China Foreign Investment: Expert Q&A Series – Oil & Gas

2019 marks more than four decades of China’s reform and in recent years China has really accelerated its opening up to foreign investment. In June, China rolled out revised Negative Lists for foreign investment market access, allowing foreign investors to run majority-share-controlling or wholly-owned businesses in more sectors.

Via our expert China Foreign Investment Expert Q&A series, we hope to keep you apprised of developments in relation to China’s foreign investment laws. We will be sharing our insights and observations of the restrictions on making investment in certain key industrial sectors set out in the Market Access Negative List. 

What is the development and the key highlights?

On June 30^th, 2019, the 2019 edition of the Special Management Measures for the Market Entry of Foreign Investment (the FDI Negative List) was published by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly and will become effective in one-month time on July 30^th.

This is the third edition since the initial list was released in 2017. Together with the newly created Foreign Investment Law (to be effected on January 1^st, 2020 - the FDI Law) and the 2018 edition of the Negative List for Market Access (jointly published by NDRC and MOFCOM on December 21^st, 2018 - the Market Access Negative List), the key legislation for treating foreign invested enterprises and domestic invested enterprises in the same manner, are in place.

This means foreign investment into an industrial sector which does not fall into the FDI Negative List will be treated as domestic investment. However, this does not mean foreign investors are now free to do business in China because certain types of investment may fall into the licensed business category of the Market Access Negative List. In such cases, investment (no matter whether made by domestic investors or foreign investors) is still subject to the review and approval of industrial regulators.

Industry highlight

One of the key highlights includes the lifting of restrictions on the exploration and development of petroleum and natural gas reserves.

In principle this means that foreign investors are now permitted to form wholly owned subsidiaries in China to conduct business in the oil and gas upstream sector. However, the Market Access Negative List has yet to amended to reflect this, the restrictions removed from the 2019 FDI Negative List still exist in the Market Access Negative List.

The table below makes a comparison between the requirements of the FDI Negative List and the Market Access Negative List.

What does this mean for your business?

Until the Market Access Negative List and the related industry rules (such as the Regulations on Sino-foreign Cooperation in the Development of Continental Petroleum Resources) are amended accordingly, international majors who are capable of independently exploring and producing oil and gas (especially coalbed methane and shale gas) will probably still need to team up with Chinese investors, who make up a broad group comprising not only national oil companies but also private players. It is also expected that new licences will be granted directly to the entities controlled or wholly owned by foreign investors and that the transfer or sub-licencing of existing licences which have been granted primarily to the State-owned companies in the past will also be permitted.