Changes And Development Of China’s Administration Of Foreign Investment Access - LNG Market Perspective.
Legal News & Analysis - Asia Pacific - China - FDI - Energy & Project Finance
23 March, 2019
Ⅰ. The Evolution and Development Trend of Management Methods regarding Foreign Investment Access
1. Catalogue Management and Special Procedure Management on Special Industries
The "Sino-foreign Equity Joint Ventures Law" promulgated on July 1, 1979, which provides creative and fundamental legal arrangements for China to open its doors and introduce foreign investments, is one of the milestones for China's opening up. Since then, China has successively promulgated the “Wholly Foreign-Owned Enterprises Law", the "Sino-foreign Cooperative Joint Ventures Law" and the "Provisions on the Administration of Registration of Foreign-funded Partnership Enterprises". In 1995, the "Guidance Catalogue for Foreign Investment Industries" was implemented. The catalogue, known as the “positive list”, stipulates four categories of foreign investment, including encouraged, permitted, restricted and prohibited, and has become the main document of guidance for foreign investments.
On June 28, 2017, the National Development and Reform Commission, and the Ministry of Commerce issued the “Guidance Catalogue for Foreign Investment Industries (2017 Revision)”. The revision promotes the opening of key areas again, proposes the negative list for foreign investment access at the same time, highlights the characteristics of the “negative list”, adjusts and optimizes the structure of “Guidance Catalogue for Foreign Investment Industries”, and keeps stabilizing incentive policies. The revision of “Guidance Catalogue for Foreign Investment Industries” also regulates restrictions on the foreign investment industries catalogue. The fields in relation to the oil and gas industry are mainly embodied in the “exploration and development of oil and natural gas (including coalbed gas, excluding oil shale, oil sands, shale gas, etc.) (only in the form of equity joint venture and cooperative joint venture)” and “construction and operation of urban gas, heat supply and water supply, and drainage networks with an urban population of 500,000 and above (controlling shares to be held by Chinese party)”, which are still within the scope of restricting foreign investments.
In general, the "Guidance Catalogue for Foreign Investment Industries" used to be the core method for regulating market access of foreign investment in China. Meanwhile, the adjustment and revision of the catalogue provides more space for foreign investments to gain access to the Chinese market to develop, which creates conditions for further opening up. It is clear that this core method will be gradually replaced in the further reform and upgrade of China's foreign investment system (see below for details).
On the basis of management of foreign investments access catalogues, in respect of special industry sectors, the competent departments of different industries successively issued regulations on supervising access procedures of special foreign investments in the legal system of industry management, such as the “Administrative Provisions on Foreign-invested Telecommunications Enterprises”, “Regulations on Establishment and Operation of Sino-Foreign Cooperative Educational Institutions” and “Provisions on Administration of Foreign Investment in International Maritime Transportation”. It should be noted that these regulations not only reflect the regulatory perspective of the access to foreign investment markets in the relevant industries at the time of legislation, but also the elaboration of administrative procedures of industry authorities in the process of access. There exists the necessity for further adjustment for these regulations with variations of the industry access system.
2. Test and Promotion of the Negative List
With the continuous decrease of restrictive measures in the "Guidance Catalogue for Foreign Investment Industries", in order to better meet the needs of the market, in 2013, along with the landing of the China (Shanghai) Pilot Free Trade Zone, the "negative list" entered the sight of China’s foreign investment management for the first time. The Shanghai Free Trade Zone highlights system innovation, especially taking the lead in conducting foreign investment management mode with the “negative list” as the core in China, reduces restrictions on the access for foreign investments, and simplifies access management, which accumulates valuable experience for China’s further opening up to the world.
The “negative list management mode” is a kind of supervising and regulating method that has been widely used in the field of investment and trade in the world. Negative list formulation usually considers standards based on national security, industrial security, protection of infant industries and environmental protection. The orientation of the “negative list management mode” is “everything is permitted without law prohibition” for the market participants, and “everything is prohibited without law authorization” for the government. As for the market access of foreign investment in China, on the basis of the practice of the Shanghai Free Trade Zone, with the promotion of the practice of the Free Trade Zones, the “negative list” system has been raised to be a coordinated issue at the national level. The General Office of the State Council, the National Development and Reform Commission, and the Ministry of Commerce issued the “Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones” respectively in 2015, 2017 and 2018. In the meantime, at the central level, the National Development and Reform Commission, and the Ministry of Commerce also updated the “Special Administrative Measures (Negative List) for Foreign Investment Access in 2018, as further consolidation of the “negative list management mode” nationwide. The restriction on foreign investment access in the fields relating to the oil and gas industry in the central level “negative list” in 2018 follows the principle as stipulated in the “Guidance Catalogue for Foreign Investment Industries” in 2017. It is worth noting that, compared with the “negative list” of the previous two years in the Free Trade Zones, although the “negative list” in 2018 retains the construction and operation of urban gas, heat supply and water supply, and drainage networks with an urban population of 500,000 and above (controlling shares to be held by Chinese party), deleted “exploration and development of natural resources of China’s exclusive economic zones and continental shelf or drilling on China’s continental shelf for any purpose shall be subject to approval by Chinese Government”, and “exploration and development of oil and natural gas (including coalbed gas, excluding oil shale, oil sands, shale gas, etc.) (only in the form of equity joint venture and cooperative joint venture)”, market access and project cooperation in this field is to be analyzed separately in conjunction with the "Regulations of the People’s Republic of China on Sino-foreign Cooperation in Exploitation of Onshore Petroleum Resources" and "Regulations of the People's Republic of China on the Exploitation of Offshore Petroleum Resources in Cooperation with Foreign Enterprises".
