By Corporate Law Department of Global Law Office

Following the establishment of the China (Shanghai) Pilot Free Trade Zone (“PFTZ”), which has been regarded as a bellwether for China’s policy of furthering opening-up and deepening the reform of the administrative review and approval procedures, the Shanghai Municipal Government further clarified the goals and procedures for how this dynamic new investment zone may be implemented by promulgating the PFTZ Special Administrative Measures on Foreign Investment Access (2013) (the “2013 Negative List”) on September 29, 2013. Generally, it grants both foreign and domestic investors equal access to dramatically simplified establishment and registration procedures available to enterprises established in the PFTZ by replacing the approval procedure with record filing.  However, it carves out and restricts foreign investors from accessing 190 specific business sectors which are otherwise available to most domestic investors. On June 30, 2014, this carve out was reduced to 139 restricted areas upon promulgation of the PFTZ Special Administrative Measures on Foreign Investment Access (2014) (the “2014 Negative List”) issued by Shanghai Municipal Government.  Although the government continues to maintain restrictions against foreign investment over some sectors such as natural resources, people’s livelihood, national security, and Chinese traditional industries, the 2014 Negative List does generally provide access to a wider range of investment opportunities for foreign investors.

We now summarize below the major highlights in the 2014 Negative List for you reference:

1. Strengthen Openness

Compared with the 2013 Negative List, the 2014 Negative List completely removes 14 restrictions, and loosens 19 other restrictions in the business sectors of manufacturing, real estate, infrastructure, commerce and trade services, shipping, social services, etc.

The 2014 Negative List cancels certain restrictions in manufacturing, services, and other business sectors, for example: restrictions on investment in companies engaged in certification services for import/export goods; and the qualification requirement for foreign investors in the certification institutions.  It also removes the requirement of equity or cooperative joint ventures for foreign investors entering into the industries such as: (i) cargo handling for international maritime freight transport, container freight station and container yard business; (ii) the air transport agency business; and (iii) manufacturing of wheeled or crawler cranes (400 tons and above).  It also removes restrictions against investment in the manufacturing of all types of ordinary level (PO) bearings and parts (steel balls, retainers) and blanks; and the restriction against manufacturing of equipment in respect of general polyester filament and staple fiber. 

Meanwhile, among the loosened restrictions, the 2014 Negative List loosens nine restrictions in manufacturing, one in infrastructure, one in real estate, four in commerce and trade services, two in shipping services, one in professional services, and one in social services.  For example, an original restriction in the 2013 Negative List stated, “restriction for wholesale and distribution of crude oil, chemical fertilizer, pesticide, agricultural film and refined oil products (including bonded oil).”  This has been revised to state, “restriction for wholesale and distribution of pesticide, agricultural film and bonded oil.”  In another case, a previous restriction in shipping stating, “shipping agency (restricted, equity controlled by Chinese party),” has now been revised to state, “except for the public international shipping agency, the foreign equity ratio shall not exceed 51%, shipping agency (restricted, equity controlled by Chinese party).”
 

2. Increase Transparency

Several cumbersome ambiguities have been resolved with the 2014 Negative List.  The 2013 Negative List did not expressly clarify restrictions for certain restricted businesses, which made it more difficult to get needed approvals by the relevant authorities because the vague language gave the approval authorities more discretion to interpret the restrictions, causing uncertainty on what would actually get approved.  Therefore, in order to give investors more predictable results, the 2014 Negative List clarifies some of these ambiguities, for example, the original 2013 phrasing of “direct selling (restricted)” has been changed to “direct selling (restricted), the investor shall have over three-years direct selling experience in foreign countries and the PRC companies’ paid-in capital shall not be less than RMB80 million; and the original 2013 phrasing of “telecommunication; radio and TV and satellite transmission (restricted)” has been changed to “basic telecommunication service (restricted), the foreign equity ratio shall not exceed 49%.”
 

3. Standardization

The 2014 Negative List removes some restrictions in some sensitive industries, such as the limitation of production of benzidine, dyes and coatings, the limitation on investment in smelting of non-ferrous metals (e.g. electrolytic aluminum, copper, lead and zinc), and prohibitions on gambling and business working with adult/erotic materials.  However, that is not to say the 2014 Negative List has actually granted foreign investors freedom to engage in these business sectors in the PFTZ.  Actually, as explained in the official website of the PFTZ, the major reason for removing these restrictions from the Negative List 2014, which is really meant to outline those areas in which foreign investment is restricted or prohibited, is to give fair treatment to all parties restricted from these business sectors and neither foreign nor domestic investors are allowed to engage in such sectors.  Also, the catch-all clause in the 2014 Negative List provides that foreign investors are prohibited (or restricted) from investment in industries which are prohibited (or restricted) by China or by international treaties China concluded with other jurisdictions, from investment in projects which compromise China’s national or social security, and from business operations which compromise the public interest.  The format of the 2014 Negative List has also been reorganized a bit to make it easier to apply.  For example, the industry codes have been moved to the column after the restrictions, restrictions with different industry codes but in the same industry have been combined, and serial number have been added to each restriction for easier reference.

Conclusion

As explained in the 2014 Negative List, further adjustments will be made according to the laws and regulations on foreign investment and development needs of the PFTZ.  Viewing the changes made between 2013 and 2014, we are beginning to see a general picture of the trend and the degree to which PFTZ is opening-up so far.  Taken in context with the Measures for Furthering Opening-up in the PFTZ involving thirty-one measures for furthering opening-up, which was approved by the State Council on June 28, 2014, we anticipate that we will have more insight into this trend since theses 31 further opening-up measures are to be formulated by the Shanghai Municipal Government in cooperation with other relevant authorities in near future.

Corporate Law Department of Global Law Office: We have more than 30-year experience in the area of corporate law, and since China’s first Sino-USA  joint-venture project, we have assisted a large number of domestic and foreign clients with their day-to-day business operation in a wide range of industries and sectors across China, and our legal services cover every aspect of business concerns, from inception to liquidation, including:
 

• Design of investment structures and corporate governance structures
• Conducting legal due diligence
• Drafting, reviewing and negotiating relevant formation documents
• Assisting in the process of obtaining government approvals, permits and registrations
• Providing legal and compliance advice on product quality, industrial safety, tax planning, IP protection, labour and human resources, foreign exchange and customs issues, exit strategies, etc.
• Drafting, reviewing and negotiating various business agreements within the course of day-to-day business
• Assisting in litigation and arbitration
• Assisting in restructuring, dissolution and liquidation, and bankruptcy