30 August, 2017
The State Administration of Foreign Exchange (“SAFE”) Shenzhen Branch is permitted to examine the pilot cross-border transfer of non-performing assets in domestic banks on a case-by-case basis.
The State Council issued the New Edition of Negative List for Pilot Free Trade Zones, which further expands the access scope for foreign investments in the current 11 Pilot Free Trade Zones.
The National Development and Reform Commission (“NDRC”) issued the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017). The negative list regime for foreign investment officially applies to the whole country.
The People's Bank of China (“PBOC”) approves Interim Measures for the Collaboration in the Mutual Bond Market Access between Mainland China and Hong Kong, signifying the official launch of the Northbound Trading in the Bond Connect.
The Vice Minister of Commerce and Financial Secretary of Hong Kong Special Administrative Region (“HKSAR”) signed the “’Mainland and Hong Kong Closer Economic Partnership Arrangement’ Investment Agreement” and the “’Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement on Economic and Technical Cooperation” on June 28, 2017, which will expand the liberalization of and further facilitate the investment, and foster economic and technical cooperation between the Mainland and Hong Kong.
The Ministry of Commerce (“MOC”) amended the Interim Measures for Record-filing Administration over the Establishment and Change of Foreign-invested Enterprises, encompassing mergers and acquisitions of domestic enterprises by foreign investors as well as strategic investment in listed companies by foreign investors into the record-filing administration.
1. Pilot Cross-border Transfer of Non-performing Assets in Domestic Banks Launched in Shenzhen
On June 1, 2017, SAFE issued the Approving Reply to Shenzhen Branch on Developing Pilot Cross-border Transfer of Non-performing Assets Business in its Administered Banks (Huifu [2017] No. 24) (the “Approving Reply No. 24”), which authorized SAFE Shenzhen Branch to examine the requests made by the banks under its administration to carry out pilot cross-border transfer of non-performing assets business (the “Pilot Business”) on a case-by-case basis.
1.1 Background
The Tentative Regulations on the Attraction of Foreign Capital by Financial Asset Management Companies to the Restructuring and Disposal of Assets promulgated by the Ministry of Finance, PBOC, and the former Ministry of Foreign Trade and Economic Cooperation on October 26, 2001 was the first policy basis for foreign investors to participate in the disposal of non-performing assets. As the transfer of a domestic debtor’s non-performing assets by the domestic bank to foreign investors creates foreign debts for the domestic debtor, such transfer has long been dual-regulated by SAFE and the NDRC, both of which are foreign debt regulators.
In recent years, although relevant laws, regulations, and government administrative measures have been progressively relaxed, no rules have been released regarding the transfer of non-performing assets directly overseas. Therefore, under current regime, investing in the non-performing assets in the domestic banks by way of AMC is the solely legitimate path available to foreign investors. Foreign investors often need to attend the AMCs’ public disposal procedures of non-performing assets and, in view of the principles of transparency, competition and selection of the best, and value maximization set forth in the Administrative Measures for Batch Transfer of Non-performing Assets of Financial Enterprises issued by the Ministry of Finance and the China Banking Regulatory Commission (“CBRC”), foreign investors do not have much bargain power when investing in non-performing assets. In the meantime, foreign investors also encounter high intrinsic uncertainty of public disposal procedures. Under relevant regulations, AMC shall conduct record-filing with NDRC on the outbound transfer of creditor’s rights after a transaction is concluded via public transfer procedures. The certification of record-filing issued by NDRC is mandatory for foreign investors to purchase and remit foreign currency abroad.
1.2 Legal Review
The Approving Reply No. 24 stipulates that outbound transferred assets that SAFE Shenzhen Branch is authorized to examine are limited to the non-performing assets sold by domestic banks. Foreign debts resulting from the Pilot Business shall not be included in the weighted balance of cross-border financing risk (or the short-term external debt balance indicators). SAFE Shenzhen Branch is responsible for the supervision of the Pilot Business, and shall report quarterly to SAFE on the examinations and status of progress. Approving Reply No. 24 will be valid through one year from the date of the reply.
