Echo Li, Head of Corporate Secretarial, TMF East China, explains how to apply the three negative lists that define the current prohibitions and restrictions on business activities in Mainland China.
Mainland China is a dynamic market undergoing constant change and reform as it continues to open up more business activities to foreign companies. There are three negative lists and it is vital for all businesses in Mainland China to be aware of the lists that apply to their business. The ‘negative lists’ are frequently referred to when doing business in Mainland China. They should be the first port of call when looking to commence new business activities in the country as they define both which activities are prohibited and which activities require specific prior government approval.
With rules and regulations under constant review, it is always advisable for companies to work with local experts to ensure that they do not fall foul of the law at this very first step.
1. The negative list on market access
The latest version of this list, issued on 25 December 2018, marks the full implementation of the market access negative list system in Mainland China, which is now applicable to all companies, both domestic and foreign owned. Any company can operate business activities that do not appear on the negative list (although foreign-owned companies are also subject to the additional negative lists detailed below). The list is in three sections. The first is an explanation of the scope of the list, followed by the list of activities that are prohibited for non-governmental bodies and finally those that require prior government approval for a company to be permitted to undertake the activity. The two appendices reference the specific regulations that apply to the prohibitions and restrictions, where full details can be found.
This system reinforces the decisive role of the market in allocating resources and, by granting equal rights and opportunities to all market players under one set of rules, reinvigorates investment in business. It also advances government reforms related to the examination and approval system, investment mechanism, supervisory mechanism, social credit system, and the reward and punishment mechanism.
The list includes 151 industry items, 581 administrative measures and 147 industry sectors listed that require prior government approval – the qualification criteria and required technical standards are also provided.
Investors are prohibited from carrying out activities in violation of The Catalogue for Guiding Industry Restructuring, issued by the National Development Regulatory Commission, and non-financial companies may not conduct financial-related business or have a business scope or a company name that includes any sensitive wording relating to finance, banking, insurance or other similar sectors. Investors are also prohibited from carrying out activities in violation of The Catalogue on Prohibition on Internet Market Access, such as public sale of prescribed medicines via the internet or courier and there are restrictions on activities of internet loan brokerage firms.
The list is a consolidation of current guidance, rules and regulations previously spread across many different government bodies. It applies to both foreign and domestic investors and provides a general guide as to which rules and regulations they should refer to. It supports the principle of market openness; any industries not listed on the negative list are open to all market players with equal access, except that for foreign investors there may be additional restrictions under the other government lists discussed below.
2. The negative list on foreign investment access
The Special Administrative Measures for Access of Foreign Investment (Negative List) (2018 Edition) (FDI negative list) specifically applies to all companies in Mainland China that are controlled by overseas investors. This is the seventh edition since its first introduction in 1997. The list must be adhered to by all foreign investors before establishment of their businesses in Mainland China. Like the negative list on market access, it too has a list of prohibited activities and a section detailing business activities that will require specific approval from the government authorities before a foreign investor can undertake the activity.
3. The negative list on foreign investment access in pilot free
The Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2018 Edition) (FTZ negative list) is the fifth edition of this negative list that first originated in 2013, reflecting the pace of change to regulations in Mainland China. It applies to all foreign-invested businesses that operate within one of the designated Free Trade Zones (FTZ) within Mainland China. It has the same structure as the other two lists with a set of prohibited activities and a section defining activities that can be undertaken given prior government approval.
Compared with the FDI negative list discussed previously, the 2018 version of the FTZ negative list further opens up the markets to investors and cancels limitations in some industry sectors. It cancels limitations on petroleum and gas exploration, expands the trial policy on the telecoms industry to all FTZs nationwide and cancels Chinese party majority ownership requirements for agencies for the performing arts. Establishment of an Artistic-culture Performance Group is now permitted as an Equity Joint Venture provided it is with Chinese party majority ownership.
Where to start
It is advisable for foreign companies to check the FDI negative list first, except where they intend to operate within a FTZ, when the broader and less rigorous FTZ negative list should take precedence. It is generally only sensible to open within a FTZ if the business activities are focused on traditional FTZ functions, such as transit trade or logistics, or if the main industry has been set lower qualification criteria in a FTZ area. The negative list on market access must then be referenced to ensure that the business activities are not more generally prohibited or restricted.
With three lists to reference, each of which undergoes regular change, and a sea of underlying rules and regulations to wade through, it is always advisable to have local expertise in Mainland China to help you navigate safely and efficiently to your business destination.
Echo Li, Head of Corporate Secretarial
TMF East China