Monday, Apr 24, 2017, 1:20 PM CST – China

Politics

Foreign Investment

Going Negative

China has recently announced that in 2018 it will further open up to foreign investment by adopting a nationwide “negative list” that outlines restricted investment sectors while emphasizing that anything unlisted is fair game

Members of China’s Central Leading Group for Deepening Overall Reform, led by Chinese President Xi Jinping, announced on September 15 that the country will continue the exploration of a “negative list” foreign investment system and implement it across the country in 2018. This national scheme will build upon the four negative-list pilot programs already established in free trade zones in Shanghai, Tianjin, Guangdong and Fujian.

A “negative list” names areas and sectors in which foreign investment is barred. Those not listed are fully accessible. Investors in these unlisted areas can obtain pre-entry national treatment (PENT), meaning that they will be accorded the same status and privileges of a domestic company before entering China.

“Setting the timetable and road map for the implementation of a negative list is at once essential, feasible and urgent,” Bai Ming, of the International Trade and Economic Cooperation Research Institute under the Ministry of Commerce, told NewsChina in a recent interview.

Part of that urgency stems from the ongoing Sino-US bilateral investment treaty (BIT) negotiations. Since China and the US agreed on a trade system involving PENT and a negative list in July 2013, both sides can now move on from debating the investment model to debating what has made it onto their respective lists.

Making the List

Previously, China had adopted a “positive list” model in its regulation of foreign investment. The country’s Catalog of Industries for Guiding Foreign Investment separated foreign investors into three categories: “encouraged,” “allowed,” and “limited and banned.” While utilizing this list, China granted post-entry national treatment to foreign investors, meaning foreign firms could operate on a level playing field with their domestic counterparts only after they were approved to do business in China.

BIT talks began in 2008 under then-presidents Hu Jintao and George W. Bush in order to deepen Sino-US economic ties. This June, during the 19th round of negotiations, both sides exchanged their respective negative lists for the first time. China wanted the US to make its restrictions clearer, while the US thought China’s negative list was too long, limiting too many areas for investment.

Currently, a total of 77 countries have adopted this same model for foreign investment, including both PENT and negative lists in their systems. With this global backdrop, it has become necessary for China to nail down its negative list as soon as possible. “Indeed, the negative-list model China is adopting is not targeted toward any one country, but instead meets shared international requirements,” Shanghai University of Finance and Economics professor Chen Bo told our reporter. “It’s an agreement for a higher level of trade and investment.”

Pilot Projects

The Shanghai free trade zone, established in 2013, was the first place in China to use a negative-list model. Last year, a revised negative list reduced the number of industries restricted for foreign investment in Shanghai from 190 to 139. In mid-April of this year, an updated list shared by the four free trade zones had further shrunk that number to 122.

Zhu Min, deputy director of the Shanghai free trade zone management committee, said that the negative-list model had forced government officials to learn more about international regulations while finding ways to help their own supervision measures to meet international requirements. “Although other countries’ negative lists may be shorter, they focus more on the service industry,” Zhu said. “Our government instead sets more restrictions on the manufacturing industry and poses rather lax regulations on the service industry, which results in a certain lack of transparency.”

“We need to winnow down our barriers from locking front gates to locking specific rooms to locking specific drawers,” Zhu continued. “For example, the newly revised negative list shows significant improvements on the restrictions towards financial sector investment; the original four ‘locked gates’ have become 14 ‘locked rooms.’ This doesn’t mean things are more restricted, rather it means regulations have become more mature and transparent.”

This change has brought about visible results. According to Chen Bo, the Shanghai free trade zone attracted 526 new foreign investment projects with registered capital amounting to a total of US$10.7 billion in the two months after the new 2015 negative list was adopted in mid-April. This displayed a sharp contrast to the results after the 2013 negative list was adopted; in that same two-month period, the Shanghai zone only drew in 39 foreign investment projects.

Before the first negative-list model went into place in 2013, it normally took a foreign enterprise some eight months to gain approval from 14 relevant government departments before it could settle in China. In 2014, after the negative list had already been implemented, the average time for a foreign enterprise to gain a local business license shrunk to seven working days. This year, with an updated negative list and more regulated management, the shortest recorded processing time was one business day.

Gradual Process

“Although the negative-list model has operated quite smoothly in the four pilot zones so far, its implementation on the national level still faces obstacles,” Chen Bo said.

In Chen’s opinion, there are two major obstacles that merit concern. Firstly, the program’s scale would be expanding abruptly from four free trade zones to the entire country. It is relatively easy to handle any problems that may arise in four demarcated areas, but if the government’s capacity to supervise doesn’t keep up with these national reforms, greater risks may appear. Secondly, while most industries have experienced the negative-list model through the four free trade zones, industries such as agriculture, animal husbandry and mining have never gone through this stress test. Thus, if a more inclusive nationwide negative list is put into place, it raises the question of whether or not these industries can manage a smooth transition.

At the same time, “just because certain issues and problems never occurred in the free trade zone pilot programs doesn’t mean they won’t happen at the national level,” Chen said. He added that generally speaking, the free trade zones’ degree of openness should be higher than that of the country as a whole. “The key question in implementing a nationwide negative list is now no longer whether or not to do it, it’s when do we do it, how big should its scale be and how much room for adjustment should we allow.” Chen thinks China should reshape the investment regulation system and open its foreign investment restrictions gradually rather than all at once.

Bai Ming told our reporter the national negative list will borrow from negative lists negotiated between China and other countries, but would not be a direct copy of any version.

The fact that the Sino-US BIT talks have yet to conclude gives the establishment of the 2018 national negative list a degree of uncertainty. If the BIT negotiations wrap up before the national negative-list model is adopted, the national list will likely be nearly identical to that agreed upon by China and the US.

Regardless of the timing, China must undergo thorough preparations before it adopts a negative list nationwide. One of the government’s biggest challenges lies in shifting its role from gatekeeper to supervisor. “Many government departments still adhere to their old mentality and cannot adapt to the new model in which resources are distributed through the ‘invisible hand of the market’ rather than the ‘visible hand of the government,’” Chen Bo said. He regards this as an opportunity for government reform.

Another challenge is to improve and regulate certain laws governing industries, especially the service industry, to make them cater to the needs of the negative list. In the US, for example, restrictions on foreign investment are stipulated in various industrial laws and regulations, which provide a legal basis for the compilation of the negative list.

In China, the negative list actually contradicts some existing legislation. “Some laws against the spirit of [the] negative list should be abolished or amended, while some industrial laws that have been long absent should be mapped out,” ran a China Daily editorial in June 2014. “Legislation should also be improved [regarding] national security checks on foreign investment. By doing these [things], the negative list can be built on [a] sound legal framework.”

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