On October 02, 2015, State Council of People’s Republic of China (the "China") released Opinions of the State Council on the Implementation of the Market Access Negative List (the “Negative List”) System (the "Opinions"). The Draft will come into effect as of December 1, 2015 and shall remain in force till December 31, 2017. The Draft, once taken into effect, will affirm the equal basis for all the market entities to invest in the different industries, sectors and businesses not included in the Negative List, which is comprehensively used by other countries to administrate domestic market, administrating state-owned enterprises, non-state-owned enterprises, domestic enterprises and foreign invested enterprises on an equal basis. The implementation of the market access negative list system is a significant change of approach and framework regarding administration of Chinese government from government-led administration to a looser resident self-governance.

1. Background

The world's second-largest economy, which grew 7 percent in the first half from a year earlier, is experiencing its slowest economic expansion during the last 25 years in 2015. Therefore, nowadays, China has made its decision to slacken restrictions on its manufacturing and service sectors as it tries to improve inefficient state-owned firms by adopting market-friendly policies to stave off slowing growth. The concept of the Negative List with respect to foreign investment was introduced to China in bilateral investment treaty negotiations with the United States. The market access negative list system (the “Negative List”) establishes that any administration of the authorities contrary to the national treatment and most favored nation treatment for the foreign investments, shall be clearly included in the Negative List, and the foreign investors will be entitled the same market access right.

2. Overview

a) Classification

Pursuant to Article 6, the Negative List, including both the prohibited access list and the restricted access list, is applicable to the investments, operations and other market access activities of various market entities via initial investment, expansion of investment as well as merger and acquisition, etc.

The Opinion has the clear access requirements for both the prohibited access list and the restricted access list. As for the fields included in the prohibited access list, the entities are prohibited to invest in and the authorities shall not examine or approve the market access or handle the relevant procedure. As for the fields included in the restricted access list, the entities may submit an application for the authorities to decide whether to approve the market access.

Further, as for the fields not included in the Negative List, all the entities may enter the market on an equal basis in accordance with the law.

b) Conditions for Application

Pursuant to Article 7, it clarifies the conditions for determining the prohibition and restriction for operations and other market access activities of various market entities. The authority may utilize the qualification of market entities, shareholding ratio, scope of businesses, status of operation, business mode, regional layout, land development and protection and other relevant administrative measures in accordance with the law, regulations and decisions of the State Council as the market access qualification in some specific fields.

We notice that the Opinion provides a standard to distinguish the prohibited and restricted fields. The national safety, the national layout of major productive powers, development of strategic resources, major public interests will be majorly taken into consideration for the prohibited and restricted field.

c) Major Types of Negative List and Their Application

Pursuant to Article 8, there are two main negative lists, including the market access negative list and the foreign investment negative list. The market access negative list applies to both the domestic and foreign investors and constitutes the uniform requirements of market access for various market entities. Meanwhile, the foreign investment negative list only applies to the investments by foreign investors in China and constitutes the special management measure for market access of foreign investment.

In Article 8, the foreign investment negative list will be formulated with the subject of diplomatic talks concerning foreign investment taken into comprehensive consideration, with the relevant rules to be separately prescribed by the State.

We understand that Article 8 is a reserve of Chinese government for future negotiation with other countries, especially with USA. When the market access negative list applies to the foreign investors, the investments by the foreign investors also has to be ruled a special foreign investment negative list, which means that if some conflicts exist between such two lists, the foreign investment negative list shall apply. In a way, it is a drawback for the market access negative list system and it has not substantially realized the national treatment for all entities.

d) Formulation, Implementation and Adjustment Procedure

Pursuant to Article 10 and 11, the Negative List will be uniformly formulated and announced by the State Council and will follow the principles of carrying out pilot programs and gradual expansion, from December 1, 2015 to December 31, 2017. The negative list system will be launched on a pilot basis in some areas to accumulate experience and gradually improve and the unified nationwide market access negative list system will be formally enforced from 2018.

National Development and Reform Commission and Ministry of Commerce will be authorized by State Council to lead in the establishment of cross-sectorial deliberation and coordination mechanism, which will be responsible for the routine work in implementing the negative list system.

We notice that the Opinion has not provided a clear timeline for implementation of the Negative List and it only provides a general principle of carrying out pilot programs and gradual expansion. We understand that this probably is another element for Chinese government to negotiate with other countries.

e) Conclusion

The Opinion has great significance in releasing the decisive role of the market in allocating resources and further developing the role of government, and in establishing a commercial environment based on the rule of law and building a new open-style economic system. Meanwhile, the final implementation of the Opinion is still subject to some uncertainties regarding the foreign investment negative list and the non-existence of timeline of implementation.