China honors pledges to scrap ownership limits on foreign automakers in new negative list
Published: Dec 27, 2021 11:20 PM
foreign investment

foreign investment

China on Monday unveiled a nationwide negative list for 2021 - in a move that observers called "a signature and phased step in high-level opening-up of the economy" - that drastically reduced barriers for foreign investment for five years in a row, with a full scrapping of restrictions on foreign ownership in passenger cars and a further easing in foreign investment in the production of key communications equipment. 

The new version of the list, whose extent of item reduction some industry insiders have dubbed "being caught off guard", underscores China's unswerving commitment to transform from a model of element-based to a rule-based and innovation-driven opening-up that is actively in line with its indigenous development tempo despite accumulated global downward pressure.

Against the backdrop of Washington's allied approach to contain and isolate Beijing, it is also set to carve out new paths for a galaxy of foreign firms including Tesla, Germany-based Volkswagen, Toyota,   Sony, Canon and Ericsson to share the opportunities brought by the spectacular rise of the world's second-largest economy in the post-virus era, while paving the way for cementing regional cooperation, analysts said, noting that the updated list could pave way for China to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and a reboot of the stalled China-Europe Comprehensive Agreement on Investment (CAI).

In addition to a nationwide negative list, China also unveiled its 2021 negative list for foreign investment in pilot free trade zones. The number of items that are off-limits for foreign investors will be cut to 31 for the nationwide version, and 27 for the free trade zone version, respectively, with a reduction ratio of 6.1 percent and 10 percent. In 2017, there were 93 and 122 items on the list respectively. 

The lists, which are jointly released by the National Development and Reform Commission (NDRC), China's economic planner, and the Ministry of Commerce will take effect on January 1, 2022.

 "China has not only fulfilled its pledge to the WTO, and but has now also voluntarily relinquished the organization's certain special treatments for developing nations. The new list is both a vote of confidence in the competitiveness of the domestic industry and an embodiment of China's image as a responsible nation, offering a ballast of support to the rest of the world amid the repercussions of the pandemic," Wang Yiwei, director of the Institute of International Affairs at Renmin University of China in Beijing, told the Global Times on Monday.

Lin Jiang, a professor of economics at Lingnan University College at Sun Yat-sen University, told the Global Times that the shortened negative list sends a signal that China will continue to open up its economy, instead of pausing after certain levels of efforts or shrinking before global obstacles and pressure. 

The NDRC said the new negative list is oriented toward further opening-up and an improvement on the dual management mechanism of foreign investment based on pre-establishment national treatment and negative lists. It coordinates development with security, and draws on common international practices.

Significant change

One significant change of the new lists is the deepening of the opening-up of the domestic manufacturing industry, after which the negative list governing free trade zones' manufacturing sector will be brought down to naught. 

Under the list, restrictions on foreign ownership in passenger car manufacturing and restrictions on the establishment of two joint ventures in China for the production of the same type of whole vehicle products will be lifted. In terms of radio and television equipment manufacturing, restrictions on foreign investment in the production of ground reception facilities and key components for satellite television and radio broadcasting will be erased, with management for foreign investment being the same as domestic enterprises.

The opening-up of the auto sector is in tandem with a plan the NDRC laid out in 2018, under which China would remove foreign ownership caps for companies making fully electric and plug-in hybrid vehicles in 2018, for makers of commercial vehicles in 2020, and the wider passenger car market by 2022.

The new rule on communication equipment manufacturing, which involves major infrastructure construction that concerns national security, represents a "big stride" from a complete ban in last version to being fully open, industry insiders said. 

According to Fu Liang, an independent tech analyst, with the development of the internet in China, demand is increasing for media companies to use more up-to-date and comprehensive solutions, which pushes the country to welcome larger companies, including international firms, into their list of suppliers.

 "China is conspicuously forging closer economic ties with other economies and facilitating regional cooperation, and defying the US-led blockade that nudges its allies away from the world's second-largest economy," Wang said. 

Lin noted that through opening-up, China is helping stabilize the world economy by giving overseas companies opportunities to make profits, thus making tremendous contributions to the global economic rebound after the coronavirus crisis. 

According to Lin, for areas where domestic consumption has already shown strong signs, such as cars, it is expected that overseas companies will be greatly encouraged by the policy to allow them to set up wholly owned firms in China. 

Analysts envisioned the new list drawing in more foreign companies, such as Japanese and German automakers Toyota and Volkswagen, global media hardware giants like Sony and Canon, as well as EU tech giants such as Ericsson and Siemens.

Wang stressed that the further opening-up will anchor China to specific terms in the CPTPP, an 11-nation free trade deal with the highest opening-up level in the world that the US withdrew from in 2017. Also, the terms for media equipment, among others, could serve as a catalyst that reactivates negotiations on CAI.  

In 2020, China attracted a total of $149.3 billion in foreign investment, ranking second in the world and bucking the trend of diving global investment, according to the NDRC. 

Restricted areas

Under the negative list on free trade zones, restrictions on access to the market research field will be lifted except in certain areas that collect views on radios and TVs, and social research for foreign investment will be allowed. But the proportion of shares held by Chinese enterprises should not be less than 67 percent, and the legal representative should be a Chinese national. 

The new list also includes specific terms on the overseas listing of Chinese enterprises engaged in businesses prohibited by the negative list, as well as caps on foreign investors' shareholding in Chinese companies listed in the mainland through various means such as Stock Connect, QFII and RQFII - the first time that such explanations have been detailed amid China's intensifying efforts to promote the two-way opening-up of capital markets. 

According to the new list, some restrictions on foreign investment are still in place, such as a ban on investing in rare-earths, and the wholesale and retail of tobacco products. The shares held by foreign investors in telecom value-added business must not exceed 50 percent, while the construction and operation of nuclear plants must be controlled by Chinese firms.

The NDRC statement said that limits on foreign investment will remain in "sensitive sectors with regard to maintaining China's national, political and ideological security."

 "The opening-up is flexible, based on our own speed rather than being forced to do so. It won't compromise China's key strategic interests, and cooperation with foreign companies should lead to a win-win result," Wang said. 

Lin said that the opening of sectors that China was previously rather cautious about, such as communications ground hardware and market surveys, shows that Beijing is implementing opening-up into different industries and at different paces. This will make overseas companies anticipate the prospect of having more investment opportunities in the Chinese market in the future.