China is one of the top global foreign direct investment destinations due to its large consumer base and integrated supply chains. China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors. Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, as well as the requirement often imposed on U.S. firms to transfer technology as a prerequisite to gaining market access. While China made modest openings in some sectors in 2018, such as financial services, insurance, new energy vehicles, and shipbuilding, China’s investment environment continues to be far more restrictive than those of its main trading partners, including the United States.
China relies on the Special Administrative Measures for Foreign Investment Access (known as the “nationwide negative list”) to categorize market access restrictions for foreign investors in defined economic sectors. While China in 2018 reduced some restrictions, foreign participation in many industries important to U.S. investors remain restricted, including financial services, culture, media, telecommunications, vehicles, and transportation equipment.
Even in sectors “open” to foreign investment, foreign investors often face difficulty establishing an investment due to stringent and non-transparent approval processes to gain licenses and other needed approvals. These restrictions shield inefficient and monopolistic Chinese enterprises in many industries – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition against private and foreign companies. In addition, lack of transparency in the investment process and lack of rule of law in China’s regulatory and legal systems leave foreign investors vulnerable to discriminatory practices such as selective enforcement of regulations and interference by the Chinese Communist Party (CCP) in judicial proceedings. Moreover, industrial policies such as Made in China 2025 (MIC 2025), insufficient protection and enforcement of intellectual property rights (IPR), requirements to transfer technology, and a systemic lack of rule of law are further impediments to successful foreign investments in China.
During the CCP 19th Party Congress held in October 2017, CCP leadership underscored Party Chairman Xi Jinping’s primacy by adding “Xi Jinping Thought on Socialism with Chinese Characteristics for the New Era” to the Party Charter. In addition to significant personnel changes, the Party announced large-scale government and Party restructuring plans in early 2018 that further strengthened Xi’s leadership and expanded the role of the Party in all facets of Chinese life: cultural, social, military, and economic. An increasingly assertive CCP has caused concern among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than political dictates from the Party.
Although market access reform has been slow, the Chinese government has pledged greater market access and national treatment for foreign investors and has pointed to key announcements and new developments, which include:
- On June 28, 2018 the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of Special Administrative Measures for Foreign Investment Access (i.e., “nationwide negative list”), which replaced the Foreign Investment Catalogue. The negative list was reformatted to remove “encouraged” economic sectors and divided restrictions and prohibitions by industry. Some of the liberalizations were previously announced, like financial services and insurance (November 2017) and automobile manufacturing and shipbuilding (April 2018). A new version of the negative list is expected to be released in 2019.
- On June 30, 2018 NDRC and MOFCOM jointly released the Special Administrative Measures for Foreign Investment Access in the Pilot Free Trade Zones (i.e., the Free Trade Zone, or FTZ, negative list). The FTZ negative list matched the nationwide negative list with a few exceptions, including: foreign equity caps of 66 percent in the development of new varieties corn and wheat (the nationwide cap is 49 percent), removal of joint venture requirements on oil and gas exploration, and removal of the prohibition on radioactive mineral smelting and processing, including nuclear fuel production.
- On December 25, 2018 the NDRC and MOFCOM jointly released The Market Access Negative List. This negative list, unlike the nationwide negative list that applies only to foreign investors, defines prohibitions and restrictions to investment for all investors, both foreign and domestic. This negative list attempted to unify guidance on allowable investments previously found in piecemeal laws and regulations that were often industry-specific. This list also highlighted what economic sectors are only open to state-owned investors.
- On March 17, 2019 the National People’s Congress passed a Foreign Investment Law (FIL) that effectively replaced existing law governing foreign investment (i.e., the China-Foreign Joint Venture Law, the Contract Joint Venture Law, and the Wholly Foreign-Owned Enterprises Law). As drafted, the FIL would address longstanding concerns of U.S. investors, including forced technology transfer and national treatment; however, due to lack of details and implementation guidelines, it is not clear how foreign investor rights would be protected.
