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27 July, 2017
Following on from a series of reform activities in 2015 and 2016, the Chinese government recently issued three new rules to further transform its foreign investment regime. These are aimed at further opening the Chinese market to foreign investors and simplifying the governmental approval procedures for foreign investment projects. Foreign investors should look out for investment opportunities in newly opened industries.
1. Background
The three new rules include:
- Measures for the Record-filing of the Incorporation and Changes of Foreign-invested Enterprises (Draft for Comment) published on 26 May 2017, which were open for comment until 15 June 2017 (Draft Measures);
- The 2017 version of the Foreign Investment Industrial Guidance Catalogue (2017 Catalogue) issued on 28 June 2017, which will take effect on 28 July 2017; and
- The 2017 version of the Free Trade Zone Foreign Investment Market Entry Negative List (2017 FTZ Negative List) issued on 5 June 2017, which came into effect on 10 July 2017.
China first introduced a negative list approach in its Free Trade Zones (FTZs). The Chinese government issued a FTZ Foreign Investment Market Entry Negative List in 2015 (2015 FTZ Negative List) which applied to the then existing four FTZs in Shanghai, Guangdong, Tianjin and Fujian.
In 2016, China amended its foreign investment laws, issued the Interim Measures for the Record-filing of the Incorporation and Changes of Foreign-invested Enterprises (2016 Measures) and rolled out the negative list approach for all foreign investment across the country. Under the new approach, a record-filing process replaced approvals for setting up and changing foreign investment enterprises (FIEs) in China that do not fall into a negative list (National Negative List). On the same day the 2016 Measures were promulgated, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) announced that the National Negative List shall equate with the aggregation of all the restricted industries, prohibited industries and encouraged industries with shareholding restrictions in the 2015 version of the Foreign Investment Industrial guidance Catalogue (2015 Catalogue).
The recently published Draft Measures are an updated version of the 2016 Measures; the 2017 Catalogue is a new national negative list to replace the 2015 Catalogue; and the 2017 FTZ Negative List is an updated version of the 2015 FTZ Negative List to further cover the newly established seven FTZs in Chongqing, Zhejiang, Hubei, Henan, Sichuan, Shaanxi and Liaoning.
2. Highlights
I. Draft Measures
Foreign investors’ M&A and strategic investment in listed companies
Foreign investors’ M&A of domestic enterprises and their strategic investment in listed companies (“Foreign Investor Acquisition”) are not covered by the existing negative list approach (i.e. MOFCOM approval is still a pre-condition for all Foreign Investor Acquisition). However, under the Draft Measures, MOFCOM approval will no longer be required for Foreign Investor Acquisition of companies that are not in the negative list. These transactions will only need to comply with the much quicker record-filing process with MOFCOM or its relevant local branch.
Ultimate controlling person
Under the 2016 Measures, only the name, nationality/incorporation country, passport number/registration number need to be filed with the MOFCOM, however the Draft Measures require ownership charts of both the FIE and the ultimate controlling person of the foreign investor when setting up a FIE or changing the ultimate controlling person.
II. 2017 Catalogue
New structure
The 2017 Catalogue adopts a new structure: the first part of the 2017 Catalogue contains the encouraged industries; the second part of the 2017 Catalogue contains the negative list which applies nationwide and integrates items under the restricted industries, prohibited industries and encouraged industries with shareholding restrictions. When determining whether the record-filing system is applicable, foreign investors can search the second part for any restrictions or prohibitions, without needing to search the first part.
New sectors opened
The 2017 Catalogue contains 63 restricted and prohibited items, reducing the 2015 Catalogue by 30 items. The changes focus on mining, manufacturing and service industries. Below are some key changes in the 2017 Catalogue:
A. Mining
The restrictions are lifted on foreign investment in investigating and developing oil shale, oil sand, shale gas and other uncommon oil gas, mining of precious metal (gold, silver, platinum) and lithium and processing of molybdenum, tin and antimony.
B. Manufacturing
Among other things, the previous foreign shareholding restrictions are lifted on processing certain edible oil, rice and flour and manufacturing biological liquid fuel; one foreign investor can establish more than two joint ventures in pure electric automobiles manufacturing; shareholding restrictions are lifted on manufacturing of certain automobile electronic devices, rail transportation equipment, ocean project equipment and certain vessel parts.
C. Service industry
Restrictions are lifted on public roads and passenger transportation, ocean shipping tally services, credit investigation and rating, accounting and auditing, construction and operation of large agricultural product wholesale markets and comprehensive water projects.
Removal of restrictions which also apply to domestic companies
The 2017 Catalogue removes restrictions which apply to both foreign and domestic investors, including in relation to the construction and development of large theme parks, golf courses, villas, the construction of certain fire power generation plants, processing of traditional medicine under the protected catalogue and processing of ivory, tiger bones, etc. Administration of foreign investment in these industries will be the same as applies to domestic investment.
II. 2017 FTZ Negative List
The 2017 FTZ Negative List covers 15 sectors, setting out 95 items and reducing the 2015 FTZ Negative List by 27 items.
New sectors opened
Compared to the 2015 FTZ Negative List, the changes focus on the following sectors: (i) mining; (ii) manufacturing; (iii) transportation; (iv) IT services; (v) financing; (vi) leasing and commercial services; (vii) education; and (viii) culture, sports and the entertainment industry.
Below are some significant changes in the 2017 FTZ Negative List:
A. Manufacturing
Newly established pure electric automobile manufacturers are no longer required to have self-owned brands and patents.
B. Transportation
The previous restrictions are lifted on foreign investment in road transportation and ocean-going vessel tally companies.
C. IT service
Foreign investors are now allowed to invest in internet access provider business premises.
D. Financing
Among other things, foreign investors investing in financial asset management companies are no longer subject to the requirements on total asset amounts. Foreign bank branches are now allowed to act as issuance agencies, payment agencies and as underwriters of government bonds. The minimum operation period requirement for foreign banks to conduct RMB business is lifted.
Relationship with 2017 Catalogue
It is hard to say conclusively whether the access thresholds set by the 2017 Catalogue are lower or higher than those under the 2017 FTZ Negative List. For prohibited industries, the 2017 Catalogue and the 2017 FTZ Negative List are essentially the same.
For restricted industries, the 2017 FTZ Negative List and the 2017 Catalogue are also substantially the same. However, the restrictions in the 2017 FTZ Negative List are described in more detail, while descriptions in the 2017 Catalogue are more general, especially when it comes to finance, transportation, storage and postal services.
III. Looking Forward
The above three mentioned rules are further steps toward streamlining governmental regulation on foreign investment and improving market entry. In 2015, the draft Foreign Investment Law was issued for public comments, there is recent news saying that the legislation process of the law which will have significant ramification to the foreign investment regime in China will be expedited.
The Draft Measures are unclear about its relationship with the current rules in relation to acquisition of domestic companies by foreign investors. It remains to be seen how the finalized measures will deal with this issue and interact with the existing FIE laws.
For further information, please contact:
Karen Ip, Partner, Herbert Smith Freehills
karen.ip@hsf.com
