by Richard van Ostende
In an earlier article, Richard van Ostende paid attention to to the new criteria by which products are classified as ‘domestic’ in public tenders in China. (See: https://www.vnc-china.nl/nieuwe-aanbestedingsregels-bieden-nieuwe-kansen/
In this second contribution, he dives deeper into China’s foreign investment policy and guides us step by step through the regulatory framework for companies that want to invest in China. The Foreign Investment Law is only the first step.
China has thoroughly reformed its foreign investment policy in recent years. With the introduction of the Foreign Investment Law On 1 January 2020, a more transparent and rules-based investment framework was introduced. This law, along with its implementing regulations, is the legal basis for foreign investment in China today.
However, it is not enough for foreign investors to look exclusively at this legislation. China has an extensive system of negative lists, incentive catalogs, and industry guidelines that determine whether an investment is allowed, restricted, or encouraged. This system applies both to investments in mainland China and to investments in the various Free Trade Zones (FTZs), where there are often wider opportunities.
In addition, there are schemes that apply to both foreign and domestic investors, such as the Market Access Negative List and the Catalogue for Guiding Industrial Restructuring (Industrial Restructuring Catalogue). These tools provide insight into licensing requirements, market access, technological standards and the industrial policy priorities of the Chinese government.
For companies considering an investment in China, it is therefore essential to assess not only whether an activity is permitted, but also under what conditions it can be carried out and how it fits within the long-term priorities of the Chinese economy.
Summary
- Since the introduction of the Foreign Investment Law in 2020, China has created a uniform and transparent regulatory framework for foreign investment, based on the principle of national treatment combined with negative lists.
- Foreign investors should assess whether their activities are permitted, restricted or prohibited under the national negative list for foreign investment or the specific negative list for Chinese free trade zones, where there are often wider investment opportunities.
- In addition to the negative lists, China publishes a Catalogue for Encouraged Foreign Investment, which includes sectors that align with national economic priorities and for which investors may be eligible for stimulus and policy benefits.
- Even where an investment is permitted, investors must take into account additional requirements from the Negative Market Access List, including permits, certifications, technical standards and sector-specific approval procedures.
- The Industrial Restructuring Catalogue provides insight into China’s industrial policy priorities by dividing sectors into encouraged, limited and phase-out activities, making it an important indicator of the long-term feasibility of investments.
- A successful investment strategy requires an integrated analysis of all relevant investment catalogues and market access rules to mitigate compliance risks and assess a project’s alignment with China’s future economic and industrial development.
The basics: the Foreign Investment Law
With the introduction of the Foreign Investment Law (2020), China replaced three previous laws that applied separately to joint ventures and wholly foreign enterprises, the Law on Sino-Foreign Equity Joint Ventures (1979), the Law on Sino-Foreign-Owned Enterprises (1986), and the Law on Sino-Foreign Contractual Joint Ventures (1988). This created a single, uniform legal framework for foreign investment.
Under this new system, the principle of national treatment prior to market access applies, combined with a system of negative lists. This means that foreign investors are in principle treated in the same way as Chinese companies, unless a sector is explicitly included on a negative list.
The Chinese regulations distinguish three categories:
- Prohibited investments: sectors in which foreign investment is not allowed.
- Restricted investment: sectors in which foreign investment is possible, but under specific conditions or additional approval procedures.
- Authorised investments: all other sectors not on the negative list.
The category ‘allowed’ is not published separately. Anything that is not explicitly prohibited or restricted is in principle considered accessible.
Two investment systems: mainland and free trade zones
China uses two parallel systems for foreign investment. The first system applies to the whole of China and is laid down in the national negative list for foreign investment. The second system applies to the national pilot free trade zones. These zones act as economic testing grounds where foreign investors often have access to sectors that are still restricted or closed elsewhere in China.
For foreign companies, it is therefore advisable to consult not only the national negative list, but also the list applicable to the free trade zones. An investment that is limited at the national level may sometimes be possible within an FTZ.
Boosted investment
In addition to the negative lists, China publishes a Catalogue of Industries for Encouraged Foreign Investment (Catalogue for Encouraged Foreign Investment). This catalogue identifies sectors in which foreign investment is actively encouraged because it aligns with national economic and industrial policy objectives.
The catalogue consists of:
- a national list that applies to the whole of China;
- a regional list for 22 provinces in Central, Western and Northeastern China.
Investments in these sectors may be eligible for various incentives, such as tax advantages, favourable land conditions or accelerated administrative procedures.
Market access and additional regulation
When an investment is allowed according to the negative lists, the review process does not stop. Investors should then consider what additional requirements apply in terms of market access and industrial regulation.
- Negative market access list : This list applies to both domestic and foreign investors. This list describes for specific sectors which permits, certifications, technical standards and qualifications are required to carry out activities. In addition, the list identifies the competent regulatory bodies and provides insight into sector-specific restrictions.
- Catalogue for Industrial Restructuring : This catalogue is an important tool in China’s industrial policy. It not only indicates which activities are allowed, but also shows which sectors the government wants to stimulate, transform or phase out.
The industries are divided into three categories:
- Encouraged: This category includes activities that contribute to technological innovation, sustainable development, energy saving, environmental protection and industrial modernisation. Projects in this category can benefit from incentives and policy support.
- Limited: This category includes activities that use outdated technologies or do not contribute sufficiently to the desired economic development. New investments are discouraged and often under strict supervision. In many cases, additional conditions or restrictions apply.
- Obsolete (to be phased out): This category includes activities that use outdated technologies, use raw materials inefficiently, cause environmental damage or do not meet modern safety standards. China is pursuing an active policy to phase out and eventually end such activities.
What does the catalogue say about China’s policy direction?
For investors, the Industrial Restructuring Catalogue is more than a compliance tool. The catalogue provides valuable insights into the Chinese government’s strategic priorities and gives an indication of which sectors can count on long-term policy support.
Sectors that are encouraged tend to align with national priorities such as high-quality manufacturing, digitalisation, energy transition, advanced technology, environmental protection and industrial modernisation. Conversely, investments in limited or obsolete sectors run a greater risk of additional regulations, higher costs or even mandatory phasing out.
Conclusion
An investment in China requires more than just an assessment of the commercial opportunities. Investors should also carefully analyze how their activities fit within China’s regulatory framework and industrial policy objectives.
An effective assessment starts with the Negative Lists for Foreign Investment and the Catalogue of Encouraged Investments. The Negative Market Access List and the Industrial Restructuring Catalogue should then be consulted to understand licensing requirements, sector-specific restrictions and the long-term direction of China’s industrial policy.
By analysing these instruments in conjunction, foreign investors can better assess whether an investment is feasible, what risks exist and to what extent a project is in line with China’s future economic development.
About the Author
Richard van Ostende is an economist who holds a PhD in foreign direct investment and market entry strategies of Dutch enterprises in China. With more than 18 years of professional experience in China, he possesses extensive expertise in international trade, investment, industrial policy, supply chains, and market development.
Throughout his career, Richard has held senior management and advisory positions within international corporations and public organizations. Among other positions, he served as Economic Counselor at the Netherlands Enterprise Agency and as Chief Representative of the Netherlands Trade and Investment Office in Nanjing, where he supported Dutch companies with their strategic positioning and operations in China. He has held management positions within multinational corporations in the automotive, maritime and industrial sectors.
From his work for AMC China (www.aegis-group.org), the Institute for China Studies (www.china-studies.org) and China Insights (https://www.china-insights.org), he regularly publishes analyses and market insights on Chinese economic developments, regulations, the investment climate and strategic trends relevant to international companies and policymakers.
