A Positive View of the 'Negative List' in Managing Investment

At a key 2013 meeting on setting a blueprint for reform,senior Communist Party officials called for a decisive role for the market in economic development. The Decision on Some Major Issues Concerning Comprehensively Deepening the Reform,adopted at the Third Plenary Session of the 18th Central Committee of the Chinese Communist Party,set out the need for establishing "fair,open and transparent market rules" with uniform market access. The final document adopted at the meeting also called for the use of a "negative list" system whereby enterprises could enter all areas of the market that were not on a proscribed list.

The negative list concept,which allows domestic and foreign investment in all areas that are not specifically designated as off-limits,is an important reform in ensuring market access and overhauling the mechanism used by the government to manage the economy. It is closely connected to the effort to expand the opening up of the economy and construct a truly market-oriented economic system that will  bring China more closely in line with international norms. It will also require substantial changes in the way the government conducts itself and the task will not be easy.

This paper takes an in-depth look at the advantages of the negative list concept. It also uses the experience of the China (Shanghai) Pilot Free Trade Zone and similar efforts elsewhere to make proposals for the promotion of a more innovative trade and investment management system.

Significant Reform

The negative list management mode is a fundamental change in social management with a greater adherence to rule of law. It reflects the internal dynamics of the development of a market economy,and its implementation is a significant reform.

The negative list concept seeks to specifically state the areas of non-conformance with overall investment treaty obligations,allowing the application of specific limitations on the use of foreign capital. It provides clearly designated areas where there can be non-conformance with national or most-favored-nation treatment. It can also set performance requirements or other standards for senior executives in an area of investment.

It seeks to avoid discrimination and promote a more market-oriented economy through greater liberalization of trade and investment.

The negative list tries to draw a clear line between the government and the market and thereby clarify governmental responsibilities. Under the negative list management mode,the behavior of market participants is considered lawful unless it intrudes into specifically prohibited areas. This helps to standardize and restrain governmental behavior,in turn helping to create a stable,transparent and predictable business environment. In addition to the use of the negative list management mode,the same policy document called for the granting of "pre-establishment national treatment" -- effectively extending national treatment during the pre-investment phase of a project. This gives foreign investors treatment that is genuinely on a par with that extended to domestic investors and their investment projects.

Negative List Advantages

The negative list concept has won high praise from businesses,academics and government officials. In general it has the following advantages:

Firstly,it optimizes the allocation of resources by avoiding the use of  officially "encouraged" areas of investment. In the past,the use of "encouraged" project classifications often led enterprises to seek preferential policy support as a way to make market inroads. A corporation's business development should depend on its own competitiveness but policy support often was used in a manner that stifled fair competition. Moreover,it often led to excess production capacity.

The negative list policy also helps in  business innovation. While the "positive list" concept tries to stipulate what an enterprise can do,the negative list states what an enterprise can't do. What is not specifically prohibited by law is therefore permitted,without a requirement of prior approval from the government. This automatically opens the door to greater participation in the economy. It also smoothes the way for industrial innovation and technical advances by blocking government interference.

Making the rules for market competition fairer and more transparent stimulates market vitality and creativity. The negative list allows a uniform market access system and lowers the threshold for foreign capital and non-governmental domestic capital. This in turn can stimulate economic development.

This also promotes the transformation of government functions by reducing excessive government intervention in the market and limiting the rent-seeking behavior of some government authorities. The positive list management system had the serious defect of allowing excessive government intervention. That led to a misallocation of resources,reduced efficiency of macro-economic policies and increased opportunities for corruption. These drawbacks also impeded economic upgrading. The negative list sharply shrinks the scope of required government approvals and promotes government efficiency.

The negative list is more in line with international trade and investment rules as it promotes the opening-up of the economy. After the global financial crisis,trade and investment rules were adjusted to help accelerate recovery. The liberalization of investment and the service trade became even more critical in international trade negotiations. For China,negative list management complies with the new trend of globalization. It is conducive to China's participation in the international economy and can build a new platform for economic cooperation.

The new form of investment management can also contribute to more positive interaction between government and soc