In recent years, the business community in China has been abuzz with talk of various market access “negative lists” — lists of exceptions to what would otherwise be open market access. China has now introduced a new market access negative list for all forms of investment in the country, both domestic and foreign. Before describing the implications of this new list, we first note the existing and proposed negative lists that have drawn widespread attention over the past couple of years:

  • US-China BIT Negative List (Under Negotiation). There has been extensive discussion of the negative list for the US-China Bilateral Investment Treaty (“BIT”) currently under negotiation. Foreign investment activities included on the BIT’s negative list would not be eligible for the market access benefits and protections of the BIT — particularly, national treatment (that is, equal treatment with domestic investors), a core principle of standard US bilateral investment treaties with other countries.
  • Nationwide Foreign Investment Negative List (Announced). Among other reforms proposed in the draft Foreign Investment Law that was released in early 2015, Chinese authorities plan to issue a nationwide negative list for foreign investment market access. As with the US-China BIT, unlisted items would be given national treatment (with some procedural differences between the treatment of investments by foreign and domestic investors).
  • Pilot FTZ Foreign Investment Negative List (Issued). Following the issuance of a negative list for foreign investment activities in China’s first pilot free trade zone (“Pilot FTZ”) in Shanghai, Chinese authorities have now adopted one unified negative list that governs all Pilot FTZs established to date — specifically, the Pilot FTZs in Shanghai, Fujian Province, Guangdong Province, and Tianjin. 

In December 2015, the State Council announced its decision to introduce a market access negative list that applies to all investment activities in China, by both domestic and foreign investors. Swiftly acting on the State Council’s decision, the National Development and Reform Commission and the Ministry of Commerce issued a trial version of the list (“Trial Negative List”) in March to be piloted throughout the entirety of the four provinces and municipalities that currently host Pilot FTZs (not just in the FTZ zones themselves): Shanghai, Tianjin, Fujian Province, and Guangdong Province. The respective governments for these four regions are to propose their own methods for implementing the Trial Negative List and obtain the approval of the State Council. Central government authorities are seeking feedback from the implementation of the Trial Negative List to facilitate the roll-out of a nationwide market access negative list in 2018.

The Trial Negative List includes 96 prohibited items in 17 sectors and 232 restricted items in 22 sectors. These items have been compiled from several sources, and include (1) investment projects requiring administrative approvals as set out in the Consolidated List of Administrative Approval Items by Departments under the State Council (included in the list as restricted items ); (2) project categories designated for elimination or closed for new investment under the Catalogue for Guiding Industry Restructuring (2011 version), which make up 46 of the 96 prohibited items; (3) projects requiring approvals from the relevant development and reform departments under the Catalogue of Investment Projects Subject to Government Verification and Approval (2014 version) (included in the list as restricted items); and (4) projects restricted or prohibited under other national laws, administrative regulations, and State Council decisions. 12 of the 328 total items are (or include sub-items that are) entirely new and were not restricted or prohibited under previous laws and regulations. These new items include an approval requirement for collaborations between domestic media and foreign news agencies and censorship requirements for gaming and entertainment equipment.

Foreign investors, including those without interests in the four pilot regions, should pay close attention to these developments. Those investing in the four regions where the Trial Negative List is being piloted should note that they are to be subject to both the Trial Negative List and any other restrictions on foreign investment that may concurrently exist (whether written restrictions or de facto ones — for instance if no procedural pathway for approval of a particular type of investment in a regulated industry is provided under existing laws and regulations). Consequently, in the four Pilot FTZs, foreign investors will need to heed both the restrictions and prohibitions contained in the Trial Negative List as well as those on the foreign investment negative list for the Pilot FTZs.

In short, the Trial Negative List does not, itself, offer any improvements in market access for foreign investors in China. Rather, it represents an effort on the part of the Chinese government to consolidate in one place a list of all restrictions applicable to both domestic and foreign investors. The goal, hopefully, is to lay the groundwork for procedural reforms, as well as for revisions to the list in the future that would provide improved market access.

