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The opening ceremony of China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”), held on September, 29, 2013, marks the formal operation of Shanghai FTZ.  Liberalization in certain media and entertainment sectors is one of the highlights of the various reforms of Shanghai FTZ.  According to media reports, many listed companies operating in media and entertainment sectors have chosen to set up subsidiaries in Shanghai FTZ, for example Time Warner[1] and Oriental Pearl[2], in order to seek opportunities in developing media and entertainment businesses, and capitalize on the opening policies of Shanghai FTZ.

On September 18, 2013, the State Council approved the Framework Plan of China (Shanghai) Pilot Free Trade Zone (the “Framework Plan”).  The Framework Plan expressly provides that Shanghai FTZ will further open cultural service sectors and reform the FDI administration system.  On September 29, 2013, with a view to implement the opening policy in the entertainment, culture and media sectors as provided in the Framework Plan, the Ministry of Culture promulgated the Circular on Implementation of Administration Policies of Cultural Market in China (Shanghai) Pilot Free Trade Zone (the “Circular”), covering setup of foreign-invested enterprises in the entertainment industry, the making and sales of gaming consoles etc.  On the same day, Shanghai municipal government released the Special Administrative Measures on Foreign Investment in China (Shanghai) Pilot Free Trade Zone (Negative List) (2013) (the “Negative List”).  Judging by the Negative List, Shanghai FTZ still takes conservative positions with regards to some parts of media and entertainment sectors.

Based on all relevant regulations and policies of Shanghai FTZ released so far, the following are the summaries of policies of foreign investment in media and entertainment sectors in Shanghai FTZ:

I. Liberalized Sectors
As compared with the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011), Shanghai FTZ has cancelled restrictions on foreign investment in performance brokerage, entertainment venues, making and sales of gaming consoles; it has also simplified the relevant regulatory approval process for FDI.  The changes would benefit development of media and entertainment operators in these sectors.

(1) Performance Brokerage
Pursuant to the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011), FDI in performance venue operation belongs to the encouraged category, provided however the Chinese partners shall be the controlling shareholders; FDI in performance brokerage enterprises belongs to the restricted category subject to the requirement that the Chinese partners are the controlling shareholders.  The Framework Plan and the Circular cancels the equity ratio restrictions on FDI in performance brokerage enterprises in Shanghai FTZ and permits setup of Sino-foreign equity joint venture, Sino-foreign cooperative joint venture and wholly foreign-invested enterprises in performance brokerage and performance venue providing service for Shanghai market.

In connection with the regulatory approval process for setup of foreign-invested performance brokerage enterprises, the Regulations on Administration of Commercial Performances mandates submission of application to the Ministry of Culture via its provincial counterpart for the exercise.  The Circular of the Ministry of Culture simplifies the approval procedure, delegating the approval power to the cultural regulatory authority in Shanghai.  Pursuant to the Circular, setup of foreign-invested companies in performance venue operations only requires filing with the cultural regulatory authority within 20 days after receiving the business license.  If a foreign-invested performance brokerage enterprise hosts a commercial performance in Shanghai, or if a foreign-invested performance venue operation company hosts a commercial performance in its own business venue, they shall only be required to submit an application to the cultural regulatory authority in Shanghai.

(2) Entertainment Venue Service
Pursuant to Catalogue of Industries for Guiding Foreign Investment (as amended in 2011), FDI in entertainment venue operation is limited to Sino-foreign equity or cooperative joint ventures.  The Framework Plan and the Circular cancel the equity ratio restrictions on FDI in entertainment venue operation, permitting setup of Sino-foreign equity or cooperative joint ventures and wholly foreign-owned enterprises.

Pursuant to Regulations on Administration of Entertainment Venues, setup of entertainment venue operation companies in the form of a Sino-foreign equity or cooperative joint venture requires submitting an application to the competent cultural regulatory authorities of provincial government where the entertainment venue is located.  The authority shall make a decision after conducting examination of the legal representative or responsible persons in association with the public security authority, followed by a field inspection.  The Circular of the Ministry of Culture simplifies the procedure, requiring that setup of entertainment venue operation companies shall be decided by Shanghai cultural regulatory authority within 20 days after receipt of application.

(3) Making and Sales of Gaming Consoles
In 2006, the Ministry of Culture, in association with other authorities, released the Opinion on Special Administration of Operational Sites of Electronic Games, imposing a comprehensive prohibition on making and sales of electronic gaming equipment and its components in China.  The Framework and the Circular cancel the prohibition on gaming consoles in Shanghai FTZ, where foreign-invested enterprises are permitted to invest in making and sales of electronic game equipment and the components in Shanghai FTZ; gaming equipment passing content-based censorship of cultural authorities can be sold in domestic market.

