Opening up the domestic market and attracting foreign investment have become important goals of national policies. Ever since the introduction and execution of the One Belt, One Road initiative, the services industry has become a key area to attract foreign investors. This has also brought about new opportunities for foreign investors to enter the domestic market. The recent relaxation on restrictions for foreign investment entry is explained below.
Investment law and industry catalogue
Foreign Investment Law (draft). The rules for foreign investors to enter the Chinese servicing industry have mainly relied on the Law on Wholly Foreign-owned Enterprises, the Law on Sino-Foreign Equity Joint Ventures, and the Law on Sino-foreign Co-operative Joint Ventures, together with their corresponding details for execution. As restrictions on foreign investment entry have been relaxed, the Ministry of Commerce (MOFCOM) published the Foreign Investment Law (Draft for Comment) on 19 January 2015.
The changes made in the draft will transform the management model for the entry of foreign investment from a case-by-case examination and approval system to a pre-establishment national treatment with negative list formulated by the State Council. These changes not only satisfy the practical needs of China as a gradually evolving and opening economy, but also provide a fairer environment for foreign investors to enter the market, invigorating the services industry.
Catalogue for the Guidance of Foreign Investment Industries (revised draft). Traditionally, it was the manufacturing industry that attracted foreign investors. However, recent trends have shown that the services industry has been attracting foreign investors and the scale of foreign investment has been increasing. The Catalogue for the Guidance of Foreign Investment Industries, revised in 2015, which has taken effect since 10 April 2015, in comparison with the 2011 catalogue, has significantly reduced the number of restricted categories, from 79 to 38. Prohibited categories have been reduced from 38 to 36, and now only legislative compliance can impose restrictions on entering the industry.
The revised catalogue mainly liberalizes the real estate, e-commerce, finance, wholesale, retail and other service areas. It clearly proposes a series of measures to promote liberalization of the services industry, mainly in commercial logistics, e-commerce, transport, social services, finance, culture and other areas. It has also guided foreign investment and encouraged foreign investors to invest in modern services.
In terms of improving the overall policy system, the revised catalogue can ensure sectors with consistent regulatory measures on foreign and domestic investors are not listed under restricted categories. Permitted categories in principle are also no longer restricted in terms of foreign ownership of equity. The regulations on the ratio of foreign shareholdings in other categories are listed in the catalogue. The policy has shifted its focus from managing the admission of foreign investment to regulating the market and monitoring the industry.
Since the China (Shanghai) Pilot Free Trade Zone (FTZ) was established in 2013, other pilot FTZs have been approved and established in Guangdong, Tianjin and Fujian. Considering the policies concerning China’s FTZs, the liberalization of the services industry has been a major focus for the four FTZs, covering areas such as finance, education, culture, medical organizations, design, accounting, statistics, e-commerce, and commercial logistics. Approval processes have been simplified and procedures reduced in the FTZs. The services industry will be gradually liberalized at a national level, with policies being executed in the FTZs as breakthrough points.
The proposal for Beijing to expand the pilot regions in liberalizing the services industry was approved by the State Council in May 2015. That proposal mainly liberalizes six major categories: science and technological services; internet and information services; cultural education services; financial services; commercial and travel services; and healthcare services.
Beijing will adopt a three-year pilot programme and gradually relax entry barriers, while revolutionizing management styles and improving the market environment, so as to build a new platform for the Beijing services industry with international standards. This experience can be replicated in other cities and the national services industry will be liberalized through the execution of such strategies in pilot cities.
Future goals and development
In the fourth session of the 12th National People’s Congress, Minister of Commerce Gao Hucheng made it clear in an interview that China will further relax its restrictions on foreign investment, especially in services industries such as technology, finance, education, culture, logistics, etc. These liberalizing strategies will encourage foreign investors to actively engage in the transformation, upgrading and technological advancement of state-owned enterprises. Regions targeted for liberalization are the mid-west and coastal areas. The catalogue for guidance of foreign investors in the mid-west region will soon be formulated and, together with the development of cross-border economic corporation zones in border and coastal regions, will form a multi-layered strategic foundation for opening up the services industry for foreign investment.
The signing of trade and investment agreements between China, the US, EU, Japan, South Korea, Australia and the ASEAN countries will also drive the opening up of the services industry.
Management and safeguards
The Foreign Investment Law (draft), together with the general scheme for opening up the services industry in Beijing, which was approved by the State Council, has provided better management and safeguard measures for the admission of foreign investment in the services industry with regard to a social credit system, market supervision patterns, the establishment of transparent standards for market access, and foreign exchange and customs clearance, which all create a fairer atmosphere for foreign investment.
Ni Xudong is co-managing partner in the Shanghai office of East & Concord Partners. Xu Deren, an associate of the firm, also contributed to the article