China lifts foreign investment restrictions on CGT

I. Updates on China's Policy for Foreign Investment Access in CGT

• Since the National Development and Reform Commission and the Ministry of Commerce of the People's Republic of China issued the "Catalogue for the Guidance of Foreign Investment Industries (Amended in 2007)" (Order No. 57 of the National Development and Reform Commission and the Ministry of Commerce) in 2007, which included "development and application of human stem cells and gene diagnosis and treatment technologies" for the first time in the prohibited categories for foreign investment, this restriction on foreign capital has continued till now.¹

• On March 19, 2024, the General Office of the State Council issued the "Action Plan for Solidly Promoting High-Level Opening Up and Attracting and Utilizing Foreign Investment with Greater Effort" (Issuance [2024] No. 9 of the General Office of the State Council) (hereinafter referred to as the "Action Plan"), provided that "Pilot programs for relaxing foreign investment access in the field of scientific and technological innovation will be carried out. It will be allowed for free trade zones in Beijing, Shanghai, Guangdong, and others to select a number of qualified foreign-invested enterprises to conduct pilot programs in development and application of gene diagnosis and treatment technology", indicating the initial signal of pilot programs for foreign investment access in the CGT field.²

• On September 8, 2024, the Ministry of Commerce, the National Health Commission, and the National Medical Products Administration jointly issued the "Notice on Conducting Pilot Work for Further Opening Up in the Medical Field" (Letter [2024] No. 568 of the Ministry of Commerce) (hereinafter referred to as the "Notice" or “New Policy”), provided that "From the date of issuance of this Notice, in the China (Beijing) Free Trade Pilot Zone, China (Shanghai) Free Trade Pilot Zone, China (Guangdong) Free Trade Pilot Zone, and Hainan Free Trade Port (hereinafter referred to as the "Four FTZs"), foreign-invested enterprises are allowed to engage in the development and application of human stem cells and gene diagnosis and treatment technologies, for the purpose of product registration, marketing and manufacturing. All products that have been registered, marketed, and approved for manufacturing can be used nationwide. Foreign-invested enterprises intending to participate in the pilot must comply with relevant laws, administrative regulations, and meet the requirements for human genetic resource regulation, clinical trials of drugs (including international multi-center clinical trials), drug registration and marketing, drug manufacturing, ethics review etc., and complete related management procedures."³ On the same day, the National Development and Reform Commission and the Ministry of Commerce issued the "Special Administrative Measures for Foreign Investment Access (Negative List) (2024 Edition)" (Order No. 23 of the National Development and Reform Commission and the Ministry of Commerce) (hereinafter referred to as the "Negative List"), which will be implemented from November 1, 2024, and still retains the restriction on foreign investment in "development and application of human stem cells and gene diagnosis and treatment technologies."⁴

II. Key Provisions of the New Policy

1. From the Notice and the Negative List, it is clear that, at this stage, foreign investment access in CGT technology development and application businesses are only permitted in the Four FTZs of Beijing, Shanghai, Guangdong, and Hainan, and still being prohibited in the rest of the country. This is consistent with the regulatory approach of the Action Plan issued by the General Office of the State Council earlier this year, which is to allow access in certain free trade zones first and then gradually expand nationwide.

2. The Notice clarified that products generated by foreign enterprises engaging in CGT technology development and application businesses within the Four FTZs can be used nationwide after they are registered, marketed, and approved for manufacturing. This means that for foreign investors investing in CGT technology development and application businesses within these Four FTZs, once the products are approved, they can be commercialised across the entire China market (i.e. not limited to the Four FTZs), which makes investment in the CGT field more attractive to foreign capital.

3. The Notice emphasised that foreign enterprises engaging in CGT technology development and application businesses within the Four FTZs must strictly comply with regulatory requirements that may apply, including human genetic resource regulation, GCP, GMP, GSP for drugs or medical devices, and ethics review. Although foreign investment is now permitted to enter the industry in China, businesses should ensure compliance with the relevant laws and regulations so that they can obtain product approval and commercialisation and establish a stable presence in the Chinese market.

III. Implications and Future Look of the New Policy

1. Although the New Policy allows foreign enterprises to engage in CGT technology development and application businesses in the Four FTZs, the broader commercial activities and regulatory requirements across the entire product lifecycle are pending for further clarification and are expected to be set out in subsequent implementing rules. Specifically:

   1) Regarding clinical trials of products, it remains unclear whether the clinical trial sites collaborating with pilot foreign enterprises must be located within the Four FTZs. Practically, the total number of medical institutions within the Four FTZs is relatively small, and if these institutions within the zones do not have the conditions or experience for clinical trials of CGT products, it may constitute an obstacle for foreign enterprises to conduct CGT technology development and application. Additionally, in the case of multi-center clinical trials, where some clinical trials are conducted at sites inside the Four FTZs and some are conducted at sites outside the Four FTZs, it remains unclear whether they can meet the regulatory requirements.

