It has been over nine months since the Shanghai Free Trade Zone (FTZ) was launched and a “negative list” approach for foreign investment adopted in the FTZ. On 1 July 2014, the Shanghai Municipal People’s Government issued a revised version of the negative list (the “Revised Negative List”), aiming to offer more leeway for foreign investment in the zone.
The negative list, first unveiled in September 2013 (“2013 Negative List”), is a ground-breaking document that lists the industry sectors in which foreign investment is restricted or prohibited. Any industry sector not included on the list is fully open to foreign investment, and more importantly, investment in sectors outside the list is no longer subject to government approval – only a simplified “one-stop” filing procedure is required. The Revised Negative List, which has replaced the 2013 version with immediate effect, adopts the same mechanism but with a shortened list of industry sectors.
Highlights of the Revised Negative List
Compared to the 2013 Negative List, the number of sectors included on the Revised Negative List is reduced by 51 (from 190 to 139). However, almost half the removals made were as a result of combining and regrouping existing sectors, or of mirroring current foreign investment policies included in other regulations (e.g., the foreign investment catalogue and CEPA arrangements). Certain sectors, such as gambling and pornography, are removed from the Revised Negative List because they are generally prohibited by law, and therefore are not open to investment – either from foreign or domestic investors. While these changes bring consistency and clarification to the restrictions on foreign investment in the Shanghai FTZ, they are more concerned with form rather than substance.
Nevertheless, the Revised Negative List – to a certain extent and in a limited number of industry sectors – removes or relaxes restrictions on foreign investment, mostly in the industries of manufacturing, transportation, real estate, wholesale and retail.
Restrictions on foreign investment have been removed in 14 sectors, including:
- Development of tracts of land;
- Operation of premises to provide Internet access (e.g., cyber cafes);
- Railway cargo transport companies;
- Cotton (seed cotton) processing;
- Paper pulp and paper manufacturing;
- Production of benzedrine, dyes and coatings;
- Production of chemical medicines including chloramphenicol, penicillin G, gentamicin and multiple vitamins preparations;
- Smelting of non-ferrous metals (e.g., electrolytic aluminium, copper, lead, zinc); and
- Wholesale, retail and distribution of vegetable oil and sugar.
Certain restrictions on foreign investment have been relaxed in 19 sectors, for example:
- Foreign investors are no longer required to form equity joint ventures with Chinese firms to pursue research, development and manufacturing of automobile electronics, automobile electronic bus-networking technology and electronic controllers for power steering systems.
- The maximum 30-year cap on the business term for any foreign-invested company providing air transportation auxiliary services is now lifted.
- The fact that foreign investors are allowed to set up project companies to trade in the real estate secondary market is clarified.
- Requirements on the minimum amount of total investment and the maximum number of years of business term for a foreign-invested medical institution are removed.
Compared to the 2013 version, the Revised Negative List further opens up the Shanghai FTZ to foreign investment, if to a limited extent. The simplification of the list is not as substantive as had been expected by foreign investors. Restrictions in certain “sensitive” industry sectors, such as telecommunication and finance, remain unchanged. It appears that the government is taking a very prudent approach to gradually relaxing restrictions and offering more flexibility to foreign investors in the FTZ.