The Chinese government made headlines around the world on July 1 when the Standing Committee of the National People’s Congress passed a sweeping new national security law (see official Chinese version here). The scope of the law, China’s most comprehensive piece of national security legislation to date, is broad. It covers issues of political security, military security, economic and financial security, social and cultural security, nuclear security, ecological security, and more. The final version of the law makes clear that the country’s leadership sees its security interests as extending far beyond the physical borders of mainland China, reaching to the depths of the sea, into outer space, and perhaps most importantly, into cyberspace.

The 84 articles of the law are divided into seven chapters that (1) set out guiding principles; (2) define national security; (3) describe the functions and responsibilities of the National People’s Congress and the various branches of government; (4) articulate the key elements of the national security regime (such as intelligence collection, risk assessment, conducting national security reviews, and responding to states of emergency); (5) outline mechanisms for allocating resources to national security work; (6) lay out obligations for  citizens and corporations to assist the government in protecting national security; and (7) close with supplementary provisions.

Beyond setting out a broad, vague definition of national security and defining a scope of coverage that touches nearly every aspect of China’s politics, economics, and society, the law’s implications for national security reviews of investments are far-reaching. Consistent recent regulations and legislative trends, Article 59 maintains the need for national security review for “foreign investments that infringe upon, or may infringe upon, national security.” However, it then goes further, also mandating national security reviews for investments involving “key materials and technologies,” “internet or information technology products and services,” “construction projects that implicate national security,” and “other major projects and  events.” How these apparently new national security review requirements will be implemented, and by which agencies, remains to be seen.

The Chinese government has hailed the national security law as an opportunity to replace an outmoded legal framework for handing security-related matters with one that is more in tune with 21st century challenges presented by globalization and information technology. These are surely challenges common to both the Chinese government and other governments around the world. Meanwhile, critics — including a particularly broad array of foreign governments, businesses, and human rights groups — see the legislation within the context of the broader consolidation of power that has characterized President Xi Jinping’s tenure (see New York Times article on the subject here).

In order to understand the import of the law, one must understand how it fits into the broader ecosystem of China’s unique legal system. A quick look at the text of the national security law shows that it is long on policy exhortations and short on details. This is not unusual in China, where national legislation is generally followed by a series of implementing rules issued by relevant government agencies under the purview of the executive State Council.

Given the wide scope of this law, we expect that a large number of government agencies regulating various sectors of the Chinese economy and polity will issue implementing measures in the months (or years) ahead. Clear, well-crafted rules could, in theory, create increased transparency to a realm that has thus far remained hidden from view, potentially constraining official discretion as called for by the Fourth Plenum of China’s Communist Party in 2014. However, recent trends and the far reaching nature of the new law suggest that it may instead serve as a legal basis for stronger restrictions on foreign business interests (as well as social and political interests) in the country, and for asserting China’s interests internationally.

Foreign companies are advised to closely monitor the process of drafting and issuing implementing rules by government agencies regulating sectors of interest to them, taking every opportunity to engage with policymakers wherever possible to ensure that their interests as responsible stakeholders in the country’s development are carefully considered. Furthermore, foreign governments negotiating trade and investment agreements — most notably, the United States, which is negotiating a bilateral investment treaty with China — should examine the impact that broad definitions of national security could have on the interpretation of security-related exceptions to agreements under negotiation.

To learn more about the content of the new national security law, read the Covington e-alert on the topic here.

As we have written previously, China is engaging in simultaneous bilateral investment treaty (BIT) negotiations with the United States and the European Union. Indications are that the Chinese government is taking these negotiations very seriously. This presents the most significant opportunity for foreign investors in China to influence market access restrictions and other restraints on foreign investment in the country since China’s accession to the World Trade Organization (WTO) in 2001.

At the request of European trade negotiators, we searched hundreds of thousands of measures issued by 39 central government agencies and five representative provincial-level governments in order to identify provisions that frame or limit market access and business activities of foreign-owned companies in China. In the process, we identified over 800 restraining provisions, which we analyzed and grouped into a number of different types and categories. The results provide a useful taxonomy for future discussion both within the BIT negotiation context and beyond.