The “Foreign Investment Law (Draft)” published in December, 2018 also further establishes principles of the “negative list” system, which is “Foreign investors shall not invest in any field with investment prohibited by the negative list for foreign investment access. Foreign investors shall meet the investment conditions stipulated under the “negative list” for any field with investment restricted by the “negative list” for foreign investment access. For the fields not mentioned in the “negative list” for foreign investment access, management shall be conducted under the principle of consistency of domestic and foreign investment.”
It is foreseeable that the “negative list” system will completely replace the catalogue management system, and the “negative list” is expected to adopt the form of “promulgation or approval promulgation of the State Council” after the “Foreign Investment Law” is and comes into force.
3. Foreign Investment Project Approval and Filing System and National Security Censorship System
The government approval system for investment projects and the national security censorship system are important units of China's investment, market supervision and regulation system, the formation and development of which are not limited to the field of foreign investment. The legal origins of the aforementioned two systems are the "Decision of the State Council on Investment System Reform", "Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening the Reform of Investment and Financing System", "Anti-Monopoly Law" and "National Security Law", and the key points of supervision and regulation contain macro-control of resource allocation, environmental impact assessment, prices related to public goods or services, and areas, resources, facilities, products and technologies, etc. related to national security.
More specifically, in the management of foreign investment projects, there still exists the “Government-approved Investment Project Catalogue” and “Administrative Measures on Approval and Filing for Foreign Investment Projects” as the basis for implementation on the basis of the catalogue management and “negative list” management introduced in Parts 1 and 2. The system covers various types of investment and financing projects related to the establishment and adjustment of foreign-invested enterprises, as well as all foreign investment and financing projects applicable to government approval.
In the field of foreign investment market access, the national security censorship system is mainly in accordance with the “Notice of the General Office of State Council on Establishment of Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors”, and the “Provisions of Ministry of Commerce on Implementation of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors”, and “Notice of the General Office of State Council on Promulgation of the Trial Measures on National Security Review for Foreign Investments in Pilot Free Trade Zones”.
The published “Foreign Investment Law (Draft)” also incorporates the above two systems, and the foreign investment security censorship system is not limited to the perspective of security censorship for foreign M&A, which might combine the supervision view of these superordinate laws, the “Anti-Monopoly Law” and “National Security Law”. We will follow up with the elaboration and integration of the specific system after the official promulgation of such law.
Ⅱ. LNG (Liquefied Natural Gas) Business Chain - LNG Terminal as Example
Since 2017, China's LNG imports have had an unprecedented and dramatic increase. According to the “Natural Gas Market Report 2018 (GAS 2018)” issued by the International Energy Agency (IEA) together with the Shanghai Petroleum and Gas Exchange, China will become the world's largest natural gas importer in 2019. By 2023, China's natural gas imports may reach 171 billion cubic meters. Transportation and delivery through pipelines and those by LNG are two major solutions for trade and logistics of natural gas products. LNG will continue occupying significant shares from the development trend of natural gas trade in China.
1. Independent Business LNG Terminal VS Supported LNG Terminal
The LNG terminal refers to the overall system of docking and unloading, refueled device, the dock working area, and LNG storage device for delivery using LNG transportation equipment. Main LNG terminals in practice are an important infrastructure of trade and logistics, serving connection points of LNG tankers in sea and river transportation, which is usually based on the dangerous goods wharf of port. The technical solution may also contain floating LNG filling and storage devices. The LNG terminal may be an independent unit in the LNG international business chain, namely at the arrival of LNG transportation to the key spots of trade, such as import and export, the operation of the LNG terminal system can be considered as a type of service capability participating in transit trade, import and export trade, and transportation and storage services for arrival and departure, and import and export parts. The service capabilities of transportation equipment and facilities such as small and medium-sized LNG tankers and LNG tank cars may be added into this business unit. As another option, LNG terminal may also become an intermediate link of larger-scale LNG, petrochemical, energy industrial projects, and urban public utilities, as facilities of project operating party’s own wharf, playing mainly a role in supporting the operation of the urban gas pipeline network, power generation with natural gas or petrochemical production, etc.
