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3 April, 2017
With the New Year’s bell ringing in 2017, the Chinese government has signalled a number of measures to attract inbound capital. However, the effects of tightened regulation and enforcement activities in 2016 still linger. The Chinese government continues to send mixed messages regarding foreign investment. As a result, foreign investors must carefully plan their business in China to embrace new opportunities whilst addressing the challenges.
Positive signs for foreign investment
In 2015, President Xi Jinping set out the following commitments in respect of foreign investment:
- the Chinese government’s policy on utilization of foreign capital;
- protection of the legitimate interests of foreign-investment enterprises (FIEs); and
- moves towards providing better services to foreign investment and its business promotion in China.
At a press conference of the fifth session of the 12th National People’s Congress, the Ministry of Commerce (MOFCOM)’s official expressed confidence in attracting foreign capital in 2017 and reiterated the above three commitments remain unchanged. The Chinese government has been making efforts to liberalise and simplify procedures for foreign investors. Recent promulgations include:
State Council’s new measures to expand the opening-up and positive utilization of foreign capital (issued on 12 January 2017). Some highlights include:
Relaxing the entry restrictions on foreign investors in certain sectors, including services (focusing on financial services), manufacturing, mining and infrastructure.
Promoting fair competition between foreign and domestic investors, for example:
unifying the standard and timing for reviewing applications for business permits (unless otherwise required by law or practice); and equal treatment in government procurement bidding.
Allowing local governments to develop favourable policies for foreign investors.
People’s Bank of China (PBOC) measures to relax capital inflow (effective from 11 January 2017). Some highlights include:
Cross-border financing limit (e.g. foreign debt quota) increased to two times the enterprise’s net assets.
FIEs may choose (within a 1-year transition period) whether to use the old “borrowing gap” rule (total investment minus registered capital) or the new model.
PBOC and the State Administration of Foreign Exchange (SAFE) will determine the final model for FIEs after the transition period.
New draft Foreign Investment Industrial Guidance Catalogue (Catalogue) (issued on 7 Dec 2016 for public comment until 6 Jan 2017). The proposed changes include:
Reforming the structure of the Catalogue, by restructuring the original “encouraged, restricted and prohibited” industrial catalogues into two main categories, i.e. the “encouraged sectors no restrictions”, and a negative list incorporating the “encouraged sectors with certain restrictions” as well as “restricted and prohibited sectors”.
Reducing the “restricted” items from 93 to 62.
Proposing new market entry opportunities for certain sectors, for example subway equipment, automobile electronic devices, new energy automobile batteries, special oil & gas, credit search and valuation services.
New MOFCOM filing system (effective from 9 October 2016)
Applicable to FIEs not subject to any special market entry and administration requirements by the State.
MOFCOM approvals no longer required for most FIEs.
Greatly simplified MOFCOM procedures with straightforward and standard application documents.
Statutory timeline of three business days for local MOFCOM to complete the filing after it is submitted online.
“Negative List” regime (effective from 8 October 2016)
The “encouraged sectors with certain restrictions”, “restricted” and “prohibited” sectors are aligned with the 2015 version of the Catalogue instead of separately formulating a negative list.
New free trade zones (approved on 31 Aug 2016)
Seven additional free trade zones in Chongqing, Zhejiang, Hubei, Henan, Sichuan, Shanxi and Liaoning are approved.
Mostly in inland areas, aimed at driving regional growth in central and western China.
Reasons to remain alert
Despite the above measures and proposed liberalisation, foreign investors still face considerable challenges:
Tightened control on capital outflow
Since the end of 2016, China has implemented various measures to tighten the control on capital outflow amid continuing pressure on renminbi depreciation and excessive capital outflow. China has been strictly scrutinising significant foreign exchange transactions. In particular, SAFE and PBOC have issued “window guidance” requiring banks to report any single foreign exchange transaction under the capital account (including remittance of dividends or equity transfer proceeds from China) of USD5 million (or its equivalent) or more to check its authenticity and compliance. Given the review process of PBOC, SAFE and banks is prolonged and unpredictable, this has been causing delays on deals involving cross-border capital flow. Please refer to our e-bulletin dated 28 February 2017, “China Tightens Control on Capital Outflow” for more detailed analysis.
Continuous anti-trust measures
Various legislation is in the pipeline, including amendments to the Anti-unfair Competition Law and six draft anti-trust guidelines aimed at improving and advancing the legal system. On the enforcement side, the National Development and Reform Commission and the State Administration for Industry and Commerce are active on price fixing and abuse of market dominance in sectors including pharma, medical devices, consumer goods and automobiles. MOFCOM is more confident and efficient in dealing with merger control reviews. We are also seeing a trend of tightened scrutiny of the more high profile and complex gun-jumping cases. According to the 13th Five Year Market Regulation Plan issued by the State Council in January 2017, regulatory authorities will step up its enforcement in the areas of healthcare, public utilities and intellectual property rights.
Strengthened labour law enforcement activities
The Chinese government issued several measures in late 2016 and early 2017 aimed at cracking down on material violations of labour laws and regulations and improving employer compliance. These require FIEs’ to pay closer attention to their employment activities and rectify non-compliance practices in a timely manner. Please refer to our previous e-bulletin “China: labour authorities tighten enforcement activities” for details of the new regulations.
Increased difficulty in dealing with Chinese State-owned enterprises (SOEs)
The Chinese government issued guidelines on SOEs in August 2016 reinforcing individual accountability of the management. SOEs have been taking a more risk averse approach to negotiation and deal making since the guidelines were issued, requesting foreign parties to take a balanced approach to risk allocation and liabilities arrangements. This will potentially change the negotiation dynamics for anyone dealing with Chinese SOEs.
Other areas
Foreign investors should also watch out for areas such as environmental and consumer protection as well as data protection (noting the new Cyber Security Law effective on 1 June 2017. Please refer to our e-bulletin China’s New Cyber-Security Law – Highlights dated 28 November 2016 for an overview of the new legislation and its implications).
Our observations
There are new opportunities for foreign investors in newly opened and less restricted industries. However local implementation of the new liberalization measures varies from locality to locality.
Though some restrictions have been lifted, the “Negative List” is still lengthy. A lot of work needs to be done to actually achieve equal treatment and fair competition with domestic companies.
Various laws and regulations need to be amended for consistency with the updated regulatory regime for foreign investors. The draft Foreign Investment Law is still under internal review and to be finalised. It was recently reported that, MOFCOM was working with the State Council and the National People’s Congress to propel the legislation work toward.
Given the mixed regulatory environment, foreign investors will continue to rationalise their Chinese businesses. More market restructuring activities for multinational corporations are expected.
Compliance will continue to be a hot topic in China. FIEs should maintain robust internal systems to comply with increasing compliance requirements, particularly relating to employment, environment, consumer and data protection, anti-trust and anti-bribery.
Foreign investors need to address challenges with careful planning by optimizing deal structures and taking into account compliance issues and regulatory hurdles at the planning stage.
Foreign investors need to carefully monitor regulatory developments and watch out for foreign exchange issues impacting their transactions and operations in 2017.
For further information, please contact:
Karen Ip, Partner, Herbert Smith Freehills
karen.ip@hsf.com
