Reality check: How welcome are foreign investors in China?

Revisions to China’s Foreign Investment Negative List (FINL) are generally presented as an indication of how far the market is opening up to foreigner investors. However, this list alone gives only a partial picture. Other negative lists can render any opening up practically meaningless. The coming round of FINL revisions will be no different, argues MERICS Senior Analyst Jacob Gunter.

Until recent years, direct market access for foreign companies was determined by the Foreign Investment Catalogue, a “positive list” of the industries in which foreign investment was permitted, and under which conditions. In 2018, China shifted to the Foreign Investment Negative List (FINL), which instead includes a list of sectors in which foreign investors are barred, or in which they must meet certain requirements. Each year, China has revised the FINL, with the overwhelming trend being to reduce the number of entries and scale down the conditions that remain. The 2020 revisions brought the number of restricted sectors from 40 down to 33 – an impressive sounding feat.

But there are other negative lists to consider. The Market Access Negative List (MANL) also stands in the way of investors, both local and foreign alike. The list is divided into two sections: items requiring approval, permitting or licensing, and those which are prohibited to “market actors”. These two lists have 123 and 152 items respectively in the 2020 revisions. 

• The prohibited list is largely composed of sectors in which European companies have no interest – like item 120, which prohibits investing in the trade of rhino horns or tiger bones – or are in areas of national security, such as item 137, which prohibits investment in military, police or political schools. 
• The approval list is potentially a second market access barrier to European investors in industries which are not covered by the FINL. These include most financial services. Although these have been removed from the FINL and nominal market access granted, items 59-68 of this list, which set out the licensing and approval requirements in the financial services sector, have meant that European financial institutions have not always been able to get licenses for the services they want to offer, such as cross-border services.

If all of that sounds complicated, the European Union Chamber of Commerce in China has a useful infographic and case-studies.  

An additional arbitrary barrier is the National Development and Reform Commission (NDRC), which must approve any foreign investment over one billion USD. Historically, this prevented foreign companies in industries that were technically open from making large investments. The chemicals industry is a good example: foreign chemical producers seeking approval were pushed through a political process in which they were essentially forced into JVs. Only in 2018 were European and US players able to convince state planners to approve large projects. This happened because China’s leaders, keen to upgrade their manufacturing, realized that foreign chemical producers were unwilling to produce top-quality chemicals through a JV as this would amount to a handover of their technology. 

Finally, there are two more lists of less relevance. First is the free-trade-zone (FTZ) version of the FINL, which is slightly shorter than the standard FINL and pilots market opening in China’s many FTZs. There is also a single positive list – the Catalogue for Industries for Encouraging Foreign Investment – which lists the sectors in which investors will enjoy preferential policies like lower taxes and easier administrative work. 

The impact of recent revisions

Recent revisions have varied widely in their impact, spanning from meaningless gestures to significant progress.

Meaningless gestures – Some of the sectors removed from the FINL are simply not of interest to foreign companies, such in the production of Xuan paper or ink ingots used in Chinese calligraphy. Other, more industrial revisions amount to little, like the removal of an entry barring the construction or operation of pipe networks for water and waste management in cities of more than 500,000 people. First, China’s unfair public procurement system is a large secondary barrier. Second, this only applies to new development in massive cities that already have established pipe systems and water management providers. This means that relevant European companies will likely continue with business as usual – selling technology and expertise without taking direct ownership. The removal of these items from the list is therefore most likely merely to help with China’s messaging when it talks about how “open” its market is.

Marginal improvements – Restrictions on insurance companies were lifted in 2020. However, insurance providers can only apply for a license one province at a time, which commonly takes a year each. Furthermore, China’s own insurance providers had saturated the market before the restrictions were lifted, leaving foreign companies with few opportunities. The intention appears therefore to be more about controlling the amount of foreign competition, some of which China’s state planners are keen on to help whip domestic insurers into shape. 

Significant progress – Much more promising is the steady opening up of the automotive sector. New Energy Vehicles (NEVs), commercial vehicles, and passenger vehicles have been or will be opened up in 2018, 2020 and 2022 respectively. While European players have remained with JVs when expanding NEV production, Tesla was able to invest in a fully owned plant in Shanghai. Meanwhile, in commercial vehicles, European producers of trucks and buses have announced 100% foreign owned operations. The impending opening up of passenger vehicles will meaningfully expand opportunities for European players. This is fundamentally about onshoring supply chains and technology that China wants, as well as encouraging onshore production of consumer goods. If there is the demand, China may as well have the jobs, taxes and innovation on home soil.  

What to expect in the 2021 revisions

At the end of June, the Ministry of Commerce initiated the revision process for the FINL and specified in its own iteration of the 14th Five-year Plan that, by 2025, opening in the following areas would be realized: telecommunications, internet (services), education, culture, and medical care. The MANL, meanwhile, is traditionally updated near the end of the year. However, although state-planners are whittling down the number of items on the lists, this alone will not mean there is comprehensive market access, as China’s negative list system is only one part of the broader market access regime. This is borne out by the European Chamber’s Business Confidence Surveys. In 2020, 15 percent of its member companies said they faced direct market access barriers, like the negative list, and 30 percent reported facing indirect ones like licensing and administrative approvals. In 2021, those shares shifted to 12 and 33 percent respectively.

When China publishes the 2021 revisions, European policymakers and business leaders alike should keep in mind that some opened doors lead to new possibilities, and others lead to yet another locked door. As always, China will continue with limited and selective opening, always keen to favor its local champions in certain areas while seeking to onshore production and technology in others.