If a foreign-invested enterprise registered in Shanghai FTZ decides to sell the self-made gaming equipment in Shanghai FTZ, it shall  submit a content review application to the cultural authority in Shanghai, who shall make a decision within 20 days after receipt of the application.  The basic information of the approved gaming equipment shall be filed with the Ministry of Culture and disclosed.

II. Prohibited and Restricted Sectors
Although Shanghai FTZ has liberalized the sectors of performance brokerage, entertainment venue service and gaming console in accordance with the Circular, the Negative List maintains restrictive measures on certain sectors of entertainment, culture and media industry, similar to those of the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011) and other laws and regulations. The current restrictive measures on FDI remain applicable to FDI in those sectors subject to restrictive measures in Shanghai FTZ.  However, the dynamic nature of the Negative List promises further adjustment in the future.

(1) Printing and Recording Media Reproduction Industry
In connection with the printing industry, the Negative List takes the same restrictive approach as the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011) and Interim Provisions on Establishment of Foreign-Invested Printing Enterprises, providing that foreign investment in printing of publications shall have registered capital more than RMB 10,000,000 and the Chinese partners shall be the controlling shareholders.

In connection with the business of CD-ROM reproduction, the FDI division of the Ministry of Commerce published the Guiding Handbook on Access Administration of Foreign Investment in 2008, permitting setup of Sino-foreign equity and cooperative enterprises engaged in reproduction of CD-ROM, provided however, the Chinese partner shall be the controlling shareholder or command leading position and the enterprise shall obtain the Business License of Disc Reproduction Operation.  The Negative List maintains the same requirement in that respect.

(2) Retail
In connection with retailing of culture & sports products and equipment, except for special stipulations in the Mainland and Hong Kong Closer Economic Partnership Arrangement, Mainland and Hong Kong Closer Economic Partnership Arrangement and their supplements, the Negative List maintains restrictive measures comparable to the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011) and Provisions on the Administration of Publications Market:
(a) In the case of investment by any foreign investor from any country (other than HK or Macau where investors from the two regions are allowed to hold no more than 65% equity interest in chain stores selling books, newspaper and periodicals if the stores exceed 30 in total), the foreign investor is not allowed to hold controlling interest in such chain stores.
(b) Except that Hong Kong or Macau service providers are permitted to provide distribution service for audio-visual products (including post-film products) in mainland through wholly-owned or equity/cooperative joint-venture form, investment in distribution of audio-visual products by investors from other countries or districts are limited to Sino-foreign cooperative operations.

(3) Telecommunication, Radio and Television, Satellite Transmission Service
Consistent with the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011), the Negative List restricts or forbids foreign investment in quite a few relevant sectors.
(a) Foreign investments in telecommunication, radio and television, satellite transmission services are restricted;
(b) Foreign investments in all radio stations, television stations, radio and television channels (frequencies), radio and television transmission and coverage networks (transmitting stations, relay stations, radio and television satellites, satellite uplink stations, satellite receiving and transmitting stations, microwave stations, monitoring stations, and cable radio and television transmission and coverage networks) are prohibited.

(4) Internet & Related Services
The Negative List takes conservative position as to Internet access and related services, Internet information services and other internet services, comparable to existing laws and regulations:
(a) The Negative List prohibits foreign investments in news websites, online audio and video programs, business premises for operation of Internet-access services, and operation of Internet cultural business (excluding music);
(b) Pursuant to the Notice of the General Administration of Press and Publication, National Copyright Administration and the Office of the National Task Force for “Eliminating Pornographic Publications and Crashing Down Illegal Publishing Activities” on Fully Implementing the State Council’s “Three-Decision” Rules and the Interpretation thereof by State Commission Office for Public Sector Reform and further Strengthening Administration of Prior Review and Approval of Online Games and of Review and Approval of Imported Online Games, which was promulgated in 2009, foreign investors are forbidden from investing or engaging in online games businesses in China in the form of wholly foreign-owned enterprises, Sino-foreign equity or cooperatives joint ventures.  The Negative List takes the same position, prohibiting foreign investors from directly or indirectly engaging in online game businesses.

(5) Leasing Industry
In connection with leasing of publications, except for special stipulations in Mainland and Hong Kong Closer Economic Partnership Arrangement, Mainland and Hong Kong Closer Economic Partnership Arrangement and their supplements, the Negative List takes the same restrictive measures as the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011) and Provisions on the Administration of Publications Market:
(a) In the case of investment by any foreign investor from any country or region (other than HK or Macau where investors from the two regions are allowed to hold no more than 65% equity interest in chain stores selling books, newspaper and periodicals if the stores exceed 30 in total), the foreign investor is not allowed to hold controlling interest in such chain stores.
(b) Except that Hong Kong or Macau service providers are permitted to provide leasing services of audio-visual products (including post-film products) in the forms of wholly-owned, Sino-foreign equity or Sino-foreign cooperative joint venture enterprises, investments in leasing services of audio-visual products (excluding films) by investors from other countries or regions are limited to Sino-foreign cooperative joint ventures.