Approving Reply No. 24 further provides that the applicants within the jurisdiction of SAFE Shenzhen Branch shall, on behalf of domestic debtors, conduct relevant procedures such as foreign debt registration and foreign exchange in accordance with the Administrative Measures for Registration of Foreign Debts, but Approving Reply No. 24 did not clarify the identity conditions and requirements for “applicants within the jurisdiction”. To our understanding, the applicants who are entitled to file application with SAFE Shenzhen Branch on the Pilot Business shall be the banking financial institutions in Shenzhen. Meanwhile, we noticed that the Approving Reply No. 24 is an answer to the Shenzhen Qianhai Financial Assets Exchange Request for Instructions concerning the Authorization of examining power for Pilot Bank Assets Cross-border Transfer Business (“QFAE”) submitted by SAFE Shenzhen Branch. It is said that QFAE, via the Kua Jing Tong Platform, may distribute to onshore and offshore financial institutions the information related to the transfer of non-performing assets. In the case of outbound transfer, QFAE can serve as an agent for foreign debt registration and foreign exchange at the SAFE Shenzhen Branch. The services provided by QFAE include information distribution, transaction matchmaking, asset registration, fund monitoring, supervision compliance, and so on.
1.3 Next Step
According to this Approving Reply, which authorized SAFE Shenzhen Branch to carry out pilot cross-border transfer of the non-performing assets business, domestic banks are permitted to transfer non-performing assets upon SAFE Shenzhen Branch’s examination. Nevertheless, as bound by the Administrative Measures for Batch Transfer of Non-performing Assets of Financial Enterprises and other relevant regulations issued by the CBRC, for the transfer of non-performing assets of 3 packs and more, domestic banks shall proceed via AMC as set forth in the original rules.
2. New Edition of Negative List for Pilot Free Trade Zones Comes into Force
On June 5, 2017, the General Office of the State Council issued the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (2017 Edition) (the “New Edition of FTZ Negative List”), which entered into effect on July 10, 2017.
2.1 Background
General Office of the State Council once issued the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (the “Original Edition of FTZ Negative List”) on April 8, 2015, which applied to four Pilot Free Trade Zones (the “FTZs”) in Shanghai, Guangdong, Tianjin, and Fujian.
On September 3, 2016, the Standing Committee of the National People's Congress issued the Decision of the Standing Committee of the National People's Congress on Revising Four Laws including the Law of the People's Republic of China on Wholly Foreign-owned Enterprises adding a new article to each of the four laws, which provides that the establishment or alteration of foreign-invested enterprises that does not involve the implementation of special access administrative measures prescribed by the State shall be subject to record-filing instead of prior approval. Soon afterwards, on October 8, 2016, the NDRC and the MOC jointly issued the 2016 Announcement No. 22, which stipulates that the scope of the special administrative measures for foreign investment shall follow the Restricted Catalog, the Prohibited Catalog, and the shareholding/executive requirements in the Encouraged Catalog of the Catalog for the Guidance of Foreign Investment Industries (Revised in 2015).
In practice, FTZ Negative List applies only to the FTZs whereas the currently effective Catalog for the Guidance of Foreign Investment Industries sets forth the scope of special administrative measures for foreign investment in the area outside of FTZs.
2.2 Legal Review
The New Edition of FTZ Negative List contains 95 items in 40 sectors, which are 27 items and 10 sectors less than the Original Edition, among which 6 sectors were removed (i.e. manufacturing of railway transportation equipment, pharmaceutical manufacturing, road transport, insurance business, accounting and audit, other commercial services) while 4 sectors were abolished due to restructuring. The features of the New Edition of FTZ Negative List are summarized as follows:
Firstly, the access for foreign investment to the transportation business is further opened up. For example, the section of railway transportation equipment manufacturing is removed, which means the manufacturing of railway transportation equipment no longer requires joint venture or joint operation with Chinese partners and that the localization ratio requirement of urban railway transportation equipment is lifted. Another example is road passenger transportation which is removed from the restricted category, meaning foreign investments in the road passenger transportation may enjoy national treatment.
Secondly, the limited access to internet-related services for foreign investment is progressively lifted. For example, foreign investors are permitted to operate premises for internet access services.
