New Foreign Investment Regulatory System in China and Open-up of Financial Sector

December 2020

The Foreign Investment Law of China (“Foreign Investment Law”) came into effect on January 1, 2020. The State Council of China and relevant government departments have made a series of rules, regulations and measures for the Foreign Investment Law. In addition, the Special Administrative Measures for Foreign Investment Access (Negative List) (“Negative List 2020”) promulgated by the National Development and Reform Commission of China (“NDRC”) and the Ministry of Commerce in late July 2020 has completely lifted the restrictions on foreign equity in the financial sector. The financial regulatory authorities have also eased the access thresholds and business restrictions of relevant foreign investors in the financial sector. This article briefly introduces the recent changes in the foreign investment regulatory system of China and the dynamics of the complete open-up of the financial sector in China.

I. New Foreign Investment Regulatory System of China

1. Foreign Invested Enterprises (“FIEs”) will transform into the same organizational structure with the domestic legal persons in China

Before the new foreign investment regulatory system in 2020, the laws governing foreign investment in China in the recent decades were the Law on Sino-foreign Equity Joint Ventures, the Law on the Sino-foreign Cooperative Joint Ventures, and the Law on Wholly Foreign-owned Enterprises (collectively referred to as “Three Laws on Foreign Investment”), which provided for tailormade settings on organization of FIEs different from those of domestic enterprises based on the unique characteristics of FIEs. The Foreign Investment Law has repealed the Three Laws on Foreign Investment, and grants a five-year transitional period till December 31, 2024 for existing FIEs to gradually transform into the organizational structure consistent with the organizational structure of domestic legal persons in China pursuant to the laws and regulations such as the Company Law and the Partnership Enterprise Law.

2. An information reporting system is adopted to replace the old approval system and to achieve the convenient online registration and the system linkage among governmental authorities

Prior to 2016, China's foreign investment access was under relatively strict control and had long been subject to the approval system of the commercial authorities. Since 2016, the filing system has been adopted nationwide and foreign investment projects which were not on the negative list nor the regulated mergers and acquisitions of foreign investment could be easily filed on the unified foreign investment filing system, which was operated by the Ministry of Commerce, but the business registration applications still need to be submitted to the Administration of Industry and Commerce (which has become a part of the Administration for Market Regulation (AMR) since 2018). However, starting in 2020, the information reporting system under the new foreign investment regulatory system has further simplified the process of establishing companies and changing registration information for foreign investors. For sectors that are not subject to the negative list, foreign investors can simply submit the information of the investment online through the company registration system of AMR and such information will be shared and filed to the commercial authorities.

However, the new foreign investment regulatory system does not change the existing approval and filing formalities for foreign investment projects of the NDRC (usually involving fixed asset investment such as infrastructure construction and industrial investment, etc.). Furthermore, the Foreign Investment Law clearly stipulates that foreign investment must comply with the provisions on concentration of undertakings under the Anti-monopoly Law and must be subject to the national security review as well.

3. The negative list management system is solidly fixed - three negative lists

The negative list management system implemented in 2017 has been fixed as a fundamental rule in the Foreign Investment Law. The negative list is approved by the State Council. Currently there are three effective negative lists: (i) the negative list of market access for all domestic and foreign entities, (ii) the negative list for foreign investment access (“Negative List”), and (iii) the negative list for foreign investment access in the pilot free trade zones (“FTZ Negative List”). The FTZ Negative List applies to all pilot free trade zones across China and has fewer items and restrictions than the Negative List. The Negative List 2020 has reduced the number of restrictive items from 40 in 2019 to 33, whereas the number of the restrictive items under FTZ Negative List is reduced to 30. Those restrictive items mainly relate to certain sectors such as agriculture, mining, publishing and printing, satellite manufacturing, nuclear power, tobacco, transportation, information, scientific research, education, medical care, culture, etc. Moreover, both versions of the negative lists of foreign investment access have set out exceptions. Any provisions under the Closer Economic Partnership Arrangement (CEPA), the Cross-Straits Economic Cooperation Framework Agreement (ECFA) or international treaties which are more favorable shall prevail. Additionally, the State Council in special cases may approve investment projects that are restricted by the negative list.

4. Investment Promotion and Investment Protection

The Foreign Investment Law specifies the rules of investment promotion and investment protection, which reflects China's attention to the essential concerns of foreign investors in the past few decades and shows China’s commitment to the continuous open-up. The special provisions on investment protection stipulate the principle of non-expropriation of foreign investment and the triggering conditions and compensation in extraordinary cases of expropriation. The law also touches on matters such as the freedom of technical cooperation, the performance of commitments of local governments and the complaint mechanism of foreign investors.

II. Complete Open-up of Financial Sector

From 2018 to 2020, China's financial sector has undergone tremendous reforms. Save the reform on deleveraging and stronger supervision in its financial sector, China's financial sector has been fully opened to foreign investment in 2020. The timetable for the open-up of the financial sector is removed in the Negative List 2020, which completely abolishes the restrictions of foreign equity in banking, securities, insurance, and fund sectors in one go.

In the banking sector, while restrictions of foreign equity have gone for some years, the banking regulations kept high requirements for the foreign-invested bank and its branches. However, the Foreign Bank Regulations revised in 2019 lowered the threshold for foreign banks and abolished the entry requirements on their total assets. Previously, foreign banks must have total assets of no less than US$10 billion at the year-end of the last year prior to the application of entry if they are to set up a foreign-invested bank as a legal person in China, and of no less than US$20 billion if they are to open a branch in China. As to the Renminbi business, the approval of the banking regulatory authorities for foreign banks to engage in Renminbi business is no longer required. The threshold for branches of foreign banks in taking deposits of Chinese residents is reduced to not less than RMB500,000 per transaction. Further, wholly foreign-owned banks, sino-foreign joint venture banks, and branches of foreign banks have all been allowed to act as agents in issuance, cashing, underwriting government bonds and the collection and payment.

In the securities sector, before the promulgation of the Negative List 2020, China Securities Regulatory Commission officially announced to remove the restrictions of foreign equity of securities companies for foreign investors from April 1, 2020. Major foreign securities firms soon filed applications for acquiring the majority shareholding in existing joint venture firms in China or establishing their wholly foreign-owned securities firms. Earlier in 2017, when the Negative List had the restrictions of foreign equity on securities firm, some securities companies have been established to be the first batch of securities firm controlled by foreign (Hong Kong) investors by virtue of the more favorable provisions under the CEPA.

The Negative List 2020 also removed the restrictions of foreign equity for the life insurance companies, whereas such restrictions were lifted for property insurance and reinsurance companies in the early years. In addition, the restrictions of foreign equity for mutual funds and future companies were also removed in the Negative List 2020. Earlier in 2016, under the favorable provisions CEPA, some fund management companies have become the first batch of mutual funds controlled by the foreign (Hong Kong) investor i.


Based on vast experiences in the open-up for decades, the new foreign investment regulatory system in 2020 provides clearer investment path and stronger investment protection for foreign investors to enter China. In the post-pandemic era, the complete open-up of the financial sector will be the main display field for the new round of further open-up of China. China’s financial market will become the indispensable and significant field of transnational banks, investment banks, insurance companies, and funds for their global development.