Items included in the Negative List may be either prohibited outright to foreign investment, or may be restricted. Prohibited activities include tobacco wholesale and retail; stem cell and genetic treatments; social surveys; film and TV production; compulsory education; and others. Restricted activities include automotive manufacturing; basic and value-added telecommunications services; transportation; energy; utilities; banks and financial institutions; agriculture; and others. Where an activity is restricted, approval is expressly at the discretion of the competent authorities. The authorities may approve of, ask for modification of or deny the investment. In any case, a joint venture with a Chinese party will be required for any restricted venture, often with the Chinese party holding a controlling interest.
Activities not on the Negative List or the Encouraged List are in principle permitted to foreign investment. However, this is subject to the discretion of the local authorities. Moreover, there are a number of areas (e.g. training) where foreign investment should be permitted in practice, but in fact are not. Approvability needs to be confirmed with the local officials at SAMR and NDRC.
National security review
Besides the restrictions on foreign investments that fall under the Negative List, a foreign investment will also be subject to a national review if it "affects or may affect national security". The rules do not expressly apply to joint ventures with Chinese parties, although an analogous informal review may take place in those cases.
Under the existing review system, the security review applies to acquisitions of all or parts of domestic military industrial enterprises and tertiary enterprises, enterprises located near major and sensitive military facilities, and other entities related to national defence or security. The review mechanism is also triggered by acquisitions in other national security related sectors such as major agricultural products, major energy and resources, infrastructure, transportation services, key technologies and key equipment manufacturing.
If an acquisition by a foreign investor is likely to trigger national security concerns, the foreign investor should notify MOFCOM of the transaction. Upon receiving a notification, if MOFCOM determines that a national security review is required, it will establish an inter-ministerial panel, principally run by NDRC and MOFCOM, to conduct the review and issue a decision within 100 to 120 working days. Depending on the sensitivity of the transaction, the inter-ministerial panel will conduct a "general review" or "special review". If the inter-ministerial panel determines that the transaction is likely to have a major impact on national security, MOFCOM will require the applicant to either terminate or restructure the transaction (including transferring back equity interests or assets if the acquisition has already been closed).
Other approval requirements
There are further approval procedures and formalities to take into consideration depending on the individual investment.
Acquisition of (parts of) a listed company
Complex approval requirements by the China Securities Regulatory Commission and MOFCOM apply where an investor intends to acquire parts of a listed company, e.g. in case of major acquisitions and changes of control of listed companies. Particular care may be required to avoid the need to make a general tender offer when acquiring more than 30% of the shares of a listed company.
State-owned enterprises (SOEs) and state assets
Foreign investors can acquire equity or assets of state-owned enterprises or their subsidiaries. The governmental process is administered primarily by the State-owned Assets Supervision and Administration Commission (SASAC) at central and lower levels. It is overall a quite cumbersome and burdensome process. The process is designed to ensure that state assets are not undervalued and to minimise the impact on employees. In any transaction potentially involving SOEs or state assets, it is critical to ensure that the seller complies with the mandatory procedures for state asset transfers. These include use of a local state asset clearinghouse, internal approval and approval by the relevant SASAC, auditing, evaluation, publication of and invitation to bid, and undertaking a bidding process if two or more interested parties respond.