China’s capital received the green light from the State Council to further open parts of the Beijing service sector to foreign investment. The affected industries include areas that were previously off-limits, such as education, telecommunications, construction, performing arts, and more. We discuss what impact this could have on foreign investors.
On Monday, October 18, 2021, China’s State Council announced that it had permitted Beijing to temporarily adjust certain regulations to enable more access to areas of the services sector for foreign investors, effective immediately.
A document released by the State Council detailed the adjustments to specific articles in several pieces of legislation that restrict foreign participation in the service industries, covering areas like education, telecommunications, entertainment, tourism, and construction, among others.
The adjusted regulations also include temporary exemptions to items on the Special Administrative Measures for Foreign Investment Access (Negative List) (2020 Edition), an extensive list of industries and fields that are off-limits to foreign investors.
The new adjustments follow several policy reforms aimed at developing and expanding market access to Beijing’s thriving services sector.
In this article, we provide a complete translation of the adjusted regulations and discuss the potential impact this change will have upon foreign investors in Beijing.
The document released by the State Council covers eight key areas of the services sector and makes exemptions to articles in several pieces of legislation that prohibit or restrict access to foreign investors.
In the embattled education sector – which has undergone a heavy regulatory crackdown, including a ban on operating for-profit K12 schools – the adjustments encourage the participation of foreign investors in for-profit adult education and vocational training institutes. This move is in line with China’s recent push to develop this sector as a means of upskilling its workforce.
Another significant change is the removal of the equity cap on foreign companies providing telecommunications services. Under national laws, foreigners may only hold a minority stake in companies engaged in basic telecom services and most value-added telecom services, with certain exceptions.
The new adjustment waives the 50 percent cap on foreign ownership for companies engaged in mobile app store information services and internet access services in specific areas of Beijing. The document also encourages foreign investors to set up joint ventures to offer virtual private network (VPN) services to foreign-invested enterprises based in Beijing, although the 50 percent equity cap remains for this sector.
Foreign participation in arts and culture has generally been limited due to its potentially sensitive nature. Now, Beijing will allow foreign investors to invest in performing arts groups in the district of Tongzhou, which has cultivated a vibrant arts and entertainment industry. Foreign investors will not be permitted to hold majority ownership.
Below is the full catalogue of regulations that have been temporarily adjusted.
Article 60 Measures for administration of for-profit training institutions which are cooperatively run by Chinese and foreign parties and registered at the administrative department for industry and commerce shall be formulated separately by the State Council.
Article 2 Foreign-invested telecommunications enterprises refer to enterprises providing telecommunications services that are established according to law with joint investment and in the form of Chinese-foreign joint ventures by foreign and Chinese investors within the territory of the People’s Republic of China.
Article 6 paragraph 2 The proportion of foreign investment in a foreign-invested telecommunications enterprise providing value-added telecommunications services (including radio paging in basic telecommunications services) shall not exceed 50%.
16. Telecommunications companies are subject to the provision of telecommunications services opened up pursuant to China’s WTO commitments; the foreign share ratio for value-add telecommunications services (except for e-commerce, domestic multi-party communications, storage-forwarding and call centers) shall not exceed 50 percent; and the controlling stake shall be held by the Chinese party for basic telecommunications services.
Article 10 paragraph 1 Foreign investors may establish performance brokerage agencies and performance venue business units within China in accordance with the law; they may not establish performing arts groups.
Special Administrative Measures for Foreign Investment Access (Negative List) (2020 Edition)
33. Investment in performing arts groups is prohibited.
Article 11 paragraph 2 Construction drawings and design documents that have not been reviewed and approved shall not be used.
Regulations on the Administration of Construction Engineering Survey and Design
Article 33 paragraph 2 Construction drawings and design documents that have not been reviewed and approved shall not be used.
Article 2 The private non-enterprise units referred to in these Regulations mean social organizations which are established by enterprises, institutions, associations, or other social forces, as well as individual citizens using non-state assets and conducting non-profit-making social service activities.
16. Telecommunications companies are subject to the provision of telecommunications services opened up pursuant to China’s WTO commitments; the foreign share ratio for value-add telecommunications services (except for ecommerce, domestic multi-party communications, storage-forwarding and call centers) shall not exceed 50 percent; and the controlling stake shall be held by the Chinese party for basic telecommunications services.
28. Investment in editing, publishing, and production of books, newspapers, periodicals, audio-visual products, and electronic publications shall be prohibited.
Source: State Council
The economy of Beijing is one of the most mature in the country, having moved to rely almost entirely on its services sector. In 2020, the tertiary industry accounted for 83.8 percent of the local GDP, reaching a value of over RMB 3 trillion (over US$470 billion).
Therefore, to sustain growth, Beijing is keenly aware that it will need to continue upgrading and improving innovation in its service industries. This latest move to open portions of the sector marks another step in Beijing’s efforts to improve market access and develop its ‘new services’ sector.
This movement was kicked into high gear about a year ago when Beijing released the Work Plan for Deepening the New Round of Service Industry Opening-up and Comprehensive Demonstration Zone (‘Work Plan’). The Work Plan laid out reform measures for nine key services industries and involved relaxing market access to certain areas, expanding the development of existing industrial parks, and ongoing institutional and supply-side reform.
Many of the new decisions were previously mentioned in this Work Plan. For example, the Work Plan proposed to allow foreign telecom companies to form joint ventures to provide VPN services to companies in Beijing.
The Work Plan also outlined plans to encourage foreign company participation in setting up adult education and vocational training institutes and to expand and open key industrial parks, including allowing majority foreign ownership of companies engaged in information services available on mobile app stores in the Zhongguancun National Independent Innovation Zone.
The regulatory exemptions will make it easier for foreign investors to participate in Beijing’s booming services sector by expanding access to areas that were previously off-limits. The exemption of the majority stake rule for internet service providers to provide internet access services will make it an easier decision for foreign companies to enter joint ventures in Beijing.
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The rules on the education sector also provide a legal pathway for foreign investors to remain in the industry, which has otherwise become all but impossible to participate in. The opening of the tourist industry to allow foreign travel agencies to organize overseas tours for Chinese travelers may also prove to be a lucrative business once international travel fully reopens.
However, strict limitations are still in place on many parts of the most lucrative portions of the services sector, such as equity caps on basic telecommunications services. Participation in publication and media remains largely off-limits, as do the performing arts and cultural sectors.
In addition, the latest relaxation of regulations does not amount to permanent nationwide amendments, and their restriction to the city of Beijing means that companies will have limited room to grow.
Investor concerns over the stability of Chinese investments have been exacerbated by recent regulatory crackdowns on sectors such as education and technology. How effective this development will be in attracting foreign investors, therefore, remains in question.
On the other hand, these adjustments will almost certainly be followed by more, and it is clear that Beijing’s service sector is on a trajectory of increased liberalization. Some areas are likely to remain off-limits for many years yet – such as the media industry – but we expect to see better access to industries such as telecom, technology, finance, healthcare, and professional services in the near future.
In the Work Plan released last year, Beijing said it would aim to realize “free and convenient investment” and “convenient cross-border flow of funds” by 2030. This sets a clear and tangible timeline for the opening of the city’s service sectors.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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