Published:  12:33 AM, 07 January 2019

Negative list for FDI in China and Bangladesh

China started reform and open up their economy in 1978 and thereafter the volume of foreign investment in China has increased exponentially in the last 40 years. In recent years, the central government continues to release strong and firm signals to attract foreign investment. According to a report by the United Nations Conference on Trade and Development, China has for a few years maintained its position as the world's second-most attractive investment destination. The FDI in China was USD131.04 billion in 2017 and USD126 billion in 2016.

The investment growth was more than 4% from last year.  On the other hand, Chinese news agency Xinhua reported that at the end of November, 2018, a total of 950,000 foreign-funded companies became registered in China in line with current laws and brought in more than 2 trillion U.S. dollars, performing as a major driving force in China's economic and social development. Bangladesh can attract FDI around 5 b per annum. Despite the huge amount of investment, China has taken special measure to increase FDI.

Interestingly, China still does not have the same openness to foreign investment seen in advanced economies such as the United States. All industry sectors are not open to FDI. Since 1995, every two to five years, the PRC government has been publishing the catalogues for the guidance of foreign investment, which list the specific industrial sectors in which foreign investors could operate within. In the Catalogues, industry sectors are grouped into four categories: "encouraged", "permitted", "restricted" and "prohibited" to foreign investment.

As for the industries listed as "encouraged" investments, the foreign investor could operate at the same conditions of a domestic company; as for industries listed as "restricted" investments, the foreign investor could perform the investment under certain conditions and limitations, e.g. in terms of foreign share limitation; lastly, the industries listed as "prohibited" were totally forbidden to foreign investors. Any industry not expressly mentioned in the catalogue would fall into the "permitted" category.

The New National Negative List pares down the special measures for foreign investment from 63 items to 48 items. The further opened up industrial sectors include financial services, transportation and logistics, commercial and trading, professional services, manufacturing, infrastructural, energy and resources and agriculture.

As early as 2017 as shown in the "Report on the Work of Government," the central government emphasized that "the door of China would only be opened wider and wider," and stated that the government would continue to promote the liberalization and facilitation of international trade and investment. The Chinese authority understands the trade liberalization is one of the major reforms for local and foreign investment.

The 2017 version of the Catalogue, whilst keeping the previous categories of "encouraged", "permitted", "restricted", and "prohibited" industries, merged the industries under the restricted category and the prohibited category into a section called "special management measures for the market entry of foreign investment", to create a "negative list" to guide foreign investors on market access policies.

Foreign investors can therefore refer to the list to determine whether an investment project is subject to MOCOM's traditional examination and approval procedure or instead can benefit from MOCOM's new record-filing regime.Recently, it has made significant improvements in the past three years, with positive results for foreign companies. For one, it has moved from a "positive" to a "negative" list approach.

Chinese National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOCOM) jointly promulgated the 2018 version of the Special Management Measures for the Market Entry of Foreign Investment.In order to simplify the regulatory procedures for foreign investment has been a focus of the Chinese government amid a series of regulatory reforms in recent years.

China has given a national treatment to overseas investment. Effective from 30 June 2018, the previous two steps i.e. filing with MOCOM (MOCOM Filing) and registration with the State Administration for Market Regulation (SAMR) (the AMR Registration) or their respective local counterparts in respect of foreign investment related matters have been consolidated into one single submission procedure.

On the contrary, in the various Free Trade Zones established in China, a "Negative list" approach was adopted towards FDI management: in fact, within the FTZ's territory, foreign investment is allowed in all sectors which are not prohibited or restricted under the "FTZ Negative List".

On 30 June 2018, the NDRC and MOC also issued the revised 'negative list 2018' for FTZs will take effect from 30 July 2018. Compared to the FTZ Negative List 2017, the number of the items in the FTZ Negative List 2018 has been reduced from 95 to 45. The interested business fields mainly include agriculture, mining and the cultural industry.