(6) News and Publication Industries
Catalogue of Industries for Guiding Foreign Investment (as amended in 2011) strictly prohibits foreign investments in news and publication industries.  The Negative List has the same stipulations with those of the Catalogue, including:
(a) Investments in news organizations are prohibited;
(b) Investments in publication of books, newspapers, and periodicals are prohibited;
(c) Investments in publication and production of audio-video products and electronic publications are prohibited.

(7) Radio, Television, Films and Video Recordings
This category includes radio, television, publication and production of film and video, film display and recordings.  The Catalogue of Industries for Guiding Foreign Investment (as amended in 2011) categorizes construction and operation of cinema, production of radio, television programs and movies as the restricted category for foreign investment while radio and television program production & operation companies, movie production & distribution companies and cinema line companies as forbidden category for foreign investment.  The Negative List takes the same position, restricting or prohibiting foreign investments as follows:
(a) Foreign investments in construction and operation of cinemas are restricted (with Chinese parties must be the controlling shareholders);
(b) Foreign investments in productions of radios, television programs and movies are restricted (limited to Sino-foreign cooperative joint ventures);
(c) Foreign investments in companies engaged in production and operation of radio and television programs, movies, movie publication companies and cinema line companies are prohibited.

(8) Entertainment
Comparable to the Catalogue of Industries for Guiding Foreign Investment (as amended in 2011), the Negative List maintains restrictions on the following entertainment sectors:
(a) Indoor recreations: foreign investments in business venues for providing Internet-access services (Internet bar) are prohibited;
(b) Amusement park: foreign investments in construction and operation of large theme parks are restricted;
(c) Lottery: foreign investments in gambling and lottery are prohibited (including horse racing for gambling);
(d) Others: foreign investments in pornography are prohibited.

III. Other Sectors
As compared with Catalogue of Industries for Guiding Foreign Investment (as amended in 2011), the culture and art industries are the new features of the Negative List, including artistic creation and performance of literature and art, art performance venue, library and archives, conservation of cultural relics and intangible cultural heritage, museum, martyr cemetery, memorial hall, mass cultural activities, other culture and art industries.  The Negative List only mandates that foreign investments in the culture and art industries shall be in accordance with relevant laws and regulations without attaching any string of restrictions or prohibitions.

IV. Administration of Foreign Investment
In order to implement the Framework Plan in terms of foreign investment administration, Shanghai municipal government promulgated the Administrative Measures of China (Shanghai) Pilot Free Trade Zone, Administrative Measures of Filing of Foreign Investment Project in China (Shanghai) Pilot Free Trade Zone and Administrative Measures of Filing of Foreign Investment Enterprise in China (Shanghai) Pilot Free Trade Zone.

The above measures expressly provide that the Administrative Commission of China (Shanghai) Pilot Free Trade Zone (the “Shanghai FTZ Commission”) shall take the responsibilities for accept filings for foreign investment projects and foreign-invested enterprises.  If the enterprises which the foreign investors contemplate to invest do not belong to the prohibited or restricted categories under the Negative List, the applicant can directly register the foreign-invested enterprises in the industry and commerce administration authority in Shanghai after the filings.  In addition, to the end of simplifying the administrative process, the industry and commerce authority in Shanghai FTZ shall cooperate with the tax authorities, quality supervision authorities and Shanghai FTZ Commission and set up “one-stop” window whereby the industry and commerce authority shall receive and issue all the related documents.

V. Comment
In accordance with the Framework Plan, Shanghai FTZ has reformed the administrative process with regards to foreign investment by transforming the approval-based regulation methods to filing-based regulation methods.  Such transformation would somehow attract foreign investors in media and entertainment industries to gravitate towards Shanghai FTZ.

The Framework Plan of the State Council and the related administrative measures promulgated by Shanghai municipal government have established the administrative frame of foreign investment, while the Circular issued by the Ministry of Culture details the requirements of investment and approval level in specific sectors, making the foreign investment in cultural sectors more practicable.

As many media and entertainment enterprises choose to set up subsidiaries in Shanghai FTZ, such authorities as the General Administration of Press and Publication, Radio, Film and Television and other authorities in media and entertainment industries are expected to promulgate more regulations, in order to implement the stipulations in the Framework Plan in Shanghai FTZ.  The new regulations are expected to clarify restrictions, approval process, procedural issues and other matters related to foreign investments in the media and entertainment industries, further promoting the development of media and entertainment industries in Shanghai FTZ.