China eliminates all access restrictions to foreign investors in the manufacturing sector

On 8 September 2024, the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC) jointly issued the Special Administrative Measures for the Market Entry of Foreign Investment (Negative List) (2024 Edition) (外商投资准入特别管理措施 (负面清单) (2024年版)) (the 2024 Negative List), which supersedes the previous edition released in 2021.

As briefed in our previous article¹, with effect from 1 November 2024, the remaining two restrictions on foreign investment in the manufacturing sector have been lifted pursuant to the 2024 Negative List. This means that China’s manufacturing sector is now fully open to foreign investment, which would enjoy a national treatment as for the domestic investors investing in this sector.²

Specifically:

1. the business of printing of publications is no longer required to be controlled by a Chinese shareholder - the previous foreign ownership limitation is effectively lifted³, and
2. foreign investment in the application of processing techniques (such as steaming, frying, moxibustion and calcination, etc.) of Chinese traditional medicine/herbal prepared in pieces, and manufacturing of confidential prescription products of proprietary Chinese medicines, will no longer be subject to any foreign shareholding prohibition or restriction.

Apart from the 2024 Negative List which applies nationwide in China, China also adopts a less restrictive foreign investment negative list (the FTZ Negative List) applicable in its several free trade zones⁴. Such FTZ Negative List has not been updated along with the 2024 Negative List but all foreign investment access restrictions in the manufacturing sector in China’s free trade zones were previously lifted in the 2021 version of the FTZ Negative List.

China has been gradually reducing restrictions/prohibitions on foreign investment since its participation in the WTO in 2001. In October 2016, China reformed its foreign investment regulatory regime by replacing the “approval” regime with a “filing” regime and started to apply the principle of “national treatment” to foreign investors, except where the foreign investments fall within the Negative List (the Foreign Investment Reform). 

Here is a summary of the opening-up and liberalisation measures for foreign investment in China’s manufacturing sector since the Foreign Investment Reform in 2016⁵:

1. Along with the Foreign Investment Reform, China introduced a new version of the Foreign Investment Industrial Guidance Catalogue (the 2017 Catalogue) in June 2017, which served as the first version of the Negative List.
   
   Under the Catalogue, there were eleven items in the manufacturing sector that were either restricted or prohibited from foreign investments, including, inter alia, vehicle manufacturing (requiring at least a 50% shareholding to be held by a Chinese party), and design/manufacturing/repair of vessels and mainline, regional aircrafts (which has to be controlled by the Chinese party) and utility aircrafts (which has to be a Sino-foreign joint venture), etc.
2. In June 2018, MOFCOM and NDRC released a new and shortened Negative List replacing the 2017 Catalogue, which reduced the restrictions and prohibitions over foreign investment in the manufacturing sector down to six sectors.

Notably, the 2018 Negative List introduced the following liberalisation measures:

• no foreign shareholding restrictions in:
  • companies manufacturing special vehicles and new energy vehicles;
  • companies manufacturing commercial vehicle (commencing from 2020);
  • companies manufacturing passenger cars, with the removal of the cap on the number of such companies which can be invested by foreign investors (previously limited to a maximum of two companies) (both commencing from 2022);
• no foreign shareholding restrictions in companies engaging in the design, manufacturing and repair of vessels and (mainline, regional and utility) aircrafts; and
• no foreign shareholding restrictions in companies engaging in rare earth smelting and separation.

3. Progressively from 2019 to 2021, each version of the Negative List further removed foreign investment prohibitions in the various sectors: manufacturing of Xuan paper and ink stick (2019 Negative List), radioactive mineral smelting and processing, and nuclear fuel manufacturing (2020 Negative List) and satellite television broadcast ground receiving facilities and its key parts (2021 Negative List) respectively.

As a result of such liberalisation, areas in the manufacturing sector which were restricted or closed to foreign investment were reduced to two. These restrictions on the final remaining two sectors have been ultimately removed under the 2024 Negative List.

China’s continuous efforts to open its market to foreign investors bring potential new investment opportunities to foreign investors. Along with such liberalisation in the manufacturing sector, foreign investors operating as a Sino-foreign joint venture in China may consider increasing their shareholding ratio or buying out the Chinese joint venture partners if they intend to gain a fuller control of their business in China.