As China celebrates the anniversary of the China (Shanghai) Free Trade Zone (FTZ) established in September 2013, Zhang Monan, an associate research fellow at the China Center for International Economic Exchanges, believes that the negative-list approach, one of the FTZ's pilot programs, needs to be further improved, providing a fair and open environment for foreign investment. Excerpts of Zhang's views follow:

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. The "negative list" specifies industries in which foreign investment is restricted or prohibited.]

As a large trading country, China has relaxed the admission procedure for foreign investors and promoted overseas investment in the services sector under the policy of pushing forward reforms by opening up further. More specifically, the country has transformed its foreign investment administration system from being approval-based to registration-based, in an effort to build an 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. It should clearly delineate the boundaries between the government and the market.

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. An overly long negative list which seeks to incorporate every industry will be no different in sum effect from 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, it allows foreign investment in industries not included - which means that industries not yet in existence 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 damage 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 Chinas 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 the biggest challenges.