Beyond published measures, the Covington team reviewed key trade publications and conducted interviews with industry groups to identify and catalogue administrative practices that may also have a restraining effect on foreign investment. As foreign business leaders in China are well aware, many of the biggest obstacles to foreign participation in the Chinese economy are imposed unofficially by government officials exercising legal or extralegal discretion.

A public version of the report prepared for the EU’s Directorate General for Trade is available on the EU DG Trade website. While it does not include the full database of restraining measures, the public version presents detailed descriptions of the types of restraints identified and provides supporting examples and observations.

The United States and China recently concluded two days of high-level talks as part of the sixth U.S.-China Strategic and Economic Dialogue (“S&ED” or the “Dialogue”), which took place in Beijing from July 9-10. The most concrete outcome of this year’s S&ED is the commitment by both sides to reach agreement on the main body of the U.S.-China Bilateral Investment Treaty (“BIT”) text by the end of 2014 and to commence negative list negotiations by early next year. Given the broad scope of BITs negotiated by the United States, the U.S.-China BIT negotiations present the most important opportunity for U.S. industry to address market access and other trade and investment barriers in China since China’s accession to the WTO in 2001.

For U.S. companies seeking to enter the Chinese market, especially in industries that historically have been prohibited or heavily restricted for foreign investment, the remainder of this year is a critical time to engage with U.S. and Chinese government officials. Companies should use this time before China releases its negative list to apprise U.S. and Chinese policymakers of the companies’ priority interests. In particular, companies will want to specify the existing Chinese laws, regulations, policies and practices that impede the establishment of new investments or the operations of investments once established, and propose text to eliminate the impediments. China has signaled a willingness to open up the financial services, healthcare/medical, accounting, e-commerce, cultural and other service sectors, and U.S. negotiators will be looking to companies, trade associations and other stakeholders to identify the market access and other barriers that the U.S. Government can communicate to their Chinese counterparts, ideally for inclusion in China’s opening negative list offer.

Beyond the U.S.-China BIT development, according to a closing statement by Vice Premier Wang, the two sides reached more than 90 outcomes from the S&ED. Additional economic-focused results of greatest relevance to foreign investors in China, as described in a U.S.-China Joint Fact Sheet, include the following:

  • China committing “to follow the guidance provided at the Third Plenum of the 18th CPC Central Committee, which is to promote the orderly opening-up of the finance, education, cultural, medical sectors, and other service areas, and to remove foreign investment access restrictions in child and old-age care, architectural design, accounting and auditing, commerce and logistics, electronic commerce, and other such service sectors, including accelerating the revision of the Catalogue Guiding Foreign Investment in Industries to further open up to foreign investment.”
  • China committing that “economic entities under all forms of ownership . . . are able to compete on a level playing field.”
  • China committing that “its three Anti-Monopoly Enforcement Agencies (AMEAs) are to provide to any party under investigation information about the AMEA’s competition concerns with the conduct or transaction, as well as effective opportunity for the party to present evidence in its defense.”

In parallel with the S&ED and U.S.-China BIT negotiations, China continues to move forward with pilot economic reforms in the Shanghai Free Trade Zone (“FTZ”).  Last week, China issued a revised negative list for the FTZ.  For a comparison with the previous (2013) list, see this matrix prepared by Covington.  An accompanying statement by the Shanghai municipal government claimed that the new list was “17.4%” less restrictive than the previous list, but the loosening has not extended to sectors of major interest to foreign investors. This rather minimal loosening of restrictions has been greeted generally by U.S. officials, including Treasury Secretary Lew, with disappointment. In any event, China’s progress in implementing reforms in the Shanghai FTZ is an important ongoing indicator of prospects for achieving other reform objectives announced by the new leadership, and bears close monitoring.

For further information about developments regarding the S&ED, the Shanghai FTZ, and the U.S.-China BIT negotiations, please see Covington’s recent advisory on these topics here.

This post originally appeared on Investment Policy Central.

A U.S.-China bilateral investment treaty (BIT) will serve as the cornerstone for the bilateral economic relationship between these two economic powerhouses for years to come.  It puts in place important rules that protect U.S. investors against discrimination and arbitrary treatment, with the United States promising the same for Chinese investments.  China remains one of the most challenging markets for U.S. investors. This is a deal worth doing, and worth doing right.

