China's second negative list a move forward

On June 3, Pingtan, the largest island in East China's Fujian province, became the second place in the country to use a negative list.

Basically, the list is a ban list, which names areas and circumstances where foreign investors are barred. Those not listed are fully open for foreign investors, who can obtain pre-entry national treatment.

Earlier, China adopted a positive list in its regulation of foreign investment. Its Catalogue of Industries for Guiding Foreign Investment lists three categories for foreign investors: sectors where foreign investors are encouraged, allowed, and limited and banned. While practicing the list, China grants post-entry national treatment to foreign investors, meaning foreign investors can gain national treatment only after they are approved to operate in China.

Shanghai (China) Free Trade Zone, established last year, was the first place in China to launch a negative list, a move that marked China's attempt to embrace the negative-list model which is adopted by most developed economies.

Pingtan, a pilot region mainly to facilitate cross-Taiwan Straits investment, now becomes the second place to pilot negative list practice.

The development shows that governments are eager to promote the practice. Although Shanghai's negative list was hastily designed and criticized for being too long and partly vague, authorities may think it is still a piece of progress in reshaping the country's investment regulation system. Local governments' enthusiasm of adopting the negative list may come from their eagerness to vie to establish the second free trade zone like Shanghai's. At the same time, authorities may want to widen the use of the negative list to accumulate diversified experience and create competition among regions.

Pingtan's negative list has 99 special regulatory measures, which ban or limit foreign investment. The number is much smaller compared with Shanghai's 190. This is a step forward in opening wider the market for overseas investors and may add some pressure on Shanghai zone, which will update its negative list later this year.

Negative lists in Shanghai and Pingtan have difference focuses. The Shanghai one was supposed to offer a template for the whole nation, while Pingtan's list is more local. Pingtan is a proxy of Taiwan investment, so its list is more catered for investors from across the Straits. The list creates more leeway for Taiwan investors. But Shanghai's list must think of the broader picture of the whole nation. That's why its list turned out to be more conservative.

But if China wants to adopt a negative list nationwide, it must do a lot of preparations.

China needs to revise its laws governing industries, especially the service industry, to make them cater to the need of the negative list. Although the US doesn't have a law about the negative list, restrictions on foreign investment are stipulated in various industrial laws and regulations, which provide a legal foundation to compile the negative list.

In China, the negative list actually contradicts with some of the existing legislations.

To solve the problem and pave way for a nationwide negative list, the country should start reviewing its economic legislations. Some laws against the spirit of negative list should be abolished or amended, while some industrial laws that have been long absent should be mapped out. Legislations should also be improved on national security checks of foreign investment. By doing these, the negative list can be built on sound legal framework.

The country may also need to revise its categorization of the service industry in accordance with international practice. Now, major countries follow the World Trade Organization's categorization but China uses its own. The difference adds to the difficulties of implementing the negative list.