China Foreign Investment: Expert Q&A Series – Civil Aviation industry

Introduction

In our China Foreign Investment Expert Q&A series, we update you on recent developments in China’s foreign investment laws. The spotlight for this update is on the civil aviation industry.

General regulatory developments

The latest 2019 edition of the Special Administrative Measures for the Market Entry of Foreign Investment (the National FDI Negative List) was published on June 30, 2019 and came into effect on July 30, 2019. Foreign investors can invest in an industrial sector which does not fall into the 2019 edition of the National FDI Negative List in the same manner as domestic investment.

However, this does not mean foreign investors are now free to conduct business in China without any licensing requirements. If a foreign investment falls into the licensed business category of the 2019 edition of the Market Access Negative List (the Market Access Negative List), relevant regulatory review and approval procedures must be fulfilled and proper license or approval received before the foreign-invested enterprise (FIE) can conduct the relevant business in China.

Foreign investment into the civil aviation industry

The most recent liberalization of the civil aviation industry took place in 2018 in accordance with the 2018 edition of the National FDI Negative List. Under the 2018 edition, design, manufacture and repair of various kinds of aircraft, which used to fall within the “restricted industry” under the legacy Catalogue of Industries for Guiding Foreign Investment (2017 Edition) (the Legacy Foreign Investment Catalogue), were opened to foreign investment. Other sectors that formerly were subject to restrictive requirements or were plainly prohibited under the Legacy Foreign Investment Catalogue remained the same in the 2018 edition and the 2019 edition of the National FDI Negative List. In other words, the 2019 edition of the National FDI Negative List did not introduce any further relaxation in the civil aviation industry.

This summary table sets out the relevant restrictions and requirements under the Legacy Foreign Investment Catalogue (2017 Edition) and the 2018 & 2019 editions of the National FDI Negative List:

Major regulatory procedures for foreign investment into the civil aviation industry

The Civil Aviation Administration of China (and its local offices) (CAAC) is the competent regulatory authority of the civil aviation industry. Foreign investment in the civil airports, public air transportation companies, general aviation companies and air transportation-related projects (e.g., air fuel, airplane repair, freight transport and storage, ground services) is subject to the approval by CAAC. CAAC has discretion whether or not to grant approval, taking into account the prevailing market conditions. For example, it has been generally difficult to obtain CAAC approval for any investment in public air transportation companies which operate trunk lines, whilst investment in operators of regional lines or general aviation companies seems to be comparatively easier to get approved.

In case the specific sector of the civil aviation industry which is to receive foreign investment (by way of greenfield investment or acquisition) falls within the National FDI Negative List as outlined in the table above, approval by the Ministry of Commerce or its competent local counterparts is also required.

As is generally the case for foreign investments in any other industries, the establishment of an FIE or the acquisition of an existing entity in the civil aviation industry should be registered with the State Administration for Market Regulation or its local counterparts subsequent to the granting of regulatory approvals as referred to above

What does this mean for foreign investors in this sector?

• The design, manufacture and repair of aircraft, specifically, (i) the design, manufacture and repair of aircraft for trunk and regional lines and general aircraft; (ii) the design and manufacture of helicopters and unmanned aerial vehicle and aerostats; and (iii) the manufacture of ground-effect and water-effect aircraft, have been generally opened to foreign investors without any foreign shareholding restriction.


• Foreign investment in civil airports, public air transportation companies and general aviation companies is still required to be in the form of Sino-foreign joint ventures. In particular, foreign investor(s) may have a majority shareholding only in general aviation companies for agriculture, forestry and fishery; otherwise, Chinese shareholder(s) are required to have a controlling stake in the joint venture.


• Operation of various civil aviation-related businesses as listed on the Market Access Negative List (2019 edition), no matter by FIEs or domestic enterprises, is subject to prior license or approval from CAAC. Such businesses include, without limitation, the manufacture and use of aircraft and related equipment, construction of civil airports and operation of civil aviation transportation and other ancillary businesses.


• Air traffic control remains a prohibited industry for foreign investment and is unlikely to be relaxed in the near future due to its close connection with national security.