On December 27, 2021, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Edition) (外商投资准入特别管理措施(负面清单)(2021年版)) (the “2021 FDI Negative List”).1 The 2021 FDI Negative List replaced the 2020 edition (promulgated on June 23, 2020) and took effect on January 1, 2022.
Relationship between Different Negative Lists
The Chinese government maintains three distinct negative lists, the Negative List for Market Access (市场准入负面清单)2 (the “Negative List”), the Special Administrative Measures (Negative List) for Foreign Investment Access (外商投资准入特别管理措施(负面清单)) (the “FDI Negative List”), and the Special Administrative Measures for Foreign Investment Access in Free Trade Pilot Zones (自由贸易试验区外商投资准入特别管理措施(负面清单))3 (the “FTZ FDI Negative List”).
The Negative List consists of sectors prohibited or restricted for investment from both Chinese and foreign companies without special regulatory approval. For sectors listed on the Negative List, Chinese and foreign investors will be treated the same with respect to investment restrictions and approval requirements.
The FDI Negative List applies only to foreign investors (including foreign-invested enterprises (“FIEs”) in China), and includes additional sectors that are prohibited or restricted to such investors, beyond those specified on the Negative List. The FDI Negative List applies nationwide.
The FTZ FDI Negative List similarly applies only to foreign investors, but only with respect to their investment activities in free trade zones in China. Compared to other parts of China, free trade zones offer greater investment access to foreign investors.
The negative lists have been updated on an annual basis since 2017. The Negative List, the FDI Negative List, and the FTZ FDI Negative List constitute the cornerstones of China’s negative list regulatory regime. Sectors not included on these lists are open to investment.
Major Changes on the FDI Negative List
Compared to its 2020 edition, the 2021 FDI Negative List reduces the number of sectors restricted or prohibited to foreign investors from 33 to 31. The two sectors removed from the earlier edition are:
The 2021 FDI Negative List includes more extensive explanatory notes in the preamble, including:
The 2021 Negative List (Draft)
In October 2021, the NDRC promulgated a draft Negative List for Market Access (2021 edition) for public comment. Compared with its 2020 edition, the draft Negative List reduced the number of restricted sectors from 123 to 117 (including six prohibited categories and 111 categories subject to regulatory licensing and approval). However, several new sectors were added to the prohibited or restricted list, including:
Draft Overseas Listing Rules and VIE Structures
On December 24, 2021, three days before promulgation of the 2021 FDI Negative List, the State Council and the China Securities Regulatory Commission (“CSRC”) published for public comment the draft Regulations on Administration of Overseas Issuance of Securities and Initial Public Offerings of Chinese Domestic Companies (境内企业境外发行证券和上市管理规定) and the draft Administrative Measures on the Filing of Overseas Issuance of Securities and Initial Public Offerings of Chinese Domestic Companies (境内企业境外发行证券和上市备案管理办法) (collectively the “Overseas Listing Rules” or the “Rules”).
The draft Overseas Listing Rules tighten regulation of Chinese companies listing abroad (which implicitly includes Hong Kong listings), especially those listed through an “indirect listing” where the listing is conducted by an offshore holding company incorporated to hold China-based assets. Many Chinese companies listed this way use a structure widely known as Variable Interest Entities (“VIEs”).
In the past, the CSRC would only examine companies incorporated in China intending to conduct direct overseas listings. The draft Rules for the first time extend the CSRC’s authority to regulate indirect listings of Chinese companies using offshore holding companies as the listing vehicle.
The draft Rules define “indirect listing” as “issuing securities overseas or conducting an IPO on overseas stock markets in the name of a foreign entity which conducts primary business activities in China based on equity interests, assets, income or economic rights in China.” To constitute an indirect listing, the following conditions also must be met under the draft Rules: Chinese domestic assets or revenue must account for 50% or more of total assets or revenue of the overseas issuer; the majority of the issuer’s senior management must reside in China (or be Chinese nationals); and the issuer must conduct its primary business activities in China.
The draft Rules establish a “filing-based” regulatory regime for Chinese companies seeking indirect overseas listings. Under the draft Rules, a company will have to submit materials including its prospectus, legal opinions, opinions from or filings with industry regulators, if applicable, and other materials to the CSRC for review within three business days after it submits an IPO application to the overseas regulator or makes the first public announcement of the relevant transaction.
The CSRC will determine whether a company may proceed with its overseas listing within 20 working days if the application meets the relevant legal requirements.
The CSRC, working with other government agencies, may reject an overseas listing application under any of the following circumstances: (1) if national laws or regulations prohibit the listing; (2) if the listing presents a threat to or endangers national security; (3) if there are major disputes over equity, assets, and core technology; (4) if the domestic company, its controlling shareholder, or ultimate controlling person have been convicted for corruption, bribery, embezzlement, and/or misappropriation of property in the past three years or are under investigation for criminal allegations; (5) if the domestic company’s senior management has been subject to administrative punishment in the past three years or are under investigation for major violations; and (6) the catchall other circumstances as prescribed by the State Council.
The draft Rules also require that foreign investment banks or securities firms that underwrite a Chinese company’s overseas listing be registered with the CSRC. This requires that such institutions establish subsidiaries in China.
The filing requirement applies to all Chinese companies seeking overseas listings, including those using VIE structures. Many Chinese companies engaged in media, Internet, education and other sectors restricted for foreign investment have used VIE structures to circumvent restrictions on foreign ownership and successfully completed overseas IPOs. Now, overseas listings using VIE structures will be subject to CSRC scrutiny under the draft Rules but will have official recognition.
The CSRC and other regulators will focus their review on whether an overseas listing presents national security concerns. Note that data security is clearly part of national security from the Chinese government’s perspective,4 as suggested by the Didi data-breach investigation. Having said this, the CSRC officials in a media interview relating to the promulgation of the draft Rules remarked that while the draft Rules apply to VIE-structured companies, overseas listings of VIE-structured companies will still be allowed as long as they are in compliance with the rules and their IPOs do not present national security, public interest, or data security concerns.