Foreign investment in China: regulatory controls to be relaxed from October 1, 2016

Publication September 2016

On September 3, 2016, the Standing Committee of the National People’s Congress resolved to make amendments (Amendments) to the laws governing foreign-invested enterprises (FIEs) including the Law on Foreign-funded Enterprises, the Law on Sino-foreign Equity Joint Venture Enterprises, the Law on Sino-foreign Cooperative Joint Venture Enterprises and the Law on the Protection of Investments by Taiwan Compatriots (collectively the FIE Laws). The Amendments will take effect from October 1, 2016.

Under the Amendments, various regulatory approvals in respect of the establishment and post-incorporation changes of FIEs will cease to be required. Instead there will be a simple filing procedure (Filing Regime), unless the industry concerned falls within the scope of the National Negative List (see below for further details), which has yet to be promulgated by the State Council. This is expected to mention the industry sectors to which foreign investment will be restricted or precluded altogether.

On the same day, the PRC Ministry of Commerce (MOFCOM) published the draft Interim Measures on the Administration of Filings in respect of Establishment and Change of Registration of Foreign-invested Enterprises (the Draft Filing Measures) for public consultation, which set forth detailed procedures regarding the Filing Regime. It is anticipated that the Draft Filing Measures will take effect on the same day as the Amendments.

We summarise below the major aspects of the Amendments and also the Draft Filing Measures which may be of special interest to foreign investors.

Coverage of the Filing Regime

According to the Amendments, various regulatory approvals applicable to FIEs under the current legal regime (including, e.g. establishment of an FIE, joint venture contracts and the amendment or termination thereof, articles of association and extension of business terms) will only require to be filed with the competent local counterpart of the MOFCOM, unless the foreign investment falls within any of industry sectors on the National Negative List.

The Draft Filing Measures also provide a longer list of matters which are to be subject to the Filing Regime, such as change of basic corporate information of FIEs, change of basic information of foreign investors, change of equity interest (including equity pledge) and transfer or mortgage of FIE’s assets. The Draft Filing Measures provide that the FIEs in respect of which the Filing Regime will apply pursuant to the Amendments will include entities invested by foreign investors, investors from Hong Kong and Macau Special Administrative Regions and Taiwan, and China-registered holding companies, venture capital investment enterprises and equity investment enterprises set up by foreign investors.

National Negative List

The concept of a negative list was first introduced and implemented on a trial basis when the China (Shanghai) Pilot Free Trade Zone was launched in 2013 (the FTZ Negative List). The FTZ Negative List divides industries into 50 items across 15 categories which are subject to special administrative measures (e.g. foreign shareholding restrictions or regulatory approvals). Generally speaking, whilst foreign investments into industries expressly referred to on the FTZ Negative List must satisfy the requirements stipulated therein and/or fulfil the specified regulatory approval procedures, foreign investment into industries outside of the FTZ Negative List may only make filings with the competent authorities. Similar regimes have been implemented in the other three free trade zones in Guangdong, Fujian and Tianjin.

With the success of the trial in the free trade zones, the State Council is now in the process of finalising a Negative List to be applicable nationwide (National Negative List) to work in conjunction with the Filing Regime. This National Negative List is expected to be published soon and take effect from October 1, 2016.

The exact scope of the National Negative List remains unclear although it is not expected to deviate too much from the FTZ Negative List.

Disclosure requirements

Whilst the regulatory control over the FIEs has been relaxed under the Amendments, the Draft Filing Measures impose disclosure requirements on FIEs and their foreign investors which will enable the regulatory authorities to exercise a supervisory function. Amongst others, the Draft Filing Measures require disclosure of the de facto controller(s) of FIEs and the source of funds for investment. Breach of the disclosure requirements will subject foreign investors or FIEs to administrative fines of up to RMB 30,000, if not rectified.

Major procedures under the Filing Regime

According to the Draft Filing Measures, establishment of an FIE that falls under the Filing Regime should be filed with the competent local counterpart of the MOFCOM either prior to, or within 30 days after, the FIE receives its business licence. For any changes to the FIE after its incorporation which are subject to the Filing Regime, filings need to be made within 30 days of the change.

To fulfil the filing obligations under the Filing Regime, FIEs or their foreign investors are required to submit the requisite documents electronically through an online platform. The competent local counterpart of the MOFCOM will review the documents and process the filing within 3 working days if all documents provided appear to be in order. The status of the filing will be available for the applicants to view on the online platform.

Uncertainties

As is normally the case in China’s legislative practice, amendments of legislation often necessitate a series of updating laws and regulations relating to that legislation as otherwise ambiguity and even conflicts may arise between the old legal regime and the new legal regime.

It is worth noting that the Amendments are made to various existing laws which focus on regulating typical greenfield investments by foreign investors. Therefore, how the Amendments will apply to the following circumstances is unclear:

  • foreign investors’ acquisition of Chinese domestic companies which then convert the domestic companies into FIEs;
  • foreign investors’ strategic investments into Chinese listed companies; and
  • foreign investors’ establishment of FIEs by contribution of equity interests held by such foreign investors in Chinese domestic companies.

Some market commentary expresses the view that the circumstances described above should still be subject to M&A regulations as well as the MOFCOM approvals stipulated thereunder. However, others take the view that, provided the National Negative List does not apply, continuing the MOFCOM approvals in these circumstances would contradict to the new Filing Regime.

In addition, for establishment of FIEs that are governed by the Filing Regime, the Draft Filing Measures have also failed to clarify:

  • whether under the Filing Regime the approval by the competent local counterpart of the National Development and Reform Commission will still be required; and
  • what procedures should apply for further investments by FIEs (other than holding companies, venture capital investment enterprises or equity investment enterprises) if the industries to receive further investment fall within the scope of the National Negative List.

The Amendments benchmark a significant relaxation of China’s legal regime governing foreign investments pending the promulgation of the PRC Foreign Investment Law which was published by MOFCOM for public consultation in January 2015. PRC Foreign Investment Law was expected to perform the function of consolidating the current multiple-faceted laws regulating foreign investments. Whilst the finalisation of PRC Foreign Investment Law may still take time as it has a relatively broad coverage and involves some controversial issues, the Amendments, together with a set of other rules expected to be in place before October 1, 2016 in order to make the Amendments functional, are considered to be a quick and effective move to relax the regulatory controls over foreign investments. This makes good sense in light of China’s slowdown of economic growth.


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