Thirdly, the access restriction for foreign investment to enter the cultural, sports, and entertainment business is slightly relaxed. For example, foreign investors are now permitted to operate the importation of artworks and digital bibliographic database and its publications as well as other cultural products. Another example is the construction and operation of large theme parks which is removed from the restricted category.
2.3 Next Step
The State Council once issued the Opinions on Implementing Negative List System for Market Access on October 2, 2015, which suggests implementing the negative list system in some regions from December 1, 2015 to December 31, 2017 in order to gather experience, make improvements, explore a uniform negative list and its corresponding institutions, and officially implement a nationwide uniform negative list system in 2018. Therefore, to understand precisely the upcoming negative list applicable to the whole country, we advise close monitoring towards this amendment of FTZ Negative List.
3. Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) Issued
On June 28, 2017, the NDRC and the MOC jointly issued the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017), the seventh amendment since the first issuance of Catalog for the Guidance of Foreign Investment Industries in 1995.
3.1 Background
As stated above, in September 2016, the Standing Committee of the National People's Congress revised four laws including the Law of the People's Republic of China on Wholly Foreign-owned Enterprises adding a new article to each of the four laws stipulating that the establishment or alteration of foreign-invested enterprises that does not involve the implementation of special access administrative measures prescribed by the state shall be subject to record-filing instead of prior approval. However, the lagging enactment of the scope of special access administrative measures causes the determination of scope of the special administrative measures for foreign investment to refer to the Restricted Catalog, the Prohibited Catalog, and the shareholding/executive requirements in the Encouraged Catalog of the Catalog for the Guidance of Foreign Investment Industries (Revised in 2015).
In January 2017, the State Council issued the Circular on Several Measures concerning the Expansion of Opening-up and the Active Use of Foreign Capital, promoting a new round of high-level opening-up by revising the Catalog for the Guidance of Foreign Investment Industries and the relevant policies and regulations, easing access restrictions on foreign capital in fields such as services, manufacturing, and mining sectors, supporting foreign capital to participate in the implementation of the innovation-driven development strategy and the transformation and upgrading of manufacturing, and encouraging overseas talents to start entrepreneurship in China.
Given the above background, the NDRC and MOC issued the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) on June 28, 2017, which came into force on July 28, 2017.
3.2 Legal Review
Compared to the previous versions of the Catalog for the Guidance of Foreign Investment Industries, the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) experienced significant alteration in respect of structure. The Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) is divided into the Catalog of Encouraged Foreign Investment Industries and the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments) wherein those items in the Restricted Catalog and the Prohibited Catalog and the shareholding/joint venture/joint operation requirements in the Encouraged Catalog of previous versions are now integrated into the Negative List for Access of Foreign Investments, in which section all access restrictions are specified. This is the first time when the negative list regime for foreign investments has been implemented in the whole country.
With respect to the contents, the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) continues to reduce restrictive measures, retaining 35 items in the Restricted Catalog and 28 items in the Prohibited Catalog, which amount to 63 items in total and are 30 items less than the previous version. The opening-up in services, manufacturing, and mining sectors are the highlights. For the services sector, access restrictions in road passenger transportation, accounting audit, and agricultural products wholesale markets, among others, are removed. For the manufacturing sector, access restrictions in railway transportation equipment, automotive electronics, new energy automobile battery, motorcycles, edible fats, biology liquid fuel, among others, are removed, and the access restriction in electric vehicles is eased. For the mining sector, access restrictions in unconventional oil and gas and rare metals, among others, are removed.
It shall be noted that for an investment item which falls simultaneously within the Catalog of Encouraged Foreign Investment Industries as well as the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments), that foreign investors will be entitled to the encouragement policies while in the meantime subject to access regulations.
3.3 Next Step
The issuance of the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) signifies a relatively high level of opening up as 11 items in the previous version that require control or 50% minimum shareholding of Chinese party are removed from the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017), so as 4 items that require joint venture or joint operation. Notwithstanding the above, we noticed strengthened control over foreign investments in the cultural field in that four items, being (1) editing of books, newspapers, periodicals audio-visual products, and electronic publications, (2) radio and television video-on-demand services, and installation services for ground receiving facilities for television broadcasting by satellite, (3) services for internet information release by the public, and (4) humanities and social sciences research institutes, are added as Prohibited items.
