WorkinChina

Compliance Paths and Opportunities for Foreign-Invested Enterprises in China

---

As China continues to expand high-level opening-up, Free Trade Zones (FTZs) have always served as "experimental fields" for foreign investment access policies. The Special Administrative Measures for Foreign Investment Access in Free Trade Zones (Negative List) (2021 Edition), as the core document regulating foreign investment entry, clarifies the fields and specific requirements for "prohibited access" and "restricted access," providing clear regulatory boundaries for foreign-invested enterprises to layout in China. Combining the content of the List, this article analyzes restrictions in key areas, compliance essentials, and potential opportunities to help foreign-invested enterprises accurately grasp the opening-up dividends of FTZs.

I. Core Logic of the Negative List: "Non-prohibited Items Are Accessible" and Classified Control

The core principle of the 2021 Edition of the FTZ Negative List is "consistency between domestic and foreign investment beyond the List," meaning that in fields not included in the List, foreign-invested enterprises can enjoy the same access treatment as domestic enterprises. The List implements controls over areas involving national security and public interests through two types of measures: "prohibited items" and "restricted items," with three key characteristics:

• Full industry coverage with focus on key areas: The List covers 11 major industry categories including agriculture, forestry, animal husbandry, fishery, mining, manufacturing, and services, with strict restrictions especially on areas vital to national economy and people's livelihood such as food security, mineral resources, and media communication.
• Clear quantitative standards: For restricted areas, it specifies requirements on shareholding ratios and nationality of senior executives, such as "Chinese parties shall hold no less than 34% of shares in wheat and corn new variety breeding" and "the investment ratio of a single foreign investor and its affiliated enterprises in public air transport companies shall not exceed 25%", facilitating enterprises to accurately assess compliance.
• Clear exceptions: It explicitly states exceptional clauses such as "specific investments approved by the State Council may be exempt from the List" and "Hong Kong and Macao investors may enjoy more preferential arrangements," leaving sufficient flexibility for special projects.

II. Analysis of Restrictions in Key Areas: "Red Lines" and "Bottom Lines" for Foreign-Invested Enterprises

Restrictions on access in multiple fields directly affect the design of business models for foreign-invested enterprises. The following are key areas requiring attention:

• Agriculture, forestry, animal husbandry, and fishery: Priority to food security and species protection
• Restrictive measures:
  • Chinese parties must hold controlling stakes (shareholding ratio ≥ 34%) in wheat and corn new variety breeding and seed production;
  • Investment in R&D, breeding, and cultivation of China's unique rare and fine varieties, as well as breeding of genetically modified varieties, is prohibited.
• Mining and energy industries: Absolute control over strategic resources
• Restrictive measures:
  • Investment in prospecting, mining, and ore dressing of rare earths, radioactive minerals, and tungsten is prohibited;
  • Chinese parties must hold controlling stakes in the construction and operation of nuclear power plants.
• Transportation and telecommunications industries: Control rights tied to national security
• Restrictive measures:
  • Chinese parties must hold controlling stakes in domestic water transport companies and public air transport companies; Chinese parties must hold relative controlling stakes in the construction of civil airports;
  • Chinese parties must hold controlling stakes in basic telecommunications services; the foreign investment ratio in value-added telecommunications services shall not exceed 50% (except for e-commerce, domestic multi-party communication, store-and-forward, and call centers).
• Service industry: Strict restrictions in areas of cultural security and social governance
• Restrictive measures:
  • Investment in internet news information services, online publishing services, and cultural relic auctions is prohibited;
  • Education: Foreign investment in compulsory education institutions is prohibited; preschool, senior high school, and higher education institutions are limited to Sino-foreign cooperative education with Chinese parties in a leading position (the principal must be a Chinese national, and Chinese members shall account for no less than 1/2 of the council);
  • Healthcare: Medical institutions are limited to joint ventures.

III. Compliance Operation Guide: Strategies for "Avoiding Pitfalls" and "Leveraging Advantages"

To ensure the legality and compliance of investments in Free Trade Zones, foreign-invested enterprises need to establish a full-process mechanism of "pre-assessment—in-process control—post-adjustment"

• Pre-investment: Accurately match the List to avoid "prohibited items"
  • Before investment, check the full text of the List through the Ministry of Commerce website or the FTZ "foreign investment service platform," and verify against business scope item by item.
  • For example, if planning to engage in "internet cultural operations," confirm whether it involves prohibited areas "except for music."
• In-process operation: Design compliant structures to meet "restricted items" requirements
  • Shareholding structure: In areas requiring "Chinese controlling stakes" such as nuclear power plants and civil airports, the foreign investment ratio must be strictly controlled below 50%; in areas requiring "relative Chinese controlling stakes" such as social surveys, the Chinese shareholding ratio of no less than 67% is sufficient.
• Post-investment: Make good use of exceptional clauses to flexibly respond to policy adjustments
  • Hong Kong and Macao investors can rely on the Mainland and Hong Kong/Macau Closer Economic Partnership Arrangement (CEPA) to enjoy more preferential access treatment than the List, for example, full ownership in some service industries.

IV. Opportunities Beyond the List: "Incremental Opening-Up" Areas in FTZs

The "subtraction" of the Negative List essentially serves the "addition" of opening-up in areas beyond the List. Foreign-invested enterprises can focus on the following unrestricted areas to seize the unique advantages of FTZs:

• Advanced manufacturing: Fields such as robotics, integrated circuits, and new energy vehicles are fully open, allowing the establishment of wholly foreign-owned R&D centers or production bases to enjoy tax incentives in FTZs;
• Modern service industry: Fields such as financial leasing and commercial factoring have no shareholding restrictions, allowing wholly foreign-owned operations, and leveraging the convenience of cross-border capital flows in FTZs to reduce financing costs;
• Green economy: Fields such as photovoltaic power, wind power, and carbon emission reduction technologies are not included in the List, enabling participation in the "green project pool" in FTZs to enjoy supporting policies such as land and subsidies.

Conclusion: Embracing Opening-Up Dividends Within Regulatory Boundaries

The 2021 Edition of the FTZ Foreign Investment Access Negative List is both a "red line" and a "roadmap"—it clarifies the forbidden zones for foreign-invested enterprises and, more importantly, releases broad opening-up space through the principle of "non-prohibited items are accessible." For foreign-invested enterprises in China, the core of understanding the List lies in accurately matching their own advantages with China's market demand within the compliance framework.

Whether entering restricted areas through joint ventures or deploying wholly-owned operations in areas beyond the List, foreign-invested enterprises can find the optimal balance between "security" and "development" by aligning their business strategies with the policy characteristics of FTZs, thus truly rooting in the Chinese market and sharing development opportunities.