China’s New Foreign Investment Policy Cracks Investment Opportunity Window
On June 28, Chinese officials announced the loosening of restrictions on foreign investments in a variety of industries in the country’s 12 free trade zones, ranging from agriculture to banking. China’s Commerce Minister Zhong Shan stated that China “will continue to defend the global multilateral trading system” and that this move was part of a greater plan to continue opening up its market to the world. China’s National Development and Reform Commission (NDRC), the top economic planning organization for the country, published the latest version of the Special Administrative Measures on Access to Foreign Investment 2018, also known as the “negative list,” a document that enumerates which industries foreign firms are prohibited from investing in. The number of sectors on the list is now just 48, a noticeable drop from 2017’s 63, and 2011’s 120. For the sectors not listed in the publication, foreign firms (on paper) are given equal treatment to domestic companies although recent surveys by the American Chamber of Commerce indicate a different picture. Many experts argue the changes are mostly superficial but the reduced list does provide opportunities for foreign investors to take advantage of.
Raw Materials
China will end the cap on foreign ownership of companies that breed and produce seeds except for wheat and corn. Prior to the publication’s release, foreigners were not allowed to own a majority in joint ventures. Domestic limits on purchases of rice, wheat, and corn will also be eliminated but foreign firms will still be prohibited from breeding genetically modified crops, livestock, and fish.
Financial Sector
While more gradual than some of the other reforms published, foreign companies providing financial services will incrementally have greater opportunities to work in China as a result of the new list. Caps on foreign banks will be removed and ownership limits on insurance companies and brokerages will be allowed up to 51% by the end of July and altogether lifted in 2021. [Analyst Comment: Due to the current financial environment in China, it is likely that this will primarily impact larger foreign firms as there are a number of big Chinese players to contend with. However, China is currently undergoing a “rural rejuvenation” campaign throughout its countryside where it is looking to develop modern farms and tourist attractions; projects that are bringing in big investment. There may be opportunities for small and medium-sized finance firms to get involved.]
Power + Infrastructure
The former policy requiring a Chinese majority ownership of construction and operation of power grids is also to be nixed. This comes as part of China’s government is seeking to increase efficiencies in electricity more efficient and cut overcapacity. [Analyst Comment: This is potentially a great sector for foreign investors due to underdevelopment in infrastructure combined with increasing electricity consumption as new cities pop up throughout the countryside. Challenges to be expected include the dominance of State Grid Corp. and China Southern Power Grid Co., preference for domestic firms, and the ongoing reforms.]
- Foreign firms will be able to construct and operate railway networks and railway passenger transportation companies without entering into joint ventures by the end of July.
- Additionally, the complete ban prohibiting foreign investment in the production of nuclear fuel will be eliminated.
Rare Earth Minerals + Mining
Rare earth minerals include 17 minerals that affect a variety of sectors. China is home to about 80% of the world’s supply. Foreign companies will now be able to operate smelting and separation without entering a joint venture with a Chinese company. The Chinese government’s goal is to restructure and consolidate the sector while limiting pollution. [Analyst note: This change is expected to have less of an impact than some other updates due to the current saturation of the market.]
- Foreign firms will no longer be required to conduct oil and natural gas exploration projects prior to entering joint ventures with Chinese companies.
Manufacturing
For the automotive industry, by the end of July, the Chinese government is expected to remove the restrictions on foreign capital share ratio of special vehicles and green energy car manufacturing. By 2020, the restrictions on foreign capital shares of commercial vehicle manufacturing will be eliminated. Finally, caps on foreign passenger car manufacturing ownership will be removed by 2022.
In the aviation sector, aircraft manufacturers can expect to see ownership caps lifted. [Analyst note: This seems unlikely to have a big impact as the world’s two most prominent players, Airbus and Boeing, since they both have already entered into joint-venture agreements and established final assembly plans for a manufacturing plant. Pre-existing agreements like this make the prospect of going out on their own more daunting and costly.]
- The policy prohibiting the manufacturing of weapons and ammunition by foreign firms is to end by the end of July.
Why most investors shouldn’t get too excited
To many, China appears to be moving in the right direction, however, the changes to the “negative list,” upon closer inspection, are mostly superficial. It’s clear that this new list is similar to announcements over the last few years in that there are not expected to have real substantial impacts on the outside business world. Most of the sectors disappearing from the list are assessed to hold limited appeal to foreign investors, allowing Beijing to put forth an image of cooperation and continued opening up while not delivering anything new. The other maneuver seen in this updated list is to eliminate sectors that foreign investors stand no chance of competing in due to unwritten cultural and governmental preferences. Industries like the Chinese petroleum, railroad, and power markets are flooded with well-established state-owned companies, making it nearly impossible for foreign firms to jockey for their share of the market. While it can sound like an attractive opportunity for firms in industries recently removed from the list to enter the Chinese market, the business environment has not become more hospitable for foreign companies across the board. Additionally, it seems unlikely that the shortened list will have any positive impact on the ensuing trade dispute between the United States and China.
About the Author: Adriana Ray is an Asia Policy Analyst at FAO Global where she researches and writes on Economic, Security, and Political issues in the region. Adriana is currently a graduate student at Georgetown University’s School of Foreign Service where she is pursuing a Masters in International Security. She is also an alum of Tsinghua University and Furman University.
Related links
- Xinhua Net – Full text of Chinese commerce minister’s signed article on People’s Daily
- CNBC – China’s move to ease foreign investment curbs leaves trade experts unimpressed
- BBC – China eases some foreign investment rules
- Lexology – China further opens market access for foreign investors
- Bloomberg – China’s Foreign Investment Door Opens, But Only Barely
- Reuters – China further eases foreign investment curbs in free trade zones
- com – Chinese Commerce Minister: Market Access For Foreign Investors To Widen
- Bloomberg – A China Borrower’s $11 Billion Debt Mountain Comes Crashing Down
- Gulf News Analysis – Not too many positives from China’s negative list
- Lexology – China’s new ‘negative list’
- China-Briefing – How to Read China’s 2018 Negative List
- Asia Times – China issues new inbound foreign investment negative list
- Caixin – Editorial: China Must Clear Hidden Obstacles for Foreign Investors
- CNBC – China’s move to ease foreign investment curbs leaves trade experts unimpressed
- Reuters – Xi’s campaign to draw people back to graying rural China faces uphill battle
