International news reports about China’s economic downturn paint a picture of falling investment and poor youth employment, and since early 2024 have raised questions about what Chinese economic policymakers will do to remedy the situation. The response from the top has been swift. In March 2024, the Premier’s Office issued the Action Plan: High-End Internationalization to Attract Foreign Investment under State Council Gazette No. 9. The action plan comprises five pillars designed to support foreign investment attraction into China. They are:
- Expanding market access (i.e. reducing Exceptions Listexclusions);
- More policy support (such as the new Hengqin FTZ investment assistance program)
- Improved equal treatment in markets (i.e. improving national treatment enforcement regulations)
- Assisting innovation collaborations between Chinese and international companies;
- Better conformance to international trade best practices.
The Action Plan is built on top of China’s existing foreign investment law enacted in 2020, which is a Chinese adaptation and modification of two US legal regimes — CFIUS and NAFTA—adding numerous Chinese legal innovations. Of particular note is that NAFTA’s exceptions provision is expanded into a comprehensive Market Access Exceptions List. If you’re not familiar with China’s foreign investment law, take a look at our China Foreign Investment FAQ.
The Action Plan is expansive, including policies for Internet and cloud service providers. This article will focus primarily on how the Action Plan mandates evolving China’s foreign investment law regulation on market access, national treatment, and visa availability.
Market Access is Improved with a Mandate to Reduce the Number of Exceptions Listed
The Action Plan mandates increasing market access for foreign investors, with a focus on high-end industries, which in Chinese economic thinking includes industries reported in the news such as electric cars, solar panels, semiconductors, artificial intelligence, and, in future news reports: biotech. China’s foreign investment law is very complex, involving regulatory certification to classify an entity as “domestic” or “foreign,” and foreign entities are guaranteed equality (national treatment) and complete market access–unless the desired operation is covered by an exception in the Market Access Exceptions List (see CBL’s translated PRC government guidance here). The Action Plan evolves this Exceptions List by mandating amendments to manufacturing, genetic diagnostics and therapy, and the information technology industry.
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Shortening the Scope of the Negative List in the Manufacturing Sector
The Exceptions List contains two Exceptions for manufacturing: the first restriction requires printing for any publishable materials to be controlled by a Chinese joint venture partner, and second, any manufacturing that would implicate herbology-related trade secrets in traditional Chinese medicine is fully prohibited. The FTZ Exceptions List does not contain any manufacturing exceptions for operations within a free trade zone. Deleting these two exceptions to foreign investor market access in the manufacturing industry implies that these restrictions will also be lifted in the future for nationwide permitting.
Since these industries comprise only a small part of the economy, the main purpose of comprehensively deleting these exceptions is largely symbolic, representing Chinese policymakers’ dedication to trade liberalization.
Genetic Diagnosis and Therapy Service and R&D Market Access Exceptions Will be Removed for FTZs
The nationwide and FTZ Exception Lists both contain Exceptions to providing market access to operations involving human stem cells, as well as R&D or services for genetic diagnosis and therapy. Previously, the genetics industry has been heavily restricted over national security concerns.
The List of Encouraged Industries for Foreign Investment, however, includes an item for cellular therapy R&D. Some cellular therapies would also be classed as genetic therapies; thus, industry proponents have pointed out that the law creates an exception for something that economic planners want to promote. At the regulatory level, there is a difference between what the law says about genetic diagnosis and therapy technology and how it is applied, and foreign-owned entities whose operations fall under the Exceptions List typically use the Variable Interest Entity (VIE) structure to participate in the market.
These industries are further governed by the Human Genetic Material Administrative Regulations and their Supplemental Rules. The Administrative Regulations require that a foreign organization that wants to do R&D involving human genetic material in China must enter into a joint venture with a Chinese organization. Moreover, a foreign organization may not collect or possess a citizen’s genetic material from within mainland China or provide such material to anyone outside mainland China.
The Supplemental Rules provide that a “foreign organization” includes any organization located outside mainland China, any entity where a foreign person holds 50% or more of the equity, or an organization subject to actual control of a foreign person.