BIT negotiations between the United States and China have been underway since 2008.  Last summer the talks gained new momentum.  The parties announced a major breakthrough when China signaled for the first time its willingness to protect U.S. investments at all phases of development and in all sectors and industries, except where specifically excluded.  China’s new openness to broader protection for investments, along with the reform agenda recently released by the new leadership of the Communist Party of China, signals China’s interest in accelerating its own economic growth through greater foreign investment and ensuring protection of Chinese outbound investment to the U.S. market.  While there is a long road ahead before the BIT is concluded, now is the time to identify unique challenges in the Chinese market so they can be addressed in the BIT negotiations.

What is a BIT and why is it important? 

A BIT is a government-to-government agreement that establishes binding rules covering the treatment of foreign investors and investments from each country.  As a practical matter, the BIT includes the legal rules that guarantee non-discriminatory access to the Chinese market and fair treatment of investments once established.  BITs provide substantive legal obligations that protect investors, such as protections against expropriation without compensation, protections from discriminatory or other arbitrary treatment, allowing investment-related capital to be freely transferred in and out of the country where the investment is made, and fair and equitable treatment of investments.  The BIT will restrict the imposition of performance requirements, such as requiring a certain level of local content be included in a product, as a condition for establishing or expanding an investment.  The BIT also will enhance transparency and opportunities for public participation in the regulatory process.

There are certain unique features of the Chinese market, including the dominance of state-owned enterprises and national champions, that may require unique disciplines in the U.S.-China BIT.  Transparency and an opportunity for public comment is another area that is particularly important in the Chinese market.

What about the U.S.-China BIT is significant?

China has entered into over 100 BITs.  But the U.S.-China BIT will break with China’s traditional BIT model in at least two significant respects.  First, in its negotiations with the United States, China has agreed that it will negotiate on the basis of a “negative list.”  By agreeing to a “negative list” approach, China has signaled its willingness to allow foreign investment in all industries and sectors of its economy, except as specifically carved out.  This leads to much broader coverage generally, since China has to “opt out” of protections, rather than “opt in.”  Second, China signaled its willingness to allow non-discriminatory access to its market at all stages of investment.  This would protect pre-investment activities and is expected to open the China market to more U.S. companies and afford greater certainty for investments in various sectors.  These are serious and important advances that will benefit U.S. investors.  The U.S.-China BIT presents the most significant opportunity for U.S. companies to address barriers in the Chinese market since China’s accession to the World Trade Organization.

Where do we go from here?

The United States and China continue to negotiate and meet regularly on economic issues, including at the upcoming U.S.-China Strategic and Economic Dialogue in July.  The Chinese are currently developing their draft “negative list” of sectors they wish to exclude from their commitments under the BIT.  That should be presented to the United States later this year or early next year.  In the meantime, however, U.S. companies can proactively work to identify and prioritize the current laws, regulations and administrative practices that restrict or otherwise impede their operations in China and seek opportunities to share those with the U.S. Government.  The BIT, once concluded, will set the ground rules for economic engagement in China for years to come. It’s important to get it right.

Promising advances have been during the past year in negotiation of a bilateral investment treaty (BIT) between the US and China.  Key objectives of the BIT are to accord certain protections to investors and also to ensure that each party will accord to investors and investments of the other party the same treatment it accords to its own investors and investments.

These negotiations have been ongoing since 2008.  A breakthrough was achieved last year when China agreed that the benefit of national treatment should apply not only to existing investments but also to those seeking to invest, thus allowing US companies and individuals to invest in previously closed sectors on the same conditions available to Chinese investors.  They also agreed that any exceptions to a party’s national treatment obligation must be specifically listed in a schedule of non-conforming measures—the so-called “negative list.”

This does not mean it will be smooth sailing to reach an agreement.  The Chinese are developing their draft negative list which they will present to the US by late 2014 or early 2015.  The US side is concerned that the “negative list” proposed by China listing those sectors to be carved out of the treaty will be far greater in scope than the US can accept.