4. PBOC Continues to Open Up the Inter-bank Bond Market to Foreign Investors by Launching the “Northbound Trading” of Bond Connect
On June 21, 2017, the PBOC issued the Interim Measures for the Collaboration in the Mutual Bond Market Access between Mainland China and Hong Kong (Order of the People’s Bank of China [2017] No.1) (the “Interim Measures”), effective since the date of issuance.
4.1 Background
The Inter-bank Bond Market has started to progressively open up to foreign investors since the PBOC clarified in August 2010 that the access and investment quota approval regime applies to foreign investors.
According to relevant regulations issued by the PBOC prior to the Interim Measures, foreign investors investing in the Mainland Inter-bank Bond Market are subject to record-filing instead of prior approval. The settlement agent entrusted to provide trading and settlement services is responsible for the examination of investor qualification.
Foreign investors permitted with access to Mainland Inter-bank Bond Market include foreign Central Banks, international financial institutions, sovereign wealth funds, and other entities that satisfy the following conditions: (1) financial institutions such as commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions lawfully registered and incorporated outside the People's Republic of China, (2) investment products lawfully launched by such financial institutions, (3) other long-and medium-term institutional investors recognized by the PBOC such as pension funds, charity funds and endowment funds, and (4) qualified foreign institutional investors (“QFII”) and RMB qualified foreign institutional investors (“RQFII”).
In addition, PBOC puts no limit on the investment quota of foreign investors investing in the Mainland Inter-bank Bond Market. Foreign investors are allowed to invest in those trading types permitted by the PBOC such as outstanding bonds.
4.2 Legal Review
The purposes of the Interim Measures are to conduct relevant business concerning the collaboration in establishing mutual Bond Market access between Mainland China and Hong Kong in a standardized manner, protect the legitimate rights and interests of domestic and foreign investors, and uphold the order of the Bond Market. Notwithstanding the above, it is specified that the Interim Measures at this stage apply only to foreign investors investing in the Mainland Inter-bank Bond Market through mutual access between the Hong Kong and Mainland Bond Market infrastructure institutions in respect of trading, custody, settlement, and so on, which is the Northbound Trading. Relevant measures for Southbound Trading will be formulated separately.
In terms of object bonds, the Interim Measures provide that any foreign investor that satisfies the requirements of the PBOC may invest in the Mainland Inter-bank Bond Market through Northbound Trading wherein the object bonds shall include all types of bonds that can be traded and circulated in the Mainland Inter-bank Bond Market. It is understood that foreign investors can invest in the object bonds by subscription to initial bond issuance as well as trading in the secondary market.
The Interim Measures follow the conventional record-filing requirement for foreign investors and provides that the electronic trading platform or other institutions that are recognized by the PBOC may file the record on behalf of foreign investors with the Shanghai Head Office of the PBOC. The available filing agencies include China Foreign Exchange Trade System (“CFETS”), domestic Custody Institutions, and Inter-bank Bond Market Settlement Agent.
The Interim Measures stipulate that overseas Custody Institutions shall open a nominee account at a domestic Custody Institution, which is used to record the balance of all bonds held nominally. Bonds purchased by the foreign investor through the Northbound Trading shall be registered under the name of the overseas Custodian Institution (such as the Central Moneymarkets Unit of Hong Kong Monetary Authority) and entitled to the rights and interests of the bonds according to the law. It should be noted that the foreign investor, as the actual owner of the rights and interests of the bonds, shall exercise creditor’s rights in accordance with relevant laws and regulations of Hong Kong.
Foreign investors are permitted under the Interim Measures to invest with self-owned RMB or foreign currencies. Where an investment is made in self-owned RMB and does not involve foreign exchange, the funds are not required to undergo foreign exchange and settlement under the Northbound Trading at Hong Kong-based Settlement Banks. Where an investment is made in a foreign currency, the funds shall be settled at Hong Kong-based Settlement Banks and in principle, when bonds mature or are sold, the funds shall be exchanged into the foreign currency if such funds are not to be used for further investment, and proceed via Hong Kong-based Settlement Banks.
