Nationwide Regulatory Reform Starting from China’s Free Trade Zones

Abstract

Before conducting profound reforms of the trade and investment legal framework, China often implements the reform on a small scale, generally in specified geographic zones as testing grounds. After these testing grounds generate fruitful results, the reform may be implemented nationwide. A typical example is the five special economic zones established in the 1980s. After the Cultural Revolution, the first round of Chinese regulatory reform in trade and investment took place in 1978. Led by the late Premier Deng Xiaoping, China implemented the opening-up policy. Deng established five special economic zones to attract foreign investment by allowing a greater role for individual autonomy and Western-style market forces. Lessons learned from the special economic zones were implemented nationwide. For example, the corporate Sino-foreign joint venture was first tested in special economic zones and, after it proved successful, was adopted nationwide. These zones are also the pioneers in China to use tax holidays to attract foreign investment and many regions in inland China followed their example. In the 1990s, special economic zones gradually ended their mission as testing grounds. Among all the regulatory reforms conducted in the free trade zones (FTZs), adopting a negative list to regulate the foreign investment market access is important, because it significantly departs from China’s long-time domestic practice and aims to bridge China’s investment law with high-standard international agreements. This chapter focuses on the negative list adopted by China’s FTZs to regulate access to foreign investment markets and explores its significance, analyses its insufficiencies, and proposes suggestions for improvement.