What is clear however is that now is the time for American businesses to provide input to the US trade negotiators.  Companies have a unique opportunity to influence the course of negotiations and hence improve their operating climate in China if an agreement is finalized.  They can do so, for example, by identifying and ranking in order of importance the current laws, regulations and administrative practices that restrict or otherwise hamper their operations in China.  Now is the time to make their concerns known and attempt to have them covered by the US-China BIT.

Next week, Members of the European Parliament (“MEPs”) will gather in Brussels for committee meetings.  Several interesting debates are scheduled to take place.

On Monday, MEPs of the Foreign Affairs Committee (“AFET”) will have an exchange of views with China’s Ambassador to the EU, Ming Zhang.  It is likely that MEPs will discuss the outcomes of the EU-China summit of September 14, 2020, and pose critical questions regarding, for example, the ongoing negotiations on a bilateral investment treaty (“BIT”) between the EU and China.  At the press conference after the summit, Commission President Von der Leyen mentioned that the EU and China had reached agreement on several chapters of the BIT, such as disciplinary rules for state-owned enterprises, forced technology transfer, and transparency rules for subsidies.  However, important differences persisted concerning market access and China’s industrial overcapacity.  President of the European Council Charles Michel also stated that the EU reiterated its concerns over China’s action in Xinjiang and Tibet and that the parties agreed to discuss these issues in detail during the EU-China Human Rights Dialogue in Beijing later this year.  Both the EU and China hope to conclude negotiations on the BIT before the end of the year, but they will need to make substantial progress to be able to convince MEPs of the merits of the BIT.  Traditionally, the Parliament has been a strong advocate for human rights and is, for example, pushing for mandatory human rights and environmental due diligence for companies with global supply chains.  Commission President Von der Leyen’s remarks are available here and European Council President Charles Michel’s remarks are available here.

On Tuesday, the Committee on the Environment, Public Health and Food Safety (“ENVI”) and the Committee on Industry, Research and Energy (“ITRE”) will hold a joint public hearing on the access to future COVID-19 vaccines.  It is expected that MEPs will ask a panel of researchers and representatives of the pharmaceutical industry about the status quo of the development of the numerous vaccines, their clinical trials, and challenges to the production and distribution of prospective vaccines.  So far, the European Commission has signed two contracts with pharmaceutical companies and continues discussions with four others.

On Wednesday, several new Special Committees will have their constitutive meetings and elect their chairs and vice-chairs.  There will be five new Special Committees, among which, a Special Committee on Artificial Intelligence and the Digital Transformation.  The Special Committee has been established to draft a roadmap with specific objectives in the medium- and long-term for the EU in the field of AI.  MEPs from multiple regular Committees will take place in the Special Committee to ensure a coordinated approach to the upcoming EU legislative proposal, which is due to be introduced by the European Commission in Q1 2021.  More information on the Special Committee on AI can be found here.

For the complete agenda and overview of the meetings, please see here.

On Friday, April 14, the U.S. Department of Treasury published a widely anticipated semi-annual report detailing the foreign exchange practices of America’s major trading partners. Although he regularly called for China to be labeled as a “currency manipulator” as a candidate, President Donald J. Trump and his administration declined to use the occasion of this report to do so. Mr. Trump previewed this decision days earlier in an interview with the Wall Street Journal, reflecting the consensus among economists that the Chinese “are not currency manipulators.” While, according to many economists, the Chinese government did keep the value of the Renminbi (“RMB”; also known as the “Chinese yuan”) at an artificially low level for many years, Chinese policymakers have been hard at work trying to prop up the currency since 2014 due, in part, to a strengthening U.S. dollar and surging capital outflows.

