31 March, 2016
The State Administration of Foreign Exchange has implemented the Administrative Provisions on Foreign Exchange for Domestic Securities Investments by Qualified Foreign Institutional Investors, which relaxed the foreign exchange regulations with regard to securities investment by Qualified Foreign Institutional Investors in China.
The State Administration of Press, Publication, Radio, Film and Television and the Ministry of Industry and Information Technology have jointly published the Administrative Provisions on Online Publishing Services, replacing the Interim Administrative Provisions on Internet Publishing which was implemented for nearly 14 years.
The PBOC promulgated [2016] No. 3 Announcement, opening the interbank bond market to eligible foreign institutional investors.
1. SAFE has implemented New QFII Rules
The State Administration of Foreign Exchange (“SAFE”) promulgated the Administrative Provisions on Foreign Exchange for Domestic Securities Investments by Qualified Foreign Institutional Investors (“New QFII Rules”), on February 3, 2016, effective as of publication. The New QFII Rules amended the procedures through which Qualified Foreign Institutional Investors (“QFIIs”) obtain their investment quotas, changing from a system where approvals were March 21, 2016 required for all cases to a system where only record-filings are required within the limit of the Basic Quota and approvals are necessary only if the Basic Quota is exceeded. The New QFII Rules also relaxed the restrictions with respect to the limit for investment quotas, the time limit for remitting in the investment principal and its lockup period, and the outbound remittance of funds.
1.1 Background
On September 29, 2009, SAFE announced the Administrative Provisions on Foreign Exchange for Domestic Securities Investments by Qualified Foreign Institutional Investors (“Old Rules”), which were later revised on December 7, 2012, requiring QFIIs to get approval to obtain investment quotas.
On September 30, 2015, SAFE promulgated the Operating Guidelines for the Administration of Quotas for Qualified Foreign Institutional Investors (“Quotas Guidelines”), which comprised supplementary provisions with respect to the classification of QFII investment quotas and the extension of the time limits for QFIIs to remit in their investment principals.
On February 3, 2016, SAFE implemented the New QFII Rules, repealing the Old Rules and the Quotas Guidelines, and stipulating that the New QFII Rules shall prevail where they are in conflict with any other relevant regulation on foreign
exchange.
1.2 Legal Review
Compared to the previous regulations, the New QFII Rules embrace reforms in the following aspects:
a. Acquisition of investment quotas
The New QFII Rules reformed the earlier system where all investment quotas must be approved by SAFE. The Basic Quota of each QFII is determined according to a formula which takes into account whether assets of the QFII and its corporate group (including the securities assets under their management) are primarily located in China, the size of the assets, and the Renminbi QFII Quota of the QFII. As long as its investment quota does not exceed its Basic Quota, a QFII is only required to submit supporting documents to its custodian, who shall review the documents and make record-filings to SAFE in batches.
Approval from SAFE is necessary only when the investment quota of a QFII exceeds its Basic Quota.
Investment quotas obtained prior to the New QFII Rules remain valid. The New QFII Rules will only apply to any future increase in these investment quotas, and will require either approvals or record-filings depending on whether the Basic Quotas are exceeded.
b. Upper limit for investment quotas
The New QFII Rules set the upper limit for the Basic Quota of a QFII at US $5 billion, far above the US $1 billion limit for the accumulated investment quota of a QFII under the Old Rules.
The New QFII Rules also removed the prohibition against an increase in the investment quota within one year after the existing investment quota was granted.
c. Time limit for remittance in the investment principal and its lockup period
The New QFII Rules abolished the time limit for remitting the investment principal and only provide that SAFE may revoke any investment quota that has not been effectively utilized within one year after its record-filing or approval.
The New QFII Rules still contain provisions on the lockup period in which the outbound remittance of investment principal is prohibited, but the length of the period is limited to three months and is not dependent on the type of the QFII. The New QFII Rules also revised the commencement date of the lockup period. Previously this was the day that the principal was fully remitted into China or six month after the approval of the investment quota; now it is the day that the accumulated investment principal remitted into China has reached the equivalent of US$ 20 million.
d. Outbound remittance of funds
The Old Rules permitted Open-end Chinese Funds (open-end funds established through public offerings which invest no less than 70% of their assets in China) to make weekly remittances of the balance of purchases and redemptions into or out of China. The New QFII Rules permit all open-end funds to make such remittances on a daily basis.