The Interim Measures require the exchange of funds with respect to Northbound Trading be subject to the administration of the purchase and sales of RMB, which implies that the scope of the purchase and sales of RMB has been extended from trade in goods, trade in services, direct investment to bond investment. Hong Kong-based settlement banks shall abide by the relevant anti-money laundering and counter-terrorism financing regulations and the provisions in respect of the purchase and sales of RMB. A Hong Kong-based settlement bank, when selling out the flat position in the domestic Inter-bank Foreign Exchange Market, shall ensure that related foreign investors exchange funds and hedge foreign exchange risks at such bank based on their real and reasonable needs for the purpose of Northbound Trading. The PBOC, in concert with the SAFE, shall supervise the RMB purchase and sales business, entry and exit of funds, hedging of foreign exchange funds, and so on in respect of Northbound Trading, and work with the Hong Kong Monetary Authority (“HKMA”) and relevant regulators of other countries or regions to step up the cross-border supervisory cooperation so as to prevent unlawful leverage of Northbound Trading such as illegal arbitrage and exchange of foreign currency.
4.3 Next Step
The Bond Connect, comprising of Northbound Trading and Southbound Trading, is an institutional innovation in the orderly open-up of Mainland China Bond Market. The early introduction of Northbound Trading helps to gather experience for the upcoming two-way access in the Bond Connect, maintain the stabilization of finance market, and reduce risks in the finance market. For now, the Northbound Trading investors can only trade in outstanding bonds, but it is anticipated that bond repurchase, bond lending, interest rate swap, forward rate agreement, and so on will be available to investors in the future.
In support of the Interim Measures, on June 22, 2017, the PBOC issued the Guide on Registration of Foreign Investors for Northbound Trading in the Bond Connect (PBOC Shanghai Head Office Announcement [2017] No. 1), which provides guidance for the record-filing of foreign investors. In addition, The PBOC and the HKMA have agreed on the principles of cross-border supervisory cooperation under Bond Connect and have signed the Memorandum of Understanding between the People’s Bank of China and Hong Kong Monetary Authority on Strengthening Supervisory Cooperation under Bond Connect. The two parties agreed, in accordance with the laws and legal authorization of Mainland China and Hong Kong respectively, the two parties will establish effective mechanisms for information exchange and execution assistance, strengthen supervisory cooperation and jointly combat cross-border illegal activities so as to ensure effective operation of the scheme.
5. Mainland and Hong Kong have signed the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Investment Agreement” and the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement on Economic and Technical Cooperation”
On June 28, 2017, under the framework of Mainland and Hong Kong Closer Economic Partnership Arrangement (“CEPA”), the Vice Minister of Commerce and Financial Secretary of HKSAR signed the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Investment Agreement” (“CEPA Investment Agreement”) and the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement on Economic and Technical Cooperation” (“CEPA ETC Agreement”). These two agreements took effect on the date of execution and the CEPA Investment Agreement will be implemented from January 1, 2018 onwards.
5.1 Background
To promote trade and investment cooperation between the Mainland and Hong Kong, the Vice Minister of Commerce and Financial Secretary of HKSAR has signed CEPA on June 29, 2003. Since then, the two parties have signed 10 supplementary agreements, the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement between the Mainland and Hong Kong on Achieving Basic Liberalization of Trade in Services in Guangdong” and the “’Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement on Trade in Services” (“CEPA TIS Agreement”).
5.2 Legal Review
5.2.1. CEPA Investment Agreement
The CEPA Investment Agreement consists of 4 chapters, 29 articles and 3 annexes, including market excess, investment protection, Investment Facilitation and Settlement of Investment Disputes.
First of all, the CEPA Investment Agreement clearly set out the definition, characteristics and forms of “Investment”. The Investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, and the assumption of risks. Forms that an investment may take include, though not exclusively: (i) an enterprise; (ii) shares, stocks and other forms of equity participation in an enterprise; (iii) bonds, debentures, loans and other debt instruments including debt instruments issued by an enterprise or one side;1 (iv) futures, options and other derivatives; (v) turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; (vi) intellectual property rights; (vii) license, authorizations, permits and similar rights conferred pursuant to the laws of one side;23 and (vii) other tangible or intangible assets, movable or immovable property, and related property rights, such as leases, mortgages, liens and pledges. We noticed that compared to the Law of Foreign Investment (Draft for Comment), forms of investment set out in the CEPA Investment Agreement are more diverse and has included the forms of futures, options and other derivatives, intellectual property and so on.
