Business set-up and consulting in China

China foreign investment Law and 2023 regulatory update

By C.i. Process (Shanghai)
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China foreign regulations explained
 
  Publication updated on August, 8, 2023      

Since China's laws and regulations allowed oversas investments, the foreign investments catalogue is regularly updated. It divides them into 4 categories : encouraged, permitted, restricted and prohibited.

Foreign investments shall be subject to official approval, after examination of the investment feasibility report.

Then, investors can apply for a business license to achieve the company's legal incorporation. They may also obtain other licenses or certificates according to the specific requirements in a targeted sector. After China joined the WTO in December 2001, the previous versions of the catalogue were published in 2004, 2007, 2011, 2015 and 2017.

  China foreign investment Law explained

In June 2018, the National Development and Reform Commission (NDRC) and the Commerce Commission jointly published a new Catalogue of negative list of foreign investments in China. It is hereunder referred to as the negative list. It replaced the previous Catalogue. Please note that, while this List is national in scope, there is a separate negative list that applies specifically to investments in free trade zones.

The List classifies the activities restricted or prohibited to foreign investments

  • The restricted or prohibited sectors are not accessible to foreign investors or are subject to special requirements. For example, the requirement to establish a sino-foreign joint venture (JV) with minority or majority capital shares, depending on the project.

  • Activities in sectors not listed are in principle permitted. This means that the establishment of a 100% owned LLC company or subsidiary (ex-WFOE) is possible to conduct these activities.

 

Insights and changes on an evolving regulation

Compared to 2019, the 2020 version contained a reduced number of restricted activities from 40 to 33. The current applicable list of Encouraged Foreign Investment (in 2023) further reduces them from 33 to 31. While this is not a significant reduction, the restrictions on foreign investment have been removed in the following 2 manufacturing activities :

  • The production of terrestrial reception facilities and key components for satellite TV broadcasting.

  • Automobile manufacturing : China's restrictions on foreign investment in the car manufacturing sector date back to 1994. The Chinese government stipulated that foreign investors could only enter the auto making industry in China through the establishment of a sino-foreign JV. The Chinese partner had to hold at least 50% of the shares and the number of JVs under the name of a single foreign investor was capped at two. Since 2018, this sector has been gradually opened to foreign investors, depending on the type of vehicle built. By order of opening : special purpose vehicles, new energy vehicles (NEV), commercial vehicles, passenger vehicles. Since 2022, China has fully opened this sector to foreign investment without any restrictions.


For the Negative List applicable to the activities of foreign companies conducted in Free Trade Zones :

  • All production sectors are now open to foreign investment.

  • Foreign investments are allowed to enter the social survey sector. Their participation is limited to a maximum of 33% of the capital of a Chinese foreign joint venture. Its legal representatives must be Chinese nationals.

For your reading convenience, we have translated in english the national list in force, herebelow :

The 31 special administrative mesures governing access
to foreign investment in mainland China (negative list)

I. Agriculture, forestry, livestock and fisheries

1. Chinese participation in the breeding and improvement of new wheat varieties and seed production shall not be less than 34%. The selection and improvement of new corn varieties and seed production shall be controlled by the Chinese side of a joint venture. The Chinese party must have a majority interest in the breeding and selection of new corn varieties and seed production.

2. It is prohibited to invest in the research and development, breeding and cultivation of valuable, rare and unique varieties in China, as well as in the production of related breeding materials (including genes for planting, breeding and aquaculture).

3. It is prohibited to invest in breeding and obtaining genetically modified varieties of agricultural crops, livestock and poultry, aquatic plants, as well as in the production of genetically modified seeds (seedlings).

4. It is prohibited to invest in the fishing of aquatic products in Chinese territorial waters and inland waters.

II. Mining activity

5. Investments in the exploration, mining, development of rare earths, radioactive minerals and tungsten are prohibited.

III. Production and manufacturing

6. The printing of publication is controlled by the Chinese part of a joint venture company.
7. It is prohibited to invest in the application of concoction techniques such as steaming, frying, roasting and calcining of Chinese medicine tablets. Prohibited to invest in the production of Chinese proprietary medicine prescription products.

IV. Electricity, heat, gas and water production & distribution industry

8. The construction and operation of nuclear power plants shall be controlled by the Chinese partner of a JV entity.

V. Wholesale and retail trade

9. Iinvestment in wholesale and retail of tobacco, cigarettes and other tobacco products is prohibited.

VI. Transport, storage and postal services

10. Chinese shipping companies shall be controlled by the Chinese side.

11. Any state-owned air transport company shall be controlled by a Chinese partner. The investment share of a foreign enterprise and its subsidiaries shall not exceed 25%. The legal representative must be a Chinese national. For civil aviation companies, the legal representative must be a Chinese national. Sino-foreign joint ventures are limited to civil aviation enterprises in the fields of agriculture, forestry and fisheries. Chinese ownership is restricted to other general aviation companies.

