When a double negative does not equal a positive

China’s new “negative list” has been released. Often an eagerly-awaited marker of reform in the world’s second largest economy, the negative list sets out industries and sectors in which foreign investors are prohibited or restricted from investing in mainland China.

Two for the price of one

In fact, the publication of the 2020 negative list is a double-whammy, because the list is again in duplicate. As has been the case for the last few years, there is one negative list for the Middle Kingdom as a whole and one shorten version for the numerous free trade zones around the country, designated areas that compete to be preferential hubs for investment and trade in China. Assuming the old phrase is true-to-form then, this “double-negative list” must be a “positive” development for businesses seeking to set up in China. Right?

First, some background

Following the official launch of the plan for the Shanghai Free Trade Zone in 2013, Linklaters were engaged by TheCityUK to compile a comparative study of similar negative lists around the globe. The aim was to help guide the Shanghai Municipal Government on the reasons for reducing its first negative list from 190 items to somewhere closer to the UK’s 0. And, indeed, since issuance of the first revised negative list for the Shanghai FTZ in 2014, the list has been reduced iteratively as China seeks to open more segments of its economy to outside investment. In fact, the negative list that will go live in a couple of weeks on 23 July is down to a “mere” 33 industries and sectors in respect of nationwide investment.

Naive viewpoints?

So, positive, yes. I agree with the British Chamber’s view that there is rationale for foreign investors and businesses to be “optimistic”. There are positive developments to be found by the overseas stakeholders in the new version of the negative list. However, with a tech hat on, I still feel a little disappointed even if some will call me “too young too simple, sometimes naive” (obviously, I am more than happy to hear the “too young” part of Jiang Zemin’s playful mantra!).

Why the sad face? Well, for a few reasons:

1. The Chinese economy, and particularly the services sector, is digitalising at a rapid pace. As we described in our updated tech sector outlook for 2020, digitalisation has arguably sped up due to Covid-19 rather than having seen a slump in activity like economies in general. That said, the rows of the negative list relevant to the tech sector continue to put the brakes on foreign capital inflows. Restrictions on investing in telecoms, internet news services, online information services, etc., all remain.

2. Although the door to foreign investment in certain sub-sectors was slightly opened in 2015 to allow minority investments from overseas into the China tech soiree, those areas have not been further liberalised in 2020. The opportunity to take a non-controlling stake in an e-commerce business, for instance, continues to be fairly redundant for most of our retail clients – they know that they cannot justify establishing a self-operated online platform rather than just selling through the giants of Taobao, JD and Pinduoduo.

3. Back in 2014, we advocated to “make the Negative List a complete and conclusive list of all restrictions and conditions on foreign investment”. Fast-forward to 2020, the negative list is still not a one-stop shop for assessing FDI restrictions. To obtain the full-picture, foreign tech investors must review the negative list, the separate Catalogue of Encouraged Industries for Foreign Investment, the relevant industry/sub-industry regulator’s own regulations, and then typically local variants of these regulations, possibly making multiple telephone enquiries to state and local level officials to confirm their approach to implementation.

4. What may be worse, however, is that the contradictions in the rules and practice governing tech investment into mainland China will remain for at least a while longer. Although there appears to be a new mechanism built into the new negative list to allow investors to request an exemption from its restrictions, the fact remains that there is no right to question the truth that licences for most value-added telecoms or internet services expressly liberalised under the negative list are not accessible to foreign business that apply for them. Full transparency is yet to be achieved.

Overall outlook

Maybe I should not be so downbeat. Given the steps being taken in the US with the revised CFIUS rules and the EU and UK with other screening regimes, China could have reacted with “corresponding measures” to actually lengthen the negative list to curb foreign investment in technology. The PRC central government permitted itself to do so when enacting Article 40 of the new Foreign Investment Law as of 1 January this year. As I explained at the end of this earlier piece, many “Old China Hands” saw this provision as a thinly-veiled threat by China’s leadership that they would respond robustly in the tit-for-tat disputes that were then playing out between China and its largest trading partners. That apprehension has not dissipated.

Tension between the US and China in the tech space looks set to continue until at least November, when the US elections will decide Mr Trump’s fate. Bystander nations (if there are any in a quickly polarising arena…), which still see opportunity in China, will wish that the safety-catch remains on in respect of Article 40 and instead further reforms are introduced to facilitate mutually-beneficial investment and collaboration between foreign and Chinese tech players. Only time will tell whether the fears of those “Old China Hands” or the hopes of this “too young” technology enthusiast become reality…