One year since the China (Shanghai) Free Trade Zone (FTZ) was established on September 29, 2013, the negative-list approach, one of the pilot programs launched in the Shanghai FTZ, needs to be further improved. Just as Premier Li Keqiang said during a recent tour to Shanghai, China should comply with international standards and treat local and foreign firms equally in the FTZ, providing a fair and open environment for foreign investment.

Currently at least 77 countries in the world have adopted a foreign investment administration approach which combines "pre-establishment national treatment" with the "negative list." [Note: Pre-establishment national treatment means that foreign investors and their investments will be accorded national treatment in the pre-establishment phase of their businesses and the negative list specifies the "negative list" specifies industries which are restricted or prohibited for foreign investment.]

Such an administrative approach has also been applied to many regional trading agreements—deals made between governments to liberalize trade and possibly to coordinate other trade related activities—and has become a new benchmark guiding international investment rules.

As a large trading country, China has adopted a number of international economic rules. In particular since the Third Plenary Session of the 18th Central Committee of the Communist Party of China held in November last year, China has relaxed the admission for foreign investors and promoted overseas investment in the service sector under the policy of pushing forward reform by furthering opening up. More specifically, the country has transformed its foreign investment administration system from being approval-based to registration-based, in an effort to build a open, fair and non-discriminatory environment for investors from other countries.

However, the following issues need to be addressed if the negative list approach is to be successfully employed in other regions in China.

First, the negative list should not be formed simply by deleting the "encouraged" industries and combining the "prohibited" and "restricted" ones not included on a conventional positive list, but should clearly delineate the boundaries between the government and the market.

Therefore, the negative list should be shortened to lift the threshold for foreign investment based on a comprehensive analysis and assessment of all kinds of domestic industries. Otherwise, an overly long negative list which seeks to incorporate every industry will be no different in sum effect to a positive list and will have limited effect on stimulating market vitality.

Second, the negative list is meant to give foreign investment more freedom. This does not mean, however, that China will relinquish its right of supervising foreign investment. The negative list has turned the focus of the model from vetting foreign investors before they form businesses to supervision during and after the establishment of companies.

On the one hand, the negative list helps to boost foreign investment by giving investors more freedom; on the other hand, the negative list allows foreign investment in industries not included in the list, which means that industries currently not yet exist in the country will also allow foreign investment in the future. The biggest challenge posed to the domestic economy by the negative list approach is that industries not included in the list may suffer potential damages from competition from foreign investment in overseas companies based in China.

Third, the current laws and regulations governing admission of foreign investment vary from region to region and sometimes even conflict with one another. Therefore, unified and transparent admission laws and regulations need to be formed in accordance with international standards by tackling the usage of overlapping and contradictory language in the existing legislation.

The bigger challenge comes from the requirement for a high degree of transparency in the foreign investment administration system. The negative list means a comprehensive opening up of the system, for which China needs to be well prepared.

The last conundrum of the negative-list approach concerns the protection of China's private and emerging industries. China is in a critical period of industrial transformation and upgrading, and new industries which represent innovations in investment models and technology are emerging rapidly. The issues of how to form a negative list which protects the core interests of domestic industries while simultaneously including industries that will emerge in the future, and how to strike a balance between economic freedom and economic security, will comprise our biggest challenges.

This is an edited excerpt of an article by Zhang Monan, an associate research fellow at the China Center for International Economic Exchanges, published in Economic Information Daily