While Chinese pronouncements of greater market access and fair treatment of foreign investment is welcome, details are needed on how these policies will address longstanding problems foreign investors have faced in the Chinese market, including being subject to inconsistent regulations, licensing and registration problems, insufficient IPR protections, and various forms of Chinese protectionism that have created an unpredictable and discriminatory business climate.
Table 1: Key Metrics and Rankings
|Transparency International’s Corruption Perceptions Index||2018||87 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2018||46 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||17 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$107,556||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2018||$8,690||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
China continues to be one of the largest recipients of global FDI due to a relatively high economic growth rate, growing middle class, and an expanding consumer base that demands diverse, high quality products. FDI has historically played an essential role in China’s economic development. In recent years, due to stagnant FDI growth and gaps in China’s domestic technology and labor capabilities, Chinese government officials have prioritized promoting relatively friendly FDI policies promising market access expansion and national treatment for foreign enterprises through general improvements to the business environment. They also have made efforts to strengthen China’s legal and regulatory framework to enhance broader market-based competition. Despite these efforts, the on-the-ground reality for foreign investors in China is that the operating environment still remains closed to many foreign investments across a wide range of industries.
In 2018, China issued the nationwide negative list that opened up a few new sectors to foreign investment and promised future improvements to the investment climate, such as leveling the playing field and providing equal treatment to foreign enterprises. However, despite these reforms, FDI to China has remained relatively stagnant in the past few years. According to MOFCOM, total FDI flows to China slightly increased from about USD126 billion in 2017 to just over USD135 billion in 2018, signaling that modest market openings have been insufficient to generate significant foreign investor interest in the market. Rather, foreign investors have continued to perceive that the playing field is tilted towards domestic companies. Foreign investors have continued to express frustration that China, despite continued promises of providing national treatment for foreign investors, has continued to selectively apply administrative approvals and licenses and broadly employ industrial policies to protect domestic firms through subsidies, preferential financing, and selective legal and regulatory enforcement. They also have continued to express frustration over China’s weak protection and enforcement of IPR; corruption; discriminatory and non-transparent anti-monopoly enforcement that forces foreign companies to license technology at below-market prices; excessive cybersecurity and personal data-related requirements; increased emphasis on requirements to include CCP cells in foreign enterprises; and an unreliable legal system lacking in both transparency and rule of law.
China seeks to support inbound FDI through the MOFCOM “Invest in China” website ( ). MOFCOM publishes on this site laws and regulations, economic statistics, investment projects, news articles, and other relevant information about investing in China. In addition, each province has a provincial-level investment promotion agency that operates under the guidance of local-level commerce departments.
- American Chamber of Commerce China 2019 American Business in China White Paper:
- American Chamber of Commerce China 2019 Business Climate Survey:
- U.S.-China Business Council’s 2018 China Business Environment Member Survey:
- EU Chamber’s 2018 Business Confidence Survey: .
- MOFCOM’s Investment Promotion Website:
Limits on Foreign Control and Right to Private Ownership and Establishment
In June 2018, the Chinese government issued the nationwide negative list for foreign investment that replaced the Foreign Investment Catalogue. The negative list identifies industries and economic sectors restricted or prohibited to foreign investment. Unlike the previous catalogue that used a “positive list” approach for foreign investment, the negative list removed “encouraged” investment categories and restructured the document to group restrictions and prohibitions by industry and economic sector. Foreign investors wanting to invest in industries not on the negative list are no longer required to obtain pre-approval from MOFCOM and only need to register their investment.
The 2018 foreign investment negative list made minor modifications to some industries, reducing the number of restrictions and prohibitions from 63 to 48 sectors. Changes included: some openings in automobile manufacturing and financial services; removal of restrictions on seed production (except for wheat and corn) and wholesale merchandizing of rice, wheat, and corn; removal of Chinese control requirements for power grids, building rail trunk lines, and operating passenger rail services; removal of joint venture requirements for rare earth processing and international shipping; removal of control requirements for international shipping agencies and surveying firms; and removal of the prohibition on internet cafés. While market openings are always welcomed by U.S. businesses, many foreign investors remain underwhelmed and disappointed by Chinese government’s lack of ambition and refusal to provide more significant liberalization. Foreign investors continue to point out these openings should have happened years ago and now have occurred mainly in industries that domestic Chinese companies already dominate.