The decision not to label China as a currency manipulator comes on the heels of the first in-person meeting between Mr. Trump and Chinese President Xi Jinping. On April 6 and 7, Mr. Trump hosted Mr. Xi at his Mar-a-Lago estate in Florida for a two-day summit, an important weather vane for near-term relations between the United States and China. Despite concerns that strategic differences over thorny issues such as North Korea and the South China Sea or harsh rhetoric regarding U.S.-China trade relations from Mr. Trump in advance of the meeting might sour the mood, both sides came out of the meetings with a buoyant step. The two sides agreed to implement a new, comprehensive framework for bilateral negotiations that will shape U.S.-China engagement in the years to come. Further, U.S. and Chinese officials announced a plan to reach agreement, within 100 days, on steps that can be taken to address trade-related frictions between the two countries.

For much of the Obama presidency, bilateral negotiations between the U.S. and China were centered around two main events: the U.S.-China Strategic and Economic Dialogue (“S&ED”) and the Joint Commission on Commerce and Trade (“JCCT”). During this first face-to-face encounter, Mr. Trump and Mr. Xi agreed to a new framework for high-level negotiations called the “U.S.-China Comprehensive Dialogue,” which is to cover four main tracks: diplomacy and security, economics, law enforcement and cybersecurity, and society and culture. Few details have been released as to how the new dialogue will work in practice, and which of the components of the S&ED and JCCT might be preserved in this new framework.

The 100-day plan for trade negotiations is aimed at addressing trade frictions, particularly with regard to increasing U.S. exports and reducing the U.S. trade deficit with China. Few details about what the 100-day plan will entail have been released, and many details are yet to be negotiated. However, it appears that these negotiations will focus on securing Chinese commitments on a range of U.S. exports including beef (banned in China since 2003) and other agricultural products, steel, oil, and gas. Additionally, the Chinese might provide greater market access for U.S. investments in the financial sector—e.g., in securities and insurance. U.S. Treasury Secretary Steven Mnuchin explained during a press briefing that there was a “very wide range of products that we discussed.” According to some reports, at least some Chinese commitments proposed at this early stage may have originally been intended for offer in the context of the bilateral investment treaty negotiations between the U.S. and China, the prospects for which are now less certain.

The current dynamics present significant opportunities for individual businesses and industry groups. Businesses seeking access to the Chinese market for exports or investment should consider engaging with U.S. policymakers to leverage the situation and make a case for addressing their specific needs during the current round of negotiations. Even if the 100-day plan does not bring about the kind of comprehensive economic benefits potentially possible under a bilateral investment treaty, companies with interests in China should see this as an opportunity to seek relief in a Chinese business environment that, according to over 80% of member companies responding to an AmCham China survey, has become less friendly to foreign business than in the past.

Leaders of 19 countries and the European Union, known as the G20, met in Hangzhou, China, on September 4-5 to assess global trends and coordinate economic and financial policies. The first time G20 leaders gathered together was in Washington, D.C., in November 2008, in the throes of the international financial crisis of 2008-2009.  It is generally acknowledged that the G20 played a significant role in pulling the world out of that crisis.  This week, the G20 Summit was held in the wake of the British vote to leave the European Union (Brexit), rising protectionist sentiments in the United States, and increasing political tensions and conflicts in Asia, Eastern Europe and in the Middle East.

In his welcoming keynote address to the G20 leaders, China’s President Xi Jinping issued a strong warning about the state and direction of the world economy. “Today, eight years on, the global economy has again reached a critical juncture,” he said.  “Economic globalization is suffering setbacks.  Protectionism and inward-looking trends are on the rise.”  “The global economy, while still on the road to recovery, faces multiple risks and challenges: weak growth momentum, sluggish demand, volatility in financial markets, and slow growth in international trade and investment.”  Xi challenged the leaders, in response, to “make the G20 an action team, instead of a talk shop.”

So what did the G20 deliver in Hangzhou?

Potentially, the most notable achievement of this year’s G20 Summit might be the joint announcement by China and the United States that the two governments have formally ratified the Paris climate change agreement. This is a major step generating significant momentum in the UN effort to combat climate change because the two nations together produce nearly 38 percent of the world’s total carbon emissions.  The Paris agreement must be ratified by at least 55 nations representing 55 percent of the world’s emissions to come into force.  Although 180 countries have signed the agreement, only 26 (now including China and the United States) have ratified it thus far, accounting for about 40 percent of the world’s emission.  This announcement is expected to encourage others, especially among the major G20 countries, to follow suit and bring the Paris agreement into force by the end of the year.