12. The construction and operation of civil airports shall be controlled by the Chinese side. The foreign party is not allowed to participate in the construction or operation of airport towers.
13. Foreign investment in postal enterprises and domestic mail services is prohibited.

VII. Information transmission services, software and information technology

14. Telecommunications enterprises : limited to those telecommunications enterprises that China committed to open upon accession to the WTO. Maximum foreign ownership of 50% in value-added telecom enterprises. (Excluding e-commerce, domestic multi-party store-and-forward communications, and call centers). Core telecommunications business must be controlled by a Chinese partner.

15. Investment in Internet news and information services, Internet publishing services, Internet audio-visual program services, Internet cultural operations (except music) and Internet public publishing services are prohibited (except music). Public information services on the Internet. (excluding the above-mentioned services which were opened in China's WTO accession commitments).

VIII. Rental and Business Services

16. Prohibited from investing in Chinese legal business (except for providing information on the impact of the legal environment in China). Prohibited from becoming a partner in a domestic law firm. Prohibited from becoming a shareholder in a Chinese law firm.
17. Foreign investment in Market research is limited to joint-venture companies. Radio and television audience surveys must be controlled by the Chinese partner.
18. Investment in social research is prohibited.

IX. Scientific Research and Technical Services

19. Prohibition of investment in the technological development and application of human stem cells, diagnostics and gene therapy.
20. Prohibition of investment in research institutions in the humanities and social sciences.

21. It is forbidden to invest in geodesy, marine mapping, aerial photography, seismic surveying, mapping of the boundaries of administrative areas, topographic. (regions, provinces, local maps, educational, 3D and electronic maps for navigation, regional geology, mineral, geophysics, geochemistry and hydrogeology).

Preparation of regional geological mapping, mineral geology, geophysics, geochemistry, hydrogeology, environmental geology, geological hazards, remote sensing geology and other studies. Mineral rights holders are not subject to this special management measure when the work is performed within the scope of the mineral rights.

X. Education

22. Primary, general secondary and higher education institutions shall be limited to education as Sino-foreign cooperation. They shall be run by the Chinese side. The director or chief administrative officer shall be a Chinese national. The representative or chief administrative officer shall be of Chinese nationality. At least half of the board of directors, supervisory board or joint management committee must be Chinese.
23. Prohibition of investment in compulsory education and religious education institutions.

XI. Health and Social Work

24. Medical facilities are limited to sino-foreign joint-ventures.

XII. Culture, Sports and Entertainment

25. Investment in news agencies including, but not limited to, news agencies is prohibited.
26. Investment in the business of editing, publishing and producing books, newspapers, periodicals, audiovisual products and electronic publications is prohibited.
27. Prohibition of investments in radio and television stations, radio and television transmission. Coverage networks (transmitters, retransmitters, radio and television satellites, satellite link stations, satellite transceiver stations, monitoring stations, etc.) are prohibited. Radio and television video-on-demand and satellite broadcasting activities are prohibited.
28. Prohibition to invest in companies producing and operating radio and television programs.
29. Investments in film production companies, distribution companies, film companies and film introduction companies are prohibited.
30. Prohibition of investment in state-owned auction houses, heritage stores and heritage museums for the sale of cultural relics.
31. It is prohibited to invest in cultural performance groups

 

As in previous editions, the control of foreign investment in China is still very much in place for the education, health and culture sectors.

 

Global landscape and key points about the foreign investments orientation

The almost annual update of the negative list indicates that China is gradually demonstrating a higher degree of openness. It shows a willingness to offer more opportunities to foreign investors by easing restrictions in non-strategic sectors. Previous versions wanted to encourage projects that would bring new know-how, methods and technologies to China. These sectors include research and development in a large part of manufacturing and assembly activities. They concern in particular products with high added value or technology.

The Negative List, in force since January 1, 2022, aims to accelerate the liberalization process in the services sector. In particular, it removes the previous restrictions on foreign investment in financial sector activities. It has also eased access to foreign investment in the farming and agricultural sectors.

While the List updates the guidelines, some clarifications and interpretations are still needed. The Chinese authorities will decide, on a case-by-case basis of investment cases, what investment conditions are available. In particular :

  • the exact scope of activities allowed in a corporate purpose that must be carefully worked out
  • the minimum capitali requirements in relation to the of the total investment plan
  • any other special conditions required (additional license or special permit)

 

So far, most foreign investment projects in China, which have been examined according to the previous catalogue, were approved in the forms of :


On December 31, 2020, a draft investment agreement between the EU and China was signed. It had the ambition to contribute to strengthen the trust and transparency in the collaboration of companies when they invest and set up business in China. However, due to diplomatic tensions between the EU and China in May 2021, the entry into force of this agreement and its implementation negotiations remain suspended for the moment.

This has not prevented the authorities from offering preferential investment conditions in some FTZ (free trade zones). Most recently, in the new FTZ on Hainan Island too. These conditions are available to Chinese and foreign investors without distinction.


 

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