However, foreign organization status can also be defined under another law. Under these rules, a foreign-owned entity or one controlled through a VIE Agreement will be subject to the Human Genetic Material Administrative Regulations and the Supplemental Rules. Extra caution has been required for international research collaborations working with human genetic material or biosafety because the above rules restrict the nature of R&D that can be done in genetic diagnostics and therapy.
The 2024 Action Plan will empower free trade zones (such as those in Beijing, Shanghai, and Guangdong) to qualify several foreign-owned entities for joint ventures to do R&D into genetic diagnostics and therapy on a pilot project basis. The Action Plan mandates a market access policy that will eliminate the existing uncertainty about the legality of foreign investment in genetic diagnostics and therapy. However, the free trade zone rules necessary to implement the policy are forthcoming, thus it remains to be seen exactly what restrictions will remain in place for foreign-owned businesses operating in the biosafety field. Nonetheless, the Action Plan emphasizes that these rules will be essential to meet the government’s investment attraction goals.
Cloud Platforms, Internet Data Centers, and Internet Service Providers Will Be Granted Market Access to Operate in FTZs
The Action Plan mandates providing foreign investors with market access for internet services not classified as “telecommunications infrastructure,” which means that internet service providers running on telecommunications lines will be liberalized. Specifically, a number of operations are defined as “value-added telecommunications” services, a category that includes things like cloud platforms, IDCs, and ISPs. The nationwide Exceptions List and the FTZ-specific Exceptions List both provide that foreign investors must hold less than 50% of the equity in any “value-added telecommunications service,” with a few exceptions such as for e-commerce and call center services. Moreover, those businesses have been subject to a stringent security review process.
In late 2023, the State Council issued a program to reduce restrictions on information technology services, which is covered in more depth in our article on cloud service, data center, and internet service provider liberalization.
Data Compliance Regulation is Streamlined to Reduce Costs
In March 2024, China’s IT ministry issued its Cross Border Data Transmission Rules, which provide definitions for data exports of “important data” and rules governing how data processors must identify and report important data. Filing a data export security assessment report is not required if the regulator has not put it on notice that the kind of data constitutes important data. Before these Rules were issued, businesses had to infer whether their data exports included “important” data but lacked a clear legal basis for the decision. Now, businesses can rely on the jurisdictional agency’s notice of what constitutes important data when making data governance decisions, which puts them on solid ground.
The Rules also provide that the FTZ has rulemaking authority to issue a data list of prohibited exports that covers security assessments, personal data export contracts, and personal data certifications. This has been called an “Exceptions List for Data,” reflecting that its principles are based in foreign investment law. Data that is not included as an exception on the Exceptions List can be freely exported from an FTZ and does not require a data export security assessment report, personal data export contracts, or a personal data protection certification.
As can be seen, the Cross-Border Data Transmission Rules are an essential extension of the Action Plan, providing exemptions from otherwise costly compliance requirements. Previously, we worked with a Fortune 500 pharmaceutical company interested in research collaboration in Shanghai to develop new drugs, but at the time, questions about data export discouraged investment. The Action Plan aims to reduce these kinds of barriers to investment.
New Visa Rules Will Make It Easier for Foreign Persons to Work, Study, and Do Business
The Action Plan acknowledges that the number of foreign persons visiting and living in China has sharply declined in recent years and aims to achieve a rebound by focusing on improving the overall foreign visitor and resident experience and making it easier to do business in China.
Specifically, the Action Plan mandates new rules making it easier for foreign-owned entities to do international staffing, including:
- Extending business visa terms for managers, technical staff, and their families to two years. Visa-free stay periods in Beijing, Shanghai, and Guangzhou are also extended.
- Reducing red tape for foreign persons to get work and residence permits by providing “one-stop” services that shorten weighting times. Improve inter-agency cooperation to make work, residence, and permanent residency easier.
Conclusion
China’s recent economic reform conference concluded that making it easier for the international community to do business in China is an essential national policy goal. The key policy tools for achieving these goals are increasing market access by reducing Exceptions List coverage and minimizing red tape around visa processes.
The Action Plan also has important symbolic significance, representing a newfound emphasis on foreign investment and international talent, adopting a different strategy, and taking a different direction from 2020.
FURTHER READING
Get authoritative insights about Chinese foreign investment law from CBL’s translations of official government guidance:
For a general overview of this topic, see also CBL’s Foreign Investment FAQ.