The foreign investment negative list restricts investments in certain industries by requiring foreign companies enter into joint ventures with a Chinese partner, imposing control requirements to ensure control is maintained by a Chinese national, and applying specific equity caps. Below are just a few examples of these investment restrictions:
Examples of foreign investments that require an equity joint venture or cooperative joint venture for foreign investment include:
- Exploration and development of oil and natural gas;
- Printing publications;
- Foreign invested automobile companies are limited to two or fewer JVs for the same type of vehicle;
- Market research;
- Preschool, general high school, and higher education institutes (which are also required to be led by a Chinese partner);
- General Aviation;
- Companies for forestry, agriculture, and fisheries;
- Establishment of medical institutions; and
- Commercial and passenger vehicle manufacturing.
Examples of foreign investments requiring Chinese control include:
- Selective breeding and seed production for new varieties of wheat and corn;
- Construction and operation of nuclear power plants;
- The construction and operation of the city gas, heat, and water supply and drainage pipe networks in cities with a population of more than 500,000;
- Water transport companies (domestic);
- Domestic shipping agencies;
- General aviation companies;
- The construction and operation of civilian airports;
- The establishment and operation of cinemas;
- Basic telecommunication services;
- Radio and television listenership and viewership market research; and
- Performance agencies.
Examples of foreign investment equity caps include:
- 50 percent in automobile manufacturing (except special and new energy vehicles);
- 50 percent in value-added telecom services (excepting e-commerce);
- 51 percent in life insurance firms;
- 51 percent in securities companies;
- 51 percent futures companies;
- 51 percent in security investment fund management companies; and
- 50 percent in manufacturing of commercial and passenger vehicles.
Investment restrictions that require Chinese control or force a U.S. company to form a joint venture partnership with a Chinese counterpart are often used as a pretext to compel foreign investors to transfer technology against the threat of forfeiting the opportunity to participate in China’s market. Foreign companies have reported these dictates and decisions often are not made in writing but rather behind closed doors and are thus difficult to attribute as official Chinese government policy. Establishing a foreign investment requires passing through an extensive and non-transparent approval process to gain licensing and other necessary approvals, which gives broad discretion to Chinese authorities to impose deal-specific conditions beyond written legal requirements in a blatant effort to support industrial policy goals that bolster the technological capabilities of local competitors. Foreign investors are also often deterred from publicly raising instances of technology coercion for fear of retaliation by the Chinese government.
Other Investment Policy Reviews
Organization for Economic Cooperation and Development (OECD)
China is not a member of the OECD. The OECD Council decided to establish a country program of dialogue and co-operation with China in October 1995. The most recent OECD Investment Policy Review for China was completed in 2008 and a new review is currently underway.
In 2013, the OECD published a working paper entitled “China Investment Policy: An Update,” which provided updates on China’s investment policy since the publication of the 2008 Investment Policy Review.
World Trade Organization (WTO)
China became a member of the WTO in 2001. WTO membership boosted China’s economic growth and advanced its legal and governmental reforms. The sixth and most recent WTO Investment Trade Review for China was completed in 2018. The report highlighted that China continues to be one of the largest destinations for FDI with inflows mainly in manufacturing, real-estate, leasing and business services, and wholesale and retail trade. The report noted changes to China’s foreign investment regime that now relies on the nationwide negative list and also noted that pilot FTZs use a less restrictive negative list as a testbed for reform and opening.
- WTO Investment Trade Review for China:
- International Monetary Fund (IMF) information on China:
- FDI Statistics from MOFCOM:
China made progress in the World Bank’s Ease of Doing Business Survey by moving from 78th in 2017 up to 46th place in 2018 out of 190 economies. This was accomplished through regulatory reforms that helped streamline some business processes including improvements related to cross-border trading, setting up electricity, electronic tax payments, and land registration. This ranking, while highlighting business registration improvements that benefit both domestic and foreign companies, does not account for major challenges U.S. businesses face in China like IPR protection and forced technology transfer.