Apart from this breakthrough, it appears that the principle outcome of the G20 Summit was to call the world’s attention to the critical issues and trends facing the global economy today. In particular, IMF Managing Director Christine Lagarde called on global leaders to take “forceful” action to revive the world economy, noting that global economic growth had stagnated for five consecutive years below the 3.7 per cent average that prevailed between 1990 and 2007. Following Brexit, the IMF adjusted its global GDP forecast downward to 3.1 percent for 2016 and 3.4 percent for 2017. Lagarde warned of a “low-growth trap” accompanied by rising inequality that has led to increasing populism and rising trade barriers.  “Pushing back against protectionism and pushing forward with free and fair trade is a vital component of this growth agenda,” she said. At the closing of the G20 Summit, Lagarde pointed to a consensus among G20 leaders that there must be more growth, and that it must be more inclusive. She echoed Xi’s words saying that urgent structural reforms need to be implemented, not just talked about.

At his closing press conference, President Obama also spoke about a G20 agreement to address the issue of excess capacity, particularly in the steel sector, by putting together a report with recommendations that will be presented to the next G20 Summit in Hamburg. He said there was a “validation of the basic principle that to the extent that overcapacity is the result not just of market forces but of specific policy decisions that are distorting a well-functioning market, that needs to be fixed.”

And U.S.-China Relations?

With respect to broader bilateral relations, President Obama said that President Xi and he agreed to advance cooperation, for example, on climate change, global heath and development, UN peacekeeping, counter-narcotics, and nuclear security. He also indicated, however, that there was a “clear, candid, direct and constructive” discussion of differences over issues like religious freedom, maritime security, and a level economic playing field.  The White House Fact Sheet, released after the meeting on September 4, noted further that the two sides “reaffirmed their commitment to implement fully their September 2015 cyber commitments” and would “refrain from competitive devaluations.”  On high-tech and digital trade, the two sides “commit not to unnecessarily limit or prevent commercial sales opportunities for foreign suppliers of ICT products or services,” to develop innovation policies “consistent with the principle of non-discrimination” and “not to require the transfer of intellectual property rights or technology as a condition of doing business in their respective markets.”  The United States reiterated its commitment to encourage and facilitate export of commercial high technology items to China for civilian end-users and for civilian end-uses.”  Finally, both sides cited “significant” progress in Bilateral Investment Treaty (BIT) negotiations and committed “to further intensify negotiations.”

In sum, G20 leaders in Hangzhou clearly recognized and acknowledged the serious challenges ahead for the global economy, especially slowing growth and rising inequality that is fueling protectionist sentiments across the world. What is not clear is whether there will be sufficient courage and will to tackle these challenges in the coming years, especially in view of the critical political and security issues that divide them.

The Chinese government makes no secret of the fact that in its view, foreign investment should be consistent with China’s economic development plans and industrial policies. Its ability to administer foreign investment in accordance with industrial policy is aided by the fact that all foreign investment must go through an often rigorous approval process. By contrast, only particularly large or sensitive foreign investments require approval in the US. (For a more thorough treatment of the Chinese approval process for foreign investment, see the report prepared by Covington for the U.S. Chamber of Commerce available here.)

Since 1995, foreign investment in China has been guided by the Catalogue of Industries for Guiding Foreign Investment (“Catalogue”). The Catalogue is divided into three lists which, respectively, list (1) “encouraged” industry sectors for which the government is actively seeking foreign investment and will therefore provide special advantages to foreign investors (e.g., preferential tax treatment, easier government approval), (2) “restricted” industry sectors for which special restrictions such as a relatively more onerous and time-consuming approval process apply, and (3) “prohibited” industry sectors in which foreign investment is banned altogether. Sectors not specifically listed are considered “permitted.”

The categorization of industry sectors is updated approximately every three years in order to reflect the government’s then prevailing economic and political goals and policies. On March 10th, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”), the two principal authorities in charge of foreign investment in China, issued a new version of the Catalogue (full Chinese version available here; English translation available here). The new Catalogue will take effect on April 10th, replacing the previous 2011 version, which became effective in 2012.

