Recently, China took a step forward in its pilot of the negative list practice.
Pingtan, a small island in east China’s Fujian province, became the second place in the country to adopt the list, which names areas and circumstances where foreign investors are barred.
Those not on the list are fully open to foreign investors who can obtain pre-entry national treatment. That means a foreign company is treated as a regulatory equal of a Chinese firm.
The development reflects Beijing’s determination to promote negative lists as a means to help China embrace the new global investment system that is taking shape. The Pingtan move also shows that the Chinese government is testing negative lists tailored for different regions.
During this process, however, it is important for top policymakers to take a prudent approach. They should avoid having too many local governments rushing to jump onto the bandwagon without properly understanding the practice.
China has long used a positive list in regulating foreign investment. The Shanghai (China) Free Trade Zone, established last year, was the first to launch a negative list.
Allowing Pingtan to test a second negative list 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 are determined to improve and promote the practice as part of efforts to reshape the country’s investment regulatory system.
Since China is in the process of negotiating a bilateral investment treaty with the United States based on a negative list, it is expected that China will have to come up with a nationally applicable list around the time a treaty is agreed.
Negotiations started in 2008 and optimists predict that the treaty could be signed in three years.
So, China does need to accelerate its efforts in testing the negative list system.
In comparing the two lists, we find the Pingtan list is indeed a step forward. Pingtan’s negative list has 99 special regulatory measures that ban or limit overseas investment. The number is much smaller than Shanghai’s 190. This is major progress in opening the market wider for overseas investors.
What is likely is that authorities want to create some competition. Pingtan’s list may add some pressure to the Shanghai zone which will update its negative list this year. Shanghai officials have said the list will be cut by one-third.
The Pingtan list is also more localized than Shanghai’s. Pingtan’s list is tailored for its zone, which is aimed mainly at business ties across the Taiwan Strait.
The list has a lot of exceptions for Taiwan investors, especially in the financial sector.
For example, it says overseas investors are limited in banking, trust and monetary brokerage, but Taiwan investors are not limited. They are not subject to stakeholder limits in investing in mainland insurance companies. In addition, Taiwan investors can hold a maximum 51 percent stake in mainland securities companies but other overseas investors are subject to a 49 percent stake ceiling.
Considering that Pingtan is a frontier for Taiwan investment, the Taiwan element of the negative list is justified.
Since China is so big and regional development is not balanced, allowing Pingtan to come up with a localized negative list reflects the central government’s wish to test the practice in line with local conditions.
Apparently, Shanghai is a test ground for the nation while Pingtan is a pilot for Fujian province. More areas also will test the practice, with Shenzhen’s Qianhai economic zone, Tianjin’s Binhai New Area and Zhuhai’s Hengqin New Area expected to join the bandwagon.
It is highly likely that these areas will design negative lists according to their conditions.
But the government must follow a few principles in testing negative lists in more areas.
Above all, a measured approach should be adopted to select regions that are capable of testing the practice. The economic opening up of these regions must be wide; market awareness must be high and these regions should also have much more foreign investment.
Thanks to their tax-friendly and open regulatory systems, bonded areas in China’s coastal regions are suitable for piloting the negative list.
Meanwhile, not too many places in inland China should be selected to be pilot areas. The negative list will eventually be adopted nationwide, so it is important to make sure less-developed regions have a chance for a trial run.
Also, the central government needs to train local officials to better understand how a negative list is implemented. It also would be very useful for the central government to help review the negative list designed by local governments to eliminate vague items.
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