The Government Enterprise Registration (GER), an initiative of the United Nations Conference on Trade and Development (UNCTAD), gave China a low score of 1.5 out of 10 on its website for registering and obtaining a business license. In previous years, the State Administration for Industry and Commerce (SAIC) was responsible for business license approval. In March 2018, the Chinese government announced a major restructuring of government agencies and created the State Administration for Market Regulation (SAMR) that is now responsible for business registration processes. According to GER, SAMR’s Chinese website lacks even basic information, such as what registrations are required and how they are to be conducted.
The State Council, which is China’s chief administrative authority, in recent years has reduced red tape by eliminating hundreds of administrative licenses and delegating administrative approval power across a range of sectors. The number of investment projects subject to central government approval has reportedly dropped significantly. The State Council also has set up a website in English, which is more user-friendly than SAMR’s website, to help foreign investors looking to do business in China.
The Department of Foreign Investment Administration within MOFCOM is responsible for foreign investment promotion in China, including promotion activities, coordinating with investment promotion agencies at the provincial and municipal levels, engaging with international economic organizations and business associations, and conducting research related to FDI into China. MOFCOM also maintains the “Invest in China” website.
Despite recent efforts by the Chinese government to streamline business registration procedures, foreign companies still complain about the challenges they face when setting up a business. In addition, U.S. companies complain they are treated differently from domestic companies when setting up an investment, which is an added market access barrier for U.S. companies. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices in China. The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular Chinese corporate entity or investment vehicle.
Since 2001, China has initiated a “going-out” investment policy that has evolved over the past two decades. At first, the Chinese government mainly encouraged SOEs to go abroad and acquire primarily energy investments to facilitate greater market access for Chinese exports in certain foreign markets. As Chinese investors gained experience, and as China’s economy grew and diversified, China’s investments also have diversified with both state and private enterprise investments in all industries and economic sectors. While China’s outbound investment levels in 2018 were significantly less than the record-setting investments levels in 2016, China was still one of the largest global outbound investors in the world. According to MOFCOM outbound investment data, 2018 total outbound direct investment (ODI) increased less than one percent compared to 2017 figures. There was a significant drop in Chinese outbound investment to the United States and other North American countries that traditionally have accounted for a significant portion of China’s ODI. In some European countries, especially the United Kingdom, ODI generally increased. In One Belt, One Road (OBOR) countries, there has been a general increase in investment activity; however, OBOR investment deals were generally relatively small dollar amounts and constituted only a small percentage of overall Chinese ODI.
In August 2017, in reaction to concerns about capital outflows and exchange rate volatility, the Chinese government issued guidance to curb what it deemed to be “irrational” outbound investments and created “encouraged,” “restricted,” and “prohibited” outbound investment categories to guide Chinese investors. The guidelines restricted Chinese outbound investment in sectors like property, hotels, cinemas, entertainment, sports teams, and “financial investments that create funds that are not tied to specific investment projects.” The guidance encouraged outbound investment in sectors that supported Chinese industrial policy, such as Strategic Emerging Industries (SEI) and MIC 2025, by acquiring advanced manufacturing and high-technology assets. MIC 2025’s main aim is to transform China into an innovation-based economy that can better compete against – and eventually outperform – advanced economies in 10 key high-tech sectors, including: new energy vehicles, next-generation IT, biotechnology, new materials, aerospace, oceans engineering and ships, railway, robotics, power equipment, and agriculture machinery. Chinese firms in MIC 2025 industries often receive preferential treatment in the form of preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors. The outbound investment guidance also encourages investments that promote China’s OBOR development strategy, which seeks to create connectivity and cooperation agreements between China and countries along the Chinese-designated “Silk Road Economic Belt and the 21st-century Maritime Silk Road” through an expansion of infrastructure investment, construction materials, real estate, power grids, etc.