2. Foreign Investment Access Management and Project Management
As for the foreign investment activities in a LNG terminal, the nature of the foreign-invested enterprise’s business scope and foreign-invested project in relation to the LNG terminal should be clarified according to the aforementioned industry function of a LNG terminal first.
Merely regarding the business scope in relation to a LNG terminal, it may include LNG’s transit trades, import and export trades, LNG maritime filling services (equivalent to retail business), arrival and departure services, and operating services relating to port and wharf operation areas, and sub-package transportation services, LNG offshore and onshore storage services (including bonded and non-bonded), LNG onshore tank car transportation services, etc. If these business activities do not refer to the construction and operation of urban gas pipeline networks that continue to extend to cities with urban populations of 500,000 and above, they will not be related to prohibited or restricted items for foreign investments under foreign investment access management or “negative list” management.
In the project approval and filing management system, the core project of the LNG terminal system currently falls within the scope of government approval project catalogue management: “Imported LNG receiving, storage and transportation facilities: Newly-established projects (including expansion projects in other regions) shall be approved by the industrial administrative department under the State Council, in which newly-established projects with the reception and storage capacity of 3 million tons or above shall be approved by the competent investment department under the State Council and filed with the State Council. Other projects shall be approved by the provincial governments concerned."
3. Application of the Security Censorship System
The current relatively matured security censorship system is mainly applicable to foreign-invested M&A projects and foreign direct and indirect investment projects in the Free Trade Zone. Specifically, compared with the universally applicable security censorship system on foreign investment M&A, the security censorship system on foreign investments in the Free Trade Zone is extended to the general forms that “foreign investors invest in newly-established projects or set up enterprises alone or with other investors”, and the special forms that “foreign investors invest in the methods of agreement control, entrustment shareholding, trust, reinvestment, overseas transactions, leasing, subscription of convertible bonds, etc.”. In addition, that foreign investors invest directly and indirectly in projects of “important energy and resources, important infrastructures and important transportation services” in the Free Trade Zone is in principle included in the scope of application of the security censorship system.
4. Perspectives of Integrated Management and Institutional Reform of LNG Terminals
Approximately 20 LNG terminals have been built and put into operation in China, among which the participation of foreign investment is extremely limited. The LNG terminals currently in operation are mainly positioned as the auxiliary facilities of large petrochemical industry and urban public utilities projects, the position of independent intermediate services, especially the public services, in LNG international trades is not clear enough. However, we have seen that China and Chinese core energy companies have expressed expectations and strategic plans on the construction and renovation of LNG terminals for the purpose of increasing China's influence on LNG international trade and logistics nodes. In the meantime, with LNG being a hazardous chemical, factors such as impacts on overall zoning, safety and environment in relation to oceans, maritime, comprehensive transportation and the surrounding enterprises and residents arising from the construction and operation of LNG terminal projects will become more and more important on the feasibility assessment and implementation of such energy infrastructure projects, especially for those with large scale and super large scale.
In addition, we must dynamically keep pace with China's various measures in promoting the reform of the central and local administrative systems. Taking the National Development and Reform Commission and the National Energy Administration as examples, the comprehensive coordinating departments of central and local major infrastructure projects and energy projects, large-scale and super-large LNG terminal projects (whether or not referring to foreign investments) will undoubtedly, directly or indirectly, face the planning, approvals and supervisions of these two key government authorities. This article is not able to accurately predict and summarize the operational mechanisms of these two key government authorities in the future, but can only list and outline relevant responsibilities of several relevant major divisions in the form of attachments, with the hope of making contributions for market participants in this field to further study, and to clarify the development trend of integrated management and system reform in the future.
China is currently a LNG-import-dependent country, with resources and output far from the position of being self-sufficient and even exporting to participate in international trades. Major natural gas and LNG suppliers in the world, such as Qatar, the United States, Australia, Russia, and countries with more mature experience of LNG international trade and logistics operations (such as Japan), as well as traditional multinational energy companies, all have possibilities to participated in the upgrade of the industrial chain of China's LNG industry, especially in LNG terminals.
In the view of market positioning and government supervision of investment, construction, and operation of LNG terminals, China's LNG industry development should be viewed from the perspective of China's participation in the upgrade of the LNG international trade chain, as well as the perspective of the introduction of international resources, capitals, technologies and operational experience together with the optimal utilization of existing and incremental assets. Both in the areas of foreign investment and the planning, approval and supervision of energy infrastructures, China is promoting comprehensive system reform and institutional upgrade, the core development principles of which have been initially established. However, the details of reforms and upgrades are still in for consideration and improvement. In order to meet the historical development opportunities of the LNG industrial chain, it is very important to pay attention to the development details of reform and upgrading continuously, and to establish long-term communication mechanisms with the government as well as the international and domestic market participants in the industry, which is also our core position in this historical development opportunity.
Ming Linghu, Counsel, Jun He