.