January 20, 2022

Latest negative list opens power sector up to foreign investors

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August 20 2018 | By Libin Zhang Contributed by Broad & Bright From ILO

Energy & Natural Resources China

Introduction
Regulatory history
2018 negative list
New types of ownership
Challenges
Domestic impact

Introduction

Prior to China’s economic reform, non-public ownership models were forbidden under the socialist economic doctrine.(1) This – combined with arguments from national companies that competition from private and foreign firms would negatively affect economic reform(2) – has meant that the country’s energy sector has traditionally been closed to foreign capital and private ownership. In fact, the energy sector was opened only briefly in the 1990s in an attempt to reduce chronic electricity shortages and improve the productivity of domestic power plants.(3)

However, in mid-2017 the Chinese authorities announced that the country would be pushing to open the upstream oil and gas industry to Sino-foreign joint ventures(4) and allow private companies to invest in oil and gas storage.(5) Progress in the energy sector has been slow, but China has strived to make significant efforts to promote free trade since signing the World Trade Organisation General Agreement on Trade in Services in 2001, including by eliminating most foreign entry and ownership restrictions. These efforts led to China’s 2013 adoption of the pre-entry national treatment with a negative list approach.(6) A ‘negative list’ is a list of industries in which foreign businesses are either:

prohibited from investing; or
restricted to investing through joint ventures with a level of Chinese control.
Regulatory history

The Special Administrative Measures on Access to Foreign Investment 2018 (the 2018 negative list) will replace the previous Catalogue for the Guidance of Foreign Investment Industriesm which was revised in 2017.(7) The regulations that led to the 2018 negative list are as follows:

In June 2005 the State Council issued Regulation 156 (Guidelines for Guiding Foreign Investment Directions). Article 8 of the regulation clearly states that the Catalogue for the Guidance of Foreign Investment Industries may limit foreign investors, as it:
restricts participation to Sino-foreign joint ventures and cooperative ventures; and
stipulates that the sum of domestic investment in projects must be 51% or above.(8)
The Notice of the National Development and Reform Commission (NDRC) on Further Strengthening and Regulating the Management of Foreign Investment Projects, issued in July 2008, implemented a strict approval system for foreign investments and strengthened the review of project authenticity.(9)
The 2011 revision of the Catalogue for the Guidance of Foreign Investment Industries stipulates that the construction and operation of new power stations (including wind, solar and geothermal energy) encourages foreign investment and does not require the previous fixed percentage of domestic investment.(10)
The June 2014 Measures for the Administration and Approval of Foreign Investment Projects introduced the national treatment principle for foreign investment projects.(11)
The October 2014 Government-Approved Investment Project Catalogue stipulates that wind power station construction projects can be wholly foreign-owned if approved by the local government.(12)
2018 negative list

The release of the latest negative list at the end of June 2018 came in the middle of the current Sino-US trade war. Thus, the list is largely a gesture to show China’s commitment to making consistent, reformative progress towards trade liberalisation. A representative of the NDRC, China’s top macroeconomic planner, stated that “revising the negative list is mainly to further push the restructuring of the market; not only is the length of the list to be shortened, but the sectors are also to be further strategically opened”.(13)

The 2018 negative list has been notably reduced, significantly opening the market up to foreign investment, particularly in the energy sector. Prohibitions and restrictions on foreign investment have rapidly decreased in recent years (dropping from 180 to 60) and, compared with the 2017 Catalogue for the Guidance of Foreign Investment Industries, the 2018 negative list has decreased by a further 15 restrictions and prohibitions. Among the restrictions which have been lifted are those regarding power grid construction and the exploration and exploitation of oil and natural gas in free trade zones (FTZs).(14)

New types of ownership

Sino-foreign joint ventures in China’s power grid construction sector no longer require majority holdings from local companies.(15) Li Junfeng, a member of the National Energy Advisory Council, told YiCai Global that “removing the equity ratio limit of foreign investment in power grids is a major move for China to expand the opening of the infrastructure construction field”.(16) Further, according to Zeng Ming – director of a North China Electric Power University research centre – if foreign-controlled power grid enterprises are present in China, competition between Chinese and foreign power grid companies will increase.(17) This will help to promote reforms of the internal management system of state-owned power grid enterprises and may affect the government’s industry management policies. Removing the foreign equity ratio restrictions will help to expand investment and financing channels for power grid construction, while also increasing the transparency of investment returns and costs for power grid enterprises.

The NDRC has also confirmed that foreign investors will no longer have to conduct oil and gas exploration and development through joint ventures within China’s FTZs.(18) Lifting such restrictions in the oil and gas industry is evidence of China’s efforts to achieve market liberalisation and meet its carbon emission obligations under the 2015 Paris Agreement by making it cheaper to adopt natural gas, the so-called ‘green’ fossil fuel,(19) as the main source of fuel over coal. These actions do much to address concerns like those set out in a 2005 symposium sponsored by the National Energy Administration on the use of foreign capital in the coalbed mining industry. At the symposium, foreign representatives reflected on the main problems of implementing Sino-foreign cooperation projects – namely, that:

the approval process for projects is complicated;
the inconsistencies in the level of issuance of coalbed mining and coal mining rights have led to mineral rights conflicts; and
the policy of entering the natural gas pipeline network when selling coal gas is unclear.(20)
However, the liberalisation of the energy sector has yet to occur. Sinopec and PetroChina Co are dominant players in the fuel retail market and State Grid Corporation of China and China Southern Power Grid Co are dominant players in the electrical grid market. The market share of these incumbent players is extremely high, making it all but impossible for new players to enter the market.