   2) Regarding product manufacturing, for example, it is unclear whether the manufacturers are required to be set up in the Four FTZs. Taking into account the cost of setting up production lines in China for foreign enterprises, they may opt for contract manufacturing arrangements. Whether there are location restrictions on manufacturing companies will affect the selection of the suitable CDMO.

   3) For product sales, the sales process may involve multiple tiers of distributors. Given that the Notice specifies that products can be used nationwide, distributors engaged in product sales will likely not be limited to those located in the Four FTZs, subject to further confirmation by implementing rules.

Moreover, it remains to be seen whether subsequent implementing rules will be issued at the national level or if each of the Four FTZs will issue its own rules. If the latter, each may introduce specific measures tailored to their circumstances, clarifying qualifications, application procedures, and supervisory measures for pilot foreign enterprises. Enterprises can then make the most suitable choice based on the different characteristics of the implementing rules issued by each of the Four FTZs.

2. Foreign enterprises engaging in CGT technology development and application in China should pay close attention to regulatory requirements for human genetic resource regulation and data protection.

   1) According to relevant regulations on human genetic resources, foreign units⁵ are not allowed to collect or preserve Chinese human genetic resources in China. Foreign units should cooperate with Chinese entities to utilise Chinese human genetic resources for scientific research, obtain administrative approval for international cooperative scientific research on human genetic resources or file record for international cooperative clinical trials on human genetic resources prior to conducting relevant business activities. Where information on human genetic resources is provided or made available for use outside of China, a record should be filed and a backup of the information should be submitted.⁶

   2) According to personal information protection regulations, information contained in human stem cells and genes involved in the development and application of CGT technologies by foreign enterprises in China is important biometric information of the corresponding individuals and closely related to the security of other personal information of such individuals. Leakage or illegal use of the information could endanger the personal and property safety of the individual, thus it constitutes sensitive personal information. The processing of sensitive personal information, especially when it involves export of data, should strictly comply with relevant regulatory requirements.⁷

3. It provides a new pathway for CGT-related enterprises with VIE structure to directly establish enterprises within the Four FTZs.

Currently, many CGT-related enterprises adopt the VIE structure to minimise the risk of the Negative List prohibiting foreign direct investment in CGT businesses, including some listed companies. Under the New Policy, enterprises previously using the VIE structure may consider dismantling the VIE structure to directly establish WFOEs or JVs in the Four FTZs. The restructuring process will involve issues related to equity transfer, company registration, employment, tax, etc. The process of determining whether to change the existing structure and how to change it reasonably and timely requires consideration of specific circumstances and business needs, with the assistance of external lawyers.

We will continue to monitor the implementation of the New Policy and the issuance of subsequent implementing rules, and will publish our analyses and summaries of relevant important policies and regulations in a timely manner.

¹ Catalogue for the Guidance of Foreign Investment Industries (Amended in 2007), issued by the National Development and Reform Commission and the Ministry of Commerce on October 31, 2007, effective from December 1, 2007, https://www.gov.cn/gongbao/content/2008/content_1018951.htm
² Action Plan for Solidly Promoting High-Level Opening Up and Attracting and Utilizing Foreign Investment with Greater Effort, drafted by the General Office of the State Council on February 28, 2024, and issued on March 19, 2024, https://www.gov.cn/zhengce/content/202403/content_6940154.htm
³ Notice on Conducting Pilot Work for Further Opening Up in the Medical Field, drafted by the Ministry of Commerce, the National Health Commission, and the National Medical Products Administration on September 7, 2024, and issued on September 8, 2024, https://www.gov.cn/zhengce/zhengceku/202409/content_6973072.htm
⁴ Special Administrative Measures for Foreign Investment Access (Negative List) (2024 Edition), drafted by the National Development and Reform Commission and the Ministry of Commerce on September 6, 2024, issued on September 8, 2024, and effective from November 1, 2024, https://www.ndrc.gov.cn/xxgk/zcfb/fzggwl/202409/t20240907_1392875.html
⁵ “Foreign units” refer to “外方单位” as defined under Detailed Rules for the Implementation of the Regulation on the Administration of Human Genetic Resources.
⁶ Articles 2, 7, 21, 22, and 28 of Regulation of the People's Republic of China on the Administration of Human Genetic Resources (2024 Revision), issued by the State Council on March 10, 2024, effective from May 1, 2024, http://xzfg.moj.gov.cn/mobile/law/detail?LawID=1714 ; Articles 11 and 12 of Detailed Rules for the Implementation of the Regulation on the Administration of Human Genetic Resources, drafted by the Ministry of Science and Technology on May 26, 2023, issued on June 1, 2023, and effective from July 1, 2023, https://www.most.gov.cn/xxgk/xinxifenlei/fdzdgknr/fgzc/bmgz/202306/t20230601_186416.html
⁷ Articles 4 and 28 of Personal Information Protection Law of the People's Republic of China, issued by the Standing Committee of the National People's Congress on August 20, 2021, effective from November 1, 2021, https://www.gov.cn/xinwen/2021-08/20/content_5632486.htm