The tool, expected to ease overseas investment rules, will be tested in just a few regions

Pingtan, a small island in East China's Fujian province, made headlines on June 3 when it became the second place in the country to use a negative list for foreign investment.

The development reflects authorities' determination to promote negative lists to help China embrace the new global investment system that is taking shape. The Pingtan move also shows that the Chinese government is stepping up efforts to pilot the practice by testing negative lists tailored for different regions.

However, during this process it is important for top policymakers to take a prudent approach. They should avoid having too many local governments rushing to jump onto the negative-list bandwagon without properly understanding the practice.

A negative list specifies the circumstances and areas where foreign investors are barred or limited. Those not listed are fully open to foreign investors, who can obtain pre-entry national treatment, which means a foreign company is treated by regulators as an equal to a Chinese firm.

China has long used a positive list in regulating foreign investment. Its Catalogue of Industries for Guiding Foreign Investment lists three categories for foreign investors: sectors where foreign investors are encouraged, those where they are allowed, and those where they are limited or banned. Using this list, China grants post-entry national treatment to foreign investors, meaning they can gain national treatment only after they are approved to operate in China.

The Shanghai (China) Free Trade Zone, established last year, was the first place in China to launch a negative list. Pingtan, the second, is a pilot region with a more limited purpose - mainly to facilitate investment across the Taiwan Straits.

Allowing Pingtan to test the second negative list shows that governments are eager to promote the practice. Although Shanghai's negative list was hastily designed and criticized for being too long and partly vague, authorities are determined to improve and promote the lists as part of an effort to reshape the country's investment regulatory system.

Since China is in the process of negotiating a bilateral investment treaty with the United States based on a negative list, it is expected that China will have to come up with a nationally applicable list around the time a treaty is agreed upon. Treaty negotiations started in 2008 and optimists predict that the treaty could be signed in three years.

So China does need to accelerate its efforts in testing negative lists.

In comparing the two lists, we find the Pingtan list is indeed a step forward. The list has 99 special regulatory measures that ban or limit overseas investment, Shanghai has 190. This represents major progress in opening the market wider for overseas investors.

What is likely is that authorities want to create some competition. Pingtan's list may add some pressure to the Shanghai zone, which will update its negative list this year. Shanghai officials have said the list would be cut by one-third.

The Pingtan list is also more localized than Shanghai's. Two features make it clear that the list is tailored for Pingtan's zone, which is aimed mainly at business ties across the Taiwan Straits.

One is that Pingtan's list does not ban overseas investors from several industries that are not big in Pingtan. For example, mining, construction and railways are not on the list. This shows the list gives a lot of consideration to local conditions.

The other feature is that the list has a lot of exceptions for Taiwan investors, especially in the financial sector. For example, the list says overseas investors are limited in banking, trust and monetary brokerage, but Taiwan investors are not limited. Taiwan investors are not subject to stakeholder limits in investing in mainland insurance companies. In addition, Taiwan investors can hold a maximum 51 percent stake in mainland securities companies, but other overseas investors are subject to a 49 percent stake ceiling.

Considering the fact that Pingtan is a frontier for Taiwan investment, the Taiwan element of the negative list is justified.

Since China is so big and regional development is imbalanced, allowing Pingtan to come up with a localized negative list reflects authorities' wish to test the practice in line with local conditions. Apparently, Shanghai is a test ground for the nation while Pingtan is a pilot for Fujian province. More areas will also test the practice, with Shenzhen's Qianhai economic zone, Tianjin's Binhai New Area and Zhuhai's Hengqin New Area expected to jump on the bandwagon.

It is highly likely that these areas will design negative lists according to their conditions.

Diversified pilots may offer more opportunities to gather experience in designing and improving the negative list. This will also help the central government understand the varied needs of local governments. All these will contribute to the forming of a unified negative list applicable to the whole country.

But the government must follow a few principles in testing negative lists in more areas.

Above all, a measured approach should be adopted to select regions that are capable of testing the practice. The economic opening-up of these regions must be wide; market awareness must be high, and these regions should also have much foreign investment. Thanks to their tax-friendly and open regulatory systems, bonded areas in China's coastal regions are suitable for piloting the negative list.

Meanwhile, one or two, but not too many, places in inland China should also be selected to be pilot areas. The negative list will eventually be adopted nationwide, so it is important to make sure less developed regions also have a chance for a trial run.

By comparison, regulators in inland China have less experience in managing foreign investment, and they are not as open minded as their counterparts in coastal areas, so it is likely that inland China may have more problems in adopting a negative list. It is important to discover these problems and design policies to solve them. Chongqing and Chengdu, with their relatively large economies and significant presence of overseas companies, could be pioneers in central and western China.

The central government also needs to train local officials to better understand how a negative list is implemented. It would also be very useful for the central government to help review the negative list designed by local governments to eliminate vague items.

A negative list is supposed to clearly state bans and limits, so it leaves no ambiguity for authorities to abuse its regulatory power. But from the contents of the Shanghai and Pingtan lists, we can see some stipulations are unclear. For example, terms such as "certain limits" are used. The word "certain" can be explained in many ways. If it is not clearly stated what the limits are, and regulators can arbitrarily cite the statements to block foreign investors. This goes against the spirit of a negative list.

The authors are financial analysts based in Shanghai. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 06/20/2014 page13)