The latest revision represents a more marked change than was seen the last time the Catalogue was revised, indicating that the government is more keen to attract foreign investment in the face of declining interest (see a post we wrote on this blog about declining foreign investor sentiment here). The government’s keenness is particularly evident when it comes to foreign investment in advanced and green technologies (e.g., manufacturing of high-throughput gene sequencing equipment and production of pollution-free feeds and additives) as well as in traditionally inefficient state-dominated sectors into which the government is seeking to inject new life (e.g., the construction and operation of urban and interurban railways and the operation of eldercare facilities).

The new Catalogue lifts restrictions on foreign investment in many sectors. Most of the liberalization is seen in the manufacturing sector, with some relaxation also found in other sectors including services, agriculture, and infrastructure. According to an NDRC official’s count, the number of restricted industries has been reduced from 79 to 38, with direct sales and insurance brokerage companies among the beneficiaries. The 2011 Catalogue listed 44 industries for which Chinese-controlled joint ventures were required, and that number has been reduced to 35 in the new Catalogue. In addition, the number of industries requiring joint ventures (with Chinese partners), but without the Chinese control requirement, has been reduced from 43 to 15, including in such sectors as real estate development. These numbers to some extent reflect improved market access in some areas and reduced market access in others, as well as the consolidation of some items — which resulted in lower numbers of restricted sectors but no actual lifting of market access restrictions. Nonetheless, the overall trend is one of liberalization.

In general, we find that foreign investment restrictions remain largely unaltered in industries that traditionally face heavy restrictions — e.g., banking, telecommunications, and cultural industries — though a significant and welcome exception is e-commerce, an industry in which companies’ foreign equity may now exceed 50%. Some types of investments face new restrictions. For example, higher education and pre-school education have been moved into the restricted category, and TV and radio ratings survey companies must now be controlled by Chinese parties.

Other industries that appear to be newly prohibited (e.g., internet publishing services, wholesale tobacco retail, and the sale of culture relics have been added to the prohibited category), or that appear to face new restrictions such as equity caps (e.g., a single foreign investor may hold no more than a 20% share of a Chinese bank, with total foreign-held shares capped at 25%) or  nationality requirements (e.g., the chief partner of a foreign-invested accounting firm and the principal of a Sino-foreign cooperative school must be Chinese nationals), do not reflect actual changes to the status quo. Instead, they represent an effort by the authorities to incorporate restrictions contained in other laws, regulations, and policies that were not reflected in previous versions of the Catalogue in order to make the Catalogue more comprehensive and useful. Interestingly, a disclaimer at the end of the 2011 Catalogue that any administrative regulations or industrial policies touching upon matters related to market access shall prevail over the provisions of the Catalogue has been removed. Whether this reflects an intention to make the Catalogue a single, one-stop list for foreign investment restrictions (bringing it closer to the concept of an economy-wide negative list, as described below) is unclear, as the text does not explicitly state that the Catalogue is now to be considered as comprehensive.

Although the new Catalogue indicates some attempt to build a friendlier, less discriminatory investment environment for foreign investors in China, it does not remove as many restrictions as foreign investors had hoped. The European Chamber of Commerce described the draft version of the Catalogue issued in November 2014 (if anything, slightly less restrictive than the final version) as merely an “incremental development,” arguing that a simplified negative list (a presumption that all investment is permitted except for a small number of narrowly crafted exceptions all listed in an easily accessible negative list) would have showed more ambition. The government has already accepted a negative list approach in the Shanghai Pilot Free Trade Zone (though it drew significant criticism for an overly extensive list of exceptions), in an important new draft foreign investment law, and in US-China bilateral investment treaty negotiations. With the release of the final version of the new 2015 Catalogue, it appears that those waiting for a negative list approach to foreign investment nationwide must wait a bit longer.

For foreign investors interested in the Chinese market who would like to carefully examine the new Catalogue and its changes, we have prepared a color-coded “redline” version identifying changes between the new 2015 Catalogue and the previous 2011 version.