Among the other modifications, foreign investors will be allowed no more than a 66-percent stake in breeding new wheat and corn varieties and their seed production, compared with a cap of 49 percent in the previous list.

Restrictions on joint ventures or foreign cooperation in exploration and exploitation of petroleum and natural gas will be removed. The list also eased restrictions in the cultural sector, as foreign investors will be allowed to own a majority stake in performing arts agencies.

In particular, the new version of the Special Administrative Measures for Foreign Investment Access ("Negative List 2018") which was released on 28 June 2018 by the NDRC and the Ministry of Commerce, with the aim to further ease the current restrictions on foreign investments. The length of the Negative List has been further shortened from 63 items to 48 items and market access in 22 industry sectors has been liberalized.

The other reform includes the withdrawal of the restriction on foreign shareholdings in the banking industry and in special purposes, motor vehicles and new energy automobiles. Moreover, the new Negative List directly and uniformly lists the special administrative measures on foreign investment access (e.g. shareholding requirements).

The 2018 National Negative List comprehensively relaxes market access in primary, secondary as well as tertiary industries, detailing the opening-up measures in 22 sectors including finance, infrastructure, transportation, trade and commerce, culture, agriculture, energy and related areas.

In addition, it has also set a transition period for certain industries and clarified the corresponding timetable. Such list will take effect from 28 July 2018, and will apply to mainland China except for China's free trade zones (FTZ).

This negative list is a document applicable to the whole of Continental China and it includes sectors of activity in which foreign investment is prohibited or restricted. Sectors of activity with restrictions generally require any investment to be made through "joint ventures" with Chinese companies, including, in most cases, restrictions on their shareholder structure.

In other sectors with restrictions, prior approval of foreign investment by MOFCOM is also required. For unlisted sectors, foreign investment can be made under the same rules as Chinese investment.

In contrast with these Lists with restrictions/prohibitions on foreign investment, there are lists of preferential activities for investment, which aim to encourage foreign investors with tax incentives and economic benefits.

The changes indeed represent a big step forward and show the commitment of Chinese government to further open up the market access to foreign investors step by step. The negative list also has clear road map for further reform to give a clear understanding to the foreign investors.

It has out a roadmap and timetable for yet further opening-up of the financial services and automobile sectors in the next few years. According to these provisions, all foreign shareholding restrictions in the financial services sector will be lifted in 2021.

Foreign shareholding restriction on the manufacturing of commercial vehicles and passenger vehicles will be lifted in 2020 and 2022 respectively. The current restriction that a foreign investor may establish no more than two joint ventures that manufacture the same category of whole vehicle products will also be removed in 2022.

Sectors not included in the New Negative Lists will be regulated under the principle of identical treatment for both domestic and foreign investment, i.e. no special restrictions should be imposed on foreign investment in those sectors.

The State Administration for Market Regulation (SAMR) or its local counterpart will serve as a one-stop shop window for AMR Registration and MOCOM Filing in respect of foreign investment related matters, which means that going forward foreign investors will only need to submit one set of application documents to SAMR or its local counterpart, instead of undertaking two separate regulatory procedures.

This new administrative measure will enhance the efficiency of AMR Registration and MOCOM Filing and is another meaningful step in the Chinese government's endeavor to simplify the regulatory regime of foreign investment.

The negative lists released this time have greatly reduced the restrictions on foreign investment access. It is believed that with further implementation of the policies, foreign investment will enjoy more equity in business environments and improved policy treatments in China. Bangladesh use to give special treatment but failed to attract desired FDI.

Recently a draft law on foreign investment has been submitted to a bimonthly session of the National People's Congress (NPC) Standing Committee. Once adopted, the unified law will replace three existing laws, namely the laws on Chinese-foreign equity joint ventures, non-equity joint ventures (or contractual joint ventures) and wholly foreign-owned enterprises.The existing Bangladesh policy of inviting overseas investors will not give positive result. Bangladesh should reform own investment and trade policy and improve ease of doing business.

The writer is a Legal Economist. Email: mssiddiqui2035@gmail.com

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