This week, China approved the formation of three new free-trade zones, or FTZs. Tianjin, Guangdong and Fujian will join Shanghai in establishing the zones (China to set more free-trade zones, March 25).
The new FTZs will all adopt the ‘negative list’ approach, which has unfortunately been a much-misunderstood concept among the foreign business community, and is worth closer examination.
Under the ‘negative list’ system, foreign investors are prohibited from engaging in any businesses or industries contained on the negative list, but are otherwise free to operate within the FTZ. The innovation has been criticised by some, as being no different to the current “Foreign Investment Industrial Guidance Catalogue” in place nationwide, which divides industries into ‘encouraged’, ‘restricted’ and ‘prohibited’ categories, and provides that anything not in one of those three categories is ‘permitted’ and therefore unrestricted.
It is true that the items on the current ‘negative list’ for the Shanghai FTZ are largely consistent with the ‘restricted’ and ‘prohibited’ categories under the old system (prohibiting investment in sectors such as internet and telecoms to foreign businesses and restricting investment in financial institutions, among others), and therefore does not allow foreign investors to do anything new. However, to dismiss the negative list solely on this basis profoundly misunderstands its significance.
While the substance is similar, the negative list is conceptually important because it sets the limits of Chinese government power for the first time.
In the West, our conception of law follows the principle of “Whatever is not prohibited is allowed” -- if the law does not specifically proscribe certain behaviour, we assume we are free to engage in it. However, in China, law and regulations operate on exactly the opposite underlying assumption: “Whatever is not allowed is prohibited”.
If you cannot find a legal or regulatory source permitting you to do what you want to do, you are not able to do it. Under this model, government power is ‘infinite’, not circumscribed by the boundaries of the written laws, and there is significant scope for administrative discretion to grant ‘special’ approvals.
This is why the ‘negative list’ is such a ground-breaking development. It tips upside down the entire legal system paradigm in China, limiting the scope of government power strictly to the boundaries set down by the negative list, and therefore limiting the scope of administrative discretion. This incidentally also happens to sit comfortably with President Xi’s ongoing anti-corruption campaign, by limiting the scope for graft.
Seen this way, the negative list is truly ground-breaking, and goes some way to explaining PRC government officials and commentators’ enthusiasm for the development.
At the same time as the new FTZs were announced, it was reported by China’s China Business News (Chinese) that the four FTZs will use a single unified form of the ‘negative list’, which is being formulated by the National Development and Reform Commission. Previously, Shanghai had formulated its own negative list.
The development makes sense, it avoids the chaos that would ensue if each FTZ developed their own negative list, and the consequent forum shopping and internal competition that would inevitably result if they did. But it nevertheless is a sharp signal that the Central Government in Beijing is yanking control back from Shanghai.
Shanghai Mayor Yang Xiong had reportedly stated that Shanghai has been actively looking at further reducing the number of items and increasing the level of transparency on the 2015 version of their negative list. It will be interesting to see if this is carried through to the national version now being formulated by the NDRC.
Antony Dapiran is a Hong Kong-based lawyer and writer. You can follow him on Twitter @antd