I. New Policies Lifting Restrictions on Foreign Investments

On September 6, 2024, the National Development and Reform Commission (the “NDRC”) and the Ministry of Commerce (the “MOC”) issued the Special Administrative Measures for Access of Foreign Investments (Negative List) (2024 Edition) (the “Negative List”), effective from November 1, 2024. The Negative List removed the final barriers to foreign investment in the manufacturing sector, being (i) “Investment in the printing of publications must be controlled by the Chinese party” and (ii) “Investment in the application of such processing techniques as steaming, frying, grilling, and calcination of traditional Chinese medicine decoction pieces and the manufacturing of Chinese patent medicine with confidential prescriptions is prohibited”. With this revision, all restrictions on foreign investment access in the manufacturing sector have been lifted.

It is worth noting that the relaxation of foreign investment restrictions also extends to the pharmaceutical and healthcare sectors. Following the issuance of the Negative List, the MOC, the National Health Commission of the People’s Republic of China and the National Medical Products Administration jointly issued Notice on Launching the Pilot Program for Expanding the Opening-up in the Medical Sector on September 7, 2024 (the “Pilot Program Notice”), pursuant to which,

(i) foreign-invested enterprises are allowed to engage in the development and application of technologies relating to human stem cells and gene diagnosis and treatment (the “CGT Activities”) in the China (Beijing) Pilot Free Trade Zone, the China (Shanghai) Pilot Free Trade Zone, the China (Guangdong) Pilot Free Trade Zone and the Hainan Free Trade Port for the MAH registration and manufacturing of products.  

The NDRC and the MOC first listed CGT Activities as a prohibited foreign investment category in the Catalogue for the Guidance of Foreign Investment Industries (2007 Edition). Since then and up to the issuance of the Negative List, the CGT Activities had been retained in the negative lists of the previous editions. However, we have observed that the restrictions on foreign investment in the CGT Activities have been gradually relaxed, with the Pilot Program Notice continuing this trend. Prior to the issuance of the Pilot Program Notice, Circular of the General Office of the State Council on Issuing the Action Plan for Steadily Promoting High-level Opening-up and Making Greater Efforts to Attract and Utilize Foreign Investment, issued on February 28, 2024, laid the foundation at the national level relaxing restrictions on foreign investment in the development and application of genetic diagnosis and therapeutic technology.  

The Pilot Program Notice includes express provisions lifting restrictions on the CGT Activities by foreign investment in certain pilot free trade zones even though such activities are retained on the Negative List. Of course, foreign-invested entities intending to participate in the pilot program under the Pilot Program Notice still need to comply with relevant laws and administrative regulations, to meet the requirements for human genetic resources management, drug clinical trials, MAH registration, drug manufacturing, and ethical review, among others, and follow the necessary management procedures.

(ii) Although under the Negative List it is still regulated that investment in medical institutions is limited to the form of equity joint ventures, it is planned to allow the establishment of wholly foreign-owned hospitals (excluding hospitals practicing traditional Chinese medicine, and acquisition of public hospitals) in Beijing, Tianjin, Shanghai, Nanjing, Suzhou, Fuzhou, Guangzhou, Shenzhen and the entire Hainan Island. The Pilot Program Notice reiterates and refines the scope of the pilot program for wholly foreign-owned hospitals, with specific conditions and requirements to be formulated.

The MOC and the National Health and Family Planning Commission issued a circular in 2014, providing that, among others, (i) foreign investors are allowed to set up wholly foreign-owned hospitals, through newly establishment or merger and acquisition, in Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan; (ii) foreign investors from places other than Hong Kong, Macao and Taiwan shall not set up hospitals of traditional Chinese medicine nature in the above provinces/cities.  Compared to this previous circular issued in 2014, the Pilot Program Notice restates the relaxation of the restriction of wholly foreign-owned hospitals and narrows down the scope of pilot program for wholly foreign-owned hospitals in the aspect of pilot areas and investment methods.  

II. FDI Policy and the Negative List Regime

As a background, we note that for decades, China has attracted foreign investments, with the negative list regime playing an important role in the foreign investment administration framework. The negative list regime is pivotal in guiding foreign investment access into various sectors, by setting forth sectors where foreign investment is restricted or prohibited and marking a transition from an approval-based regime to a market-oriented regime.  The negative list is updated periodically to align with China's evolving economy and industrial policies, with certain variations on national and regional levels, particularly in free trade zones.

Taking the CGT Activities as an example, before the issuance and enforcement of the Pilot Program Notice and other relaxation policies, foreign investors have been restricted from engaging in such activities. However, in practice, some entities with foreign investment seeking to operate in the CGT Activities have been trying to circumvent this restriction by resorting to a “Variable Interest Entity” (VIE) structure, under which the registered shareholders of the operating entities are domestic PRC persons, with the actual control held by foreign investments through a set of contractual arrangements.

Many companies with VIE structure, a common approach to circumventing foreign investment restrictions, intend to list on the offshore stock markets, including Hong Kong Stock Exchange (the “HKEX”).  Although the VIE structure is not prohibited by the HKEX, the HKEX adopts a “narrowly tailored” principle, which is designed to ensure transparency and protect the interests of the investors, especially the public investors, considering the VIE structure, compared to the shareholding control, may pose additional complexity and offer less protection to the investors. Particularly for companies adopting the VIE structure due to the negative list restrictions, it is imperative for such companies to demonstrate that the VIE structure is utilized only to the extent required to surmount foreign ownership limitations. The principle has been further elucidated to emphasize that the VIE structure should be adopted only to the extent required to fulfill the applicant's business objectives and to reduce the potential conflicts with applicable Chinese laws.

As a result, the Pilot Program Notice may force companies engaging in the CGT Activities and planning to get listed on the HKEX to reorganize into wholly foreign-owned enterprises or joint ventures. This shift could align them with the evolving regulatory landscape and capitalize on the new opportunities presented by the Pilot Program Notice, thereby enhancing their prospects for growth and expansion in China's burgeoning healthcare market.

The progressive easing of foreign investment restrictions in China’s healthcare sector promises a wealth of opportunities for international investors. As policies continue to evolve, the healthcare industry stands poised to embrace innovative growth and collaboration.