Secondly, the CEPA Investment Agreement also gives a clear definition of “Investors” and sets out the relevant conditions. To be classified as an “Investor”, a Hong Kong enterprise investing in the Mainland in the form of commerce presence shall satisfy the requirements of incorporation or establishment in Hong Kong, obtaining a valid business registration certificate and engagement in substantive business operations in Hong Kong. The criteria for determining the engagement in substantive business operations in Hong Kong follows those of “Service Provider” under the CEPA, and includes that the Hong Kong investor should be incorporated or established in Hong Kong, and have engaged in substantive business operations for 3 years or more (including 3 years), should have paid profit tax, should own or rent premises in Hong Kong to engage in substantive business operations and should employ the required percentage of employees.
Lastly, the CEPA Investment Agreement continues to adopt the negative listing approach adopted in the CEPA TIS Agreement for market access. The CEPA Investment Agreement states that unless it is explicitly listed out in the negative list, one side should give the other side national treatment, most favored treatment and imposes on both sides the substantive obligations regarding performance requirements and senior management, board of creditors and entry of personnel. The CEPA Investment Agreement only contains the negative list of the Mainland for Hong Kong investors, i.e. Schedule of concessions of the Mainland.
5.2.2 CEPA ETC Agreement
The Mainland and Hong Kong signed the CEPA ETC Agreement based on the CEPA and all its supplementary agreements. The CEPA ETC Agreement not only sorts out, updates, classifies and summarizes the economic and technical cooperation under the CEPA and its supplementary agreements comprehensively, but also added new cooperation areas based on the actual need for economic and trade cooperation between two sides4. The CEPA ETC Agreement consists of 7 chapters and 26 articles, including the Cooperation Objective and Mechanism, the Cooperation in Economic and Trade Areas of the "Belt and Road", the Cooperation in Key Areas, and the Sub-regional Economic and Trade and Investment Facilitation.
The Mainland encourages Hong Kong to participate in the "Belt and Road" Initiative and support to strengthen the sub-regional economic and trade cooperation between the two sides. For this purpose, the CEPA ETC Agreement adds chapters for new cooperation areas in relation to "Belt and Road" Initiative and Sub-regional Cooperation. The Sub-regional Economic and Trade Cooperation includes strengthening the economic and trade cooperation in the Pan-Pearl River Delta Region, supporting Hong Kong to participate in the Pilot Free Trade Zones, and deepening the operation between Hong Kong and Qianhai, Nansha and Hengqin.
The CEPA ETC Agreement listed the cooperation in key areas which include financial cooperation, tourism cooperation, cooperation in legal and dispute resolution services, accounting cooperation, cooperation in convention and exhibition industry, cultural cooperation, environmental cooperation, innovation and technology cooperation, education cooperation, electronic commerce cooperation, medium and small enterprise cooperation, intellectual property cooperation, trademark and branding cooperation and cooperation in traditional Chinese medicine and Chinese medicinal products industry. On top of cooperation areas under the CEPA, the CEPA ETC Agreement adds the areas of cooperation in legal and dispute resolution services, and accounting cooperation, which provides new opportunities for professional services institutions in Hong Kong5.
5.3 Next Step
For implementation of the CEPA Investment Agreement and the CEPA ETC Agreement, the State Council and relevant ministries shall promulgate relevant rules and regulations, which is worthy of our attention.
On July 1, 2017, the National Development and Reform Commission, the People’s Government of Guangdong province, the HKSRA government and the government of the Special Administrative Region of Macau have signed the Framework Agreement on Deepening the Cooperation among Guangdong, Hong Kong and Macau and Promoting the Development of the Greater Bay Area, to jointly promote the development of the Guangdong-Hong-Kong-Macau Greater Bay Area and facilitate the cross-border investment between the Mainland enterprises and enterprises from Hong Kong and Macau. The impact of the CEPA, the CEPA Investment Agreement and the CEPA ETC Agreement on the development of the Guangdong-Hong-Kong-Macau Greater Bay Area is also worthy of our attention.
