2014 Negative List for the Shanghai Free Trade Zone

The Shanghai Pilot Free Trade Zone (Shanghai FTZ), established on September 29, 2013, has been earmarked by the Chinese government as a center for experimentation with reduction or elimination of restrictions on foreign investment in China. For this purpose, it has adopted a "negative list" approach, featuring a finite list of the restrictions and prohibitions on foreign investment that will be applied in the Shanghai FTZ and the principle that all activities which are not on this list will be fully open to foreign investment.

The first negative list, issued in September 2013 (2013 Negative List), was of some disappointment to many foreign investors, since it included virtually all of the restrictions and prohibitions on foreign investment set out in various Chinese regulations and policy documents, like the current Foreign Investment Industrial Guidance Catalogue which governs foreign investments nationwide. But hope for more change was kept alive by promises that the restrictions and prohibitions would be reduced in subsequent editions of the negative list that would be periodically issued by the Shanghai Municipal Government.

The first of these subsequent editions of the negative list, the Special Administrative Measures on Foreign Investment Access into the China (Shanghai) Pilot Free Trade Zone, was issued by the Shanghai Municipal Government on June 30, 2014 (2014 Negative List). With a total of 139 listed items, it is about 27 percent shorter than the 2013 Negative List, although it bears noting that many of the reductions appear to result from reclassification and elimination of items which were duplicated on the 2013 Negative List.

The reductions include removal of restrictions from 14 items which were on the 2013 Negative List. Almost half of them relate to manufacturing and processing. The others relate to professional services, transportation, entertainment, trading and real estate.

In the areas of manufacturing and processing, removal of restrictions will now, in principle, allow foreign investors in the Shanghai FTZ to engage in cotton seed processing, pulp and paper production, the manufacture of all types of ordinary level bearings and parts (steel balls and retainers), and the production of more than 20 pharmaceuticals (including penicillin G, vitamin B1, vitamin B2, vitamin C, vitamin E and multiplex vitamins). However, it is not clear whether some of these changes will be meaningful, since there is very little room for new manufacturing or processing activities in the Shanghai FTZ and since these sorts of manufacturing and processing activities do not seem to be encouraged by the Shanghai FTZ authorities.

The changes in the 2014 Negative List which relate to professional services, transportation, entertainment, trading and real estate may be more significant. They include the following:

• Professional Technology Services. Foreign investment is now allowed for the establishment of imported and exported goods certification companies, and the qualification criteria for foreign certification institutions are now removed.
• Transportation Services. Restrictions on foreign investment in international cargo handling, international marine shipping container station, yard operation or air transportation agency (permitting only Sino-foreign equity or cooperative joint ventures) have been removed.
• Entertainment. Foreign investment is now permitted for the establishment of Internet cafes.
• Trading. Foreign investment is now allowed in trading companies which engage in vegetable oil and sugar wholesale, retail and distribution.
• Automotive Electronics R&D. Restrictions on foreign investment in the research and development of automotive electronics (permitting only Sino-foreign equity joint ventures) have been removed.
• Real Estate. Foreign investment in project companies is now allowed in the secondary property market and for investments in high-end hotels, office buildings and international exhibition centers.

The 2014 Negative List does not indicate whether foreign-invested companies engaged in the activities mentioned above will be able to do business or operate branch offices outside the Shanghai FTZ.

It bears noting that, although some of the restrictions on foreign investment in banks, financial firms, trust firms and currency brokers appearing in the 2013 Negative List have been removed from the 2014 Negative List, it is likely that they will remain in effect, since a statement was added to the 2014 Negative List to the effect that investments in banking-style institutions will be subject to existing regulations.

Also, although some restrictions on the minimum investment threshold and the maximum operation period of foreign-invested medical institutions have been removed from the 2014 Negative List, these restrictions will likely remain in effect since they now appear in the Tentative Measures for the Administration of Wholly Foreign-Owned Medical Institutions in the Shanghai FTZ, promulgated on November 13, 2013.

Finally, although prohibitions on gambling and pornography have been removed from the 2014 Negative List, it would be imprudent to assume that foreign investment is now permitted in these activities, since they are prohibited nationwide by Chinese criminal laws and regulations.

In conclusion, it appears to us that, although the 2014 Negative List takes a few modest steps towards the reduction or elimination of restrictions on foreign investments in the areas of professional services, entertainment, trading and real estate, it leaves many existing restrictions on foreign investment untouched. We look forward to the issuance of the next edition of the negative list, to see what changes it will bring.