Challenges

According to Li Junfeng, “the biggest difficulty facing foreign investors is how to enter [the market]”, and the presence of behemoths such as the State Grid and China Southern Power Grid, finding the right entry point and gradually expanding investment scales will be the first issues for foreign capital to solve.(21) Li Jungfeng believes that foreign enterprises could participate in the Chinese power grid market by:

cooperating with local state-owned enterprises or large private firms to build local distribution networks;
constructing inter-regional transmission channels; or
independently investing in the construction of distributed micro-networks.(22)
Foreign capital has already successfully joined forces with Chinese companies to enter local power markets. For example, Liangjiang Changxing Electric Power and Energias de Portugal have worked together regarding market-oriented retail power, the distribution of network construction and distributed energy.(23)

Domestic impact

The NDRC has stated that the domestic industry will not be negatively affected by the energy market’s liberalisation. Rather, the lifting of restrictions will allow mutually beneficial Sino-foreign investment cooperation and stimulate China’s market vitality by:

encouraging effective competition;
promoting technological progress; and
optimising resources.(24)
According to industry experts, the expansion of the 2018 negative list to include both domestic and foreign investment is a major breakthrough for market access and investment management systems, signalling the end of China’s 30-year-long investment management approval system.(25) The practical effects of the list’s implementation can already be seen. Among the liberalised energy sector industries, the new energy vehicles field will shortly witness the emergence of foreign-owned enterprises in addition to the typical domestic-owned ones, as a number of joint ventures have officially been liberated.(26) While some foreign critics have argued that restrictions have been removed only for industries where foreign investment is unlikely, most foreign investors have responded to the reform with tentative comments that it is still too early to tell whether significant changes will be wrought.(27)

For further information on this topic please contact Libin Zhang at Broad & Bright by telephone (+86 10 8513 1818) or email ([email protected]). The Broad & Bright website can be accessed atwww.broadbright.com.

Endnotes

(1) Hui Jiang and Jing-chun Chu, “Theoretical Thinking on the Relations Between Power Development and Electric System Reform”, Journal of North China Electric Power University (Social Sciences), 14-16 (2007).

(2) Michal Meidan, The structure of China’s oil industry: Past trends and future prospects (2016).

(3) Allen Blackman and Xun Wu, Foreign direct investment in China’s power sector: trends, benefits and barriers, 27 Energy Policy 695–711 (1999), Blackman Wu pdf.

(4) Zainab Calcuttawala, “Is China Liberalizing Its Oil And Gas Industry At The Right Time?”, 28 May 2017.

(5) “China says will eventually allow private companies to invest in oil storage”, Reuters, 21 May 2017.

(6) “Implementing a negative list of foreign investment approvals nationwide from July 28 – Description of the “Guidance Catalogue for Foreign Investment Industries (Revised in 2017)””, NDRC.

(7) Dorcas Wong, “How to read China’s 2018 negative list”, China Briefing (2018).

(8) NDRC on further Notice on Strengthening and Regulating the Management of Foreign Investment Projects (2008).

(9) Id.

(10) “Implementing a negative list of foreign investment approvals nationwide from July 28”, supra.

(11) Id.

(12) Id.

(13) Weiwei Chen , “The negative list is shortened again and the key areas are more open – the new version of foreign investment access negative list releases new signals”, Xinhua News Agency, 29 June 2018.

(14) Kevin Yao and Xu Jing, “China further eases foreign investment curbs in free trade zones”, Reuters, 30 June 2018.

(15) Chunting Lin, “China Eases Limits on Foreign Capital in Power Grid Construction”, Yicai Global, 5 July 2018.

(16) Id.

(17) Id.

(18) Yao and Jing, supra.

(19) Calcuttawala, supra.

(20) “Energy Bureau holds symposium on foreign investment in coalbed methane industry”, National Energy Administration (2005).

(21) Lin, supra.

(22) Id.

(23) Id.

(24) “National Development and Reform Commission: 2018 version of the negative list will not impact domestic industry”, CCTV, 18 July 2018.

(25) Nanhua Li, “Ministry of Commerce: The 2018 version of the negative list will be full revised”, China Postcoin Card Network.

(26) “Letting foreign stocks out more than restricting new energy vehicles will enter the era of foreign-owned enterprises?”, High-Tech Electric Car Network (2018).

(27) Wong, supra.

Annie Dai, Carolyn Liu and Angelina Wang, interns at Broad & Bright, assisted in the preparation of this update.

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IMAGE: Libin Zhang

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