6. Mergers and Acquisitions of Domestic Enterprises as well as Strategic Investment into Listed Companies by Foreign Investors are subject to the MOC Record-filing Administration.
On July 30, 2017, the MOC released the Decision on Amending the Interim Measures for Record-filing Administration over the Establishment and Change of Foreign-invested Enterprises (MOC 2017 Order No. 2) (the “Decision”) and the Announcement on Matters Relating to the Record-filing Administration over Establishment and Change of Foreign-invested Enterprises ([2017] No. 37) (the “Announcement No. 37”), clarifying that the mergers and acquisitions of domestic enterprises and strategic investment into listed companies by foreign investors shall fall within the scope of the record-filing administration provided that no special access administrative measures or acquisition of a related party is involved.
6.1 Background
Under the Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, mergers and acquisitions of domestic enterprises by foreign investors are subject to approval by the authority. In addition, acquisitions of A-shares of the listed company which have finished reform of non-tradable shares and of the newly listed companies by means of long-and-mid-term strategic investment of mergers and acquisitions with certain scale are subject to MOC’s prior approval under the Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies.
From October 1, 2016, according to the Interim Measures for Record-filing Administration over the Establishment and Change of Foreign-invested Enterprises (the “Record-filing Measures”), except for those involving special access administrative measures, the establishment and alteration of foreign-invested enterprises are no longer subject to prior approval, but shall be governed by the record-filing administration. However, the Record-filing Measures did not explicitly include the mergers and acquisitions of established enterprises as well as strategic investment into listed companies into the record-filing system, and hence prior approval from relevant authorities were still required pursuant to the Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors and the Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies.
6.2 Legal Review
Under the Record-filing Measures as amended by the Decision, a non-foreign-invested enterprise (the “non-FIE”) changing into a foreign-invested enterprise (the “FIE”) resulting from acquisition or consolidation by merger or otherwise, and not involving special access administrative measures or acquisition of a related party, shall undergo the record-filing formalities and fill in the Establishment Application Form; whereas a foreign investor investing in a listed company shall complete the record-filing formalities before or within 30 days after the security registration with the competent securities registration and settlement institution and, if the listed company is a FIE, fill in the Establishment Application Form or the Alteration Application Form.
The term “special access administration measures” refers, within the FTZs, to those set forth in Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (2017 Edition), and outside of the FTZs, to the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments) in the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017). Additionally, the term “acquisition of a related party” is defined as domestic companies, enterprises or natural persons using the companies legally established or controlled by them in foreign countries to nominally merge or acquire the domestic companies that are related to them. The mergers and acquisitions and strategic investment by foreign investors that involve the aforesaid special access administration measures and acquisition of a related party do not fall within the record-filing administration and shall obtain relevant approval before conducting investments.
It shall be noted that under the amended Record-filing Measures, the shareholding chart of the FIE’s ultimate actual controlling party is added as requested document which shall be uploaded to the Comprehensive Administration System. Furthermore, if a foreign investor pays with the shares of an overseas company, the Certificate of Foreign Investment of the domestic enterprise shall be provided.
6.3 Next Step
The amended Record-filing Measures is another huge step on the way towards the construction of an open economic system, implementation of high-level opening-up, unifying of laws and regulations on domestic and foreign investments, and the innovation of foreign investment legal system.
1. Some forms of debt, such as bonds, debentures and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics.
2. Whether a particular type of license, authorization, permit or similar instrument (including a concession to the extent that it has the nature of such an instrument) is an asset that has the characteristics of an investment also depends on such factors as the nature and extent of the rights that the holder has under the laws of one side. Among such instruments that do not constitute an asset that has the characteristics of an investment are those that do not create any rights protected under the laws of one side. For greater certainty, the foregoing is without prejudice to whether any asset associated with such instruments has the characteristics of an investment.
3. The term “investment” does not include an order or judgment entered in a judicial or administrative action.
4. http://tga.mofcom.gov.cn/article/zwyw/zwxx/201706/
5. http://tga.mofcom.gov.cn/article/zwyw/zwxx/201706/
For further information, please contact:
Qinghui (Catherine) MIAO, Partner, Jun He
miaoqh@junhe.com
