On September 19, the Ministry of Commerce issued Decree No. 4 [2020] Provisions on the List of Unreliable Entities (《不可靠实体清单规定》) (“the Provisions”), taking effect on the date of issuance.

This is part of China’s overall effort to create more legal tools in response to foreign sanctions, export controls, investment reviews, and procurement bans. China had announced plans for crafting an unreliable foreign entity list back in May of 2019, right after the United States added Chinese tech giant Huawei to the Entity List on May 16, which made it more difficult for Huawei to import advanced foreign technology and products. Around the same time, China started an investigation on FedEx over its alleged misconduct related to multiple Huawei packages.

What is in the new rules

The Provisions give the unreliable list a legal basis. Some key aspects are as follows.

The Provisions are formulated pursuant to China’s Foreign Trade Law and National Security Law. (Article 1) According to the Provisions, China establishes a new legal framework for composing an unreliable entity list of foreign enterprises, organizations or individuals, in order to take measures when the entities are considered to be engaging in activities that endanger national sovereignty, security, development interests, or violate market principles and terminate normal trade activities with Chinese entities, or take discriminatory measures against Chinese entities that seriously injure Chinese entities'  legal rights. (Article 2) The unreliable list aims at deterring the extra-territorial application of foreign laws, including sanctions.

The Provisions establish a working mechanism with the participation of relevant agencies of the Central Government. The Office will be established within the Business and Commerce  Department of the State Council (Article 4). The Office decides whether to investigate the behavior of relevant foreign entities under its own authority, or based on the suggestions and reports of relevant parties.

Once an investigation has been launched, the Office will take into account four factors to determine whether to list the foreign entity as an unreliable entity: (1) the degree of harm to China's national sovereignty, security, and development interests; (2) the degree of damage to the lawful rights and interests of Chinese enterprises, other organizations or individuals; (3) whether it complies with internationally accepted economic and trade rules; and (4) other factors. (Article 7) It is worth noting that the unreliable entity list is different from the controlled list under the Export Control Law, even though it is possible for some entities to be listed in both. The difference will be explained in a table at the end of this post.

Once a decision to list a foreign entity is made, such a decision shall be released in a public notice. The Office may also make a determination to apply one or more of the following six measures to the listed entity:

  1. Restrict or prohibit import and export activities related to China;
  2. Restrict or prohibit investment in China;
  3. Restricting or prohibiting related persons and transportation vehicles from entering China;
  4. Restrict or cancel the work permit, stay, or residence qualification of relevant personnel in China;
  5. Impose fines;
  6. Other necessary measures. (Article 10)

The application of the measures for unreliable entities does not include blocking or freezing assets, as sometimes happens in U.S. sanctions. Instead, it has an option of imposing fines, but the Provisions do not create a threshold or ceiling.

The public notice may also include a description of the risks of continuing trading with the listed entity and a period for the entity to change its behavior, during which no punitive measures will take place. (Article 9) If the listed entity does not change its behavior within the specified time frame, the punitive measures will be implemented after the end of the grace period. (Article 11)

Chinese entities and others may apply for exemption and continue trading with the listed foreign entities under special circumstances only if approved by the Office. (Article 12)

The Office may also decide to remove a foreign entity from the list, and shall do so if the listed entity corrects its behavior within the time frame specified in the notice and takes measures to eliminate any consequences. (Article 13) According to an interview with a MOFCOM official on the Provisions, if the facts based on which the relevant foreign entity was listed have substantially changed, the party may be removed from the list too. Foreign entities have the right to apply for removal, and the decision will be made by the Office.

What is NOT in the new rules

The Provisions do not come with an entity list. So far, Beijing has not announced any particular names, nor is there a timeline for a list. In the same interview mentioned previously with a MOFCOM official, there is no scheduled timeline or a potential list. The same official also emphasized that the Provisions will be applied strictly and only to “a very few” companies.

The announcement of the unreliable foreign entity list has sparked concerns that American companies could be further treated unfavorably in China compared to their competitors, especially considering the deteriorating economic relations between the United States and China over the past several years, and the growing competition in many sectors, especially in technology. Such speculation was denied by the MOFCOM official:

The Chinese government has always insisted on continuously expanding opening up, further relaxing market access. We welcome and protect any foreign investment by continuously optimizing the business environment, and introducing practical measures to promote sustained economic recovery… The [Provisions] issued by the Chinese government are aimed at providing a more stable, fair, and predictable business environment for foreign businessmen that are law-abiding, and eliminating any interference of illegal activities. China will, as always, welcome foreign investors to invest and start businesses in China...

On its face, the unreliable entity list seems to only target foreign entities. It is ambiguous about whether the list will target foreign subsidiaries registered in China, which according to Chinese law, should be considered as Chinese companies. According to some Chinese lawyers from King & Wood Malleson, one of the major law firms in China, if the Chinese government wants to maximize the deterrent effect of the unreliable list, it should improve upon the current rules. One example is that, for easier implementation, it is suggested to target domestic entities, including foreign subsidiaries registered in China.

The new rules are also ambiguous about the legal consequence of violating relevant rules or the conditions for exemption, leaving it to a case-by-case decision of administrative agencies.

Unreliable entity List vs. Export Control List

Unreliable Entity List

Controlled List of Foreign Importers and End-Users

Legal basis

Provisions on Unreliable Entity List

Export Control Law

Criteria for listing

Entities and individuals that threaten national sovereignty, security and development interests, violate market principles and disrupt regular business activities, or take discriminatory measures against Chinese enterprises, entities or individuals

Importers and end-users, including entities that violate the end-use and end-user rules, pose a threat to national security, or use controlled items for terrorist purposes

Legal consequences of being listed

One or multiple measures related to trade, investment, entry at the border, residency and work permits, fines, or others

Export restrictions