This year, it’s not just Santa Claus who’s making a list. China’s Communist Party is taking one down too. Theirs is a “negative list” that contains a number of businesses and industries that are off limits to foreign companies – at least for the time being.
Negative lists are policymakers’ wish lists for reform. They could even become the norm for rolling out change in the country in the coming years.
When a negative list was first published in late September, detailing what foreign companies would not be able to do in the Shanghai free trade zone, disappointment was widespread. International firms complained the list was too long, too vague and many points still needed to be clarified.
Since then, the Communist Party and some of the country’s regulatory bodies have hinted at issuing more lists. They’ve even broached the term “negative list model” as a method of pushing through reform.
On November 15, at the conclusion of the Third Plenum, a document issued by the Communist Party stated that a “negative list management model” would be established for foreign companies looking to enter the Chinese market. That list has yet to materialize.
Lifting the controls on China’s capital account may follow a similar list. In a guidebook published last week by the People’s Bank of China, chairman Zhou Xiaochuan said that a negative list for foreign investment in mainland equities should be drawn up.
Wang Yang, a reform-leaning vice premier, even came out last week and said the negative-list model could be adopted nationally as a way of gaining experience in reform.
So far, only the list for the Shanghai free trade zone has been made public.
The technocrats that devised it came up with 190 items that are controlled within the zone. The bulk, in areas such as “erotic industries,” “investment in news agencies,” “internet data services,” and even the “processing of green tea with Chinese traditional handicraft,” were listed as “prohibited” for foreign firms, according to an unofficial translation.
Other interests, like the “processing of rice and flour,” “the construction of luxury hotels” and “legal consultation” were dubbed “restricted” without any further explanation.
The binds on some industries were slightly clearer: Accounting firms would be allowed as “partnership only.” Information services “other than app stores” could take foreign participation of up to 50%. Distribution of audio and video materials excluding movies is restricted to “corporate joint ventures only.”
The mayor of Shanghai, Yang Xiong, defended the list in October, saying that it would be shortened in the future. The theory behind it is that items will be scratched off as time goes on.
Han Zheng, the party secretary of Shanghai, shed a little light on the subject in an interview with independent Caixin magazine in mid-November. According to him, any financial or commercial business not marked on the negative list is fair game and doesn’t need government approval, but the authorities must be informed. Companies can expect the government to slowly “trim” items on the list, he said, although there was no timeframe for this.
For the free trade zone, or any other negative list that surfaces, one question is: How long trimming will actually take? How much time must pass before companies can invest in something like an erotic business on the mainland, or is that permanently prohibited? And what of foreign-opened app stores: Are those banned too? Companies signing up to the zone, hoping to access a currently blocked off part of the market, could be frustrated with how long it takes to unlock new sectors.
Another caveat for the list is that any business that compromises China’s national or social security, or the public interest, is prohibited. This sounds reasonable, yet Beijing has used loosely defined threats to “national security” and divulging of “state secrets” as a way to sideline business disputes in the past.
Without clarity on the state secrets law, as well as overall bolstered rule of law in the country, questions over China’s “public interest” could overrule anything printed out on a list.