The New QFII Rules abolished the requirement that the investment quota be reduced according to the amount of investment principal that has been remitted out of China. A QFII, being an open-end fund or otherwise, will no longer have its investment quota reduced when its investment principal is remitted out, and to the extent of its investment quota, the QFII is free to remit the investment principal back to China afterwards.
e. Limit to the number of accounts
The Old Rules contained limits to the numbers of foreign currency accounts and Renminbi accounts that a QFII may open. A QFII could only open one foreign currency account for its own funds, for the funds of its clients, and for each Open-end Chinese Fund, respectively, and were limited to no more than six Renminbi accounts for the clients’ funds under its management for the purpose of investment in Chinese securities markets. The New QFII Rules do not contain any limit to the number of accounts.
1.3 NextStep
The New QFII Rules will surely boost QFII investment activities in the capital markets in China and their effect will continued to be monitored.
2. The State Administration of Press, Publication, Radio, Film and Television and the Ministry of Industry and Information Technology have jointly published the Administrative Provisions on Online Publishing Services
On February 4, 2016, The State Administration of Press, Publication, Radio, Film and Television (“SAPPRFT”) and the Ministry of Industry and Information Technology (“MIIT”) jointly published the Administrative Provisions on Online Publishing Services (“Administrative Provisions on Online Publishing”), effective March 10, 2016. The Administrative Provisions on Online Publishing strengthens the supervision of online publishing services from five perspectives: online publishing services permit, management of online publishing services, supervision and administration, protection and incentives and legal liabilities. In the meantime, the Interim Administrative Provisions on Internet Publishing, which had been in effect since 2002, is abolished.
2.1 Background
In 2002, the General Administration of Press and Publication (the predecessor of SAPPRFT) and Ministry of Information Industry (the predecessor of MIIT) jointly published the Interim Administrative Provisions on Internet Publishing. As the first provision directly regulating the online publishing service sector in China, the Interim Administrative Provisions on Internet Publishing provided principles to regulate various matters, including definition, administrative approvals, business operation, supervision and management of internet publishing. With the rapid development over the past 10 years, there has been dramatic change in the online publishing service sector such that the forms of online publications have kept increasing and illegal content has appeared, bringing new challenges to regulators. However, no amendments or updates had been made to the Interim Administrative Provisions on Internet Publishing, making the Provisions ill-suited to the development and change of circumstances in internet publishing.1 To further promote market discipline for the online publishing industry, the General Administration of Press and Publication issued the Administrative Measures on Online Publishing Services (Revised Draft for Comments) in 2012 for public comments.2 After considering a wide range of public comments, the SAPPRFT and MIIT jointly published the Administrative Provisions on Online Publishing on February 4, 2016, replacing the Interim Administrative Provisions on Internet Publishing which was implemented for nearly 14 years.
2.2 Legal Review
The newly published Administrative Provisions on Online Publishing follows the administrative approval system and regulatory regime established in the Interim Administrative Provisions on Internet Publishing. Administrative Provisions on Online Publishing shows the following changes compared with the Interim Administrative Provisions on Internet Publishing:
a. Clarification on the terms including “online publishing service”
The Administrative Provisions on Online Publishing has replaced the previous term “internet publishing” with “online publishing service” to keep consistent with the terms used in other laws and regulations. Meanwhile, a new term “online publications” has been added, specifying that “online publications are digital works with characteristics of publishing such as editing, production or processing which are provided to the public through information networks”. Four types of works are enumerated for illustrative purposes: the original works, works whose contents are consistent with existing publications, compilation works and works identified by the SAPPRFT.
In addition, The Administrative Provisions on Online Publishing specifically provides that maps, games, animations and comics, audio books and databases are online publications, and publishers engaging in publishing services of these publications are subject to the Provisions. The Administrative Provisions on Online Publishing also grants the SAPPRFT discretion to identify more online publications than those already specified in the Administrative Provisions on Online Publishing.
b. Different market access requirements apply to different publishers engaging in online publishing service
In response to the state policy of encouraging the merger of traditional publishers and new media, the market access requirements applicable to traditional publishers (such as book, audiovisual, electronic, newspaper and periodical publishers) are much simpler than that of other publishers. For example, publishers that are not traditional publishers shall not only satisfy requirements on legal representative and major responsible person, but also satisfy the requirements of hiring at least eight fulltime editorial staff with relevant publication and other professional qualifications admitted by the SAPPRFT, at least 3 of which shall hold mid-level qualifications or above. Nevertheless, a new access requirement is
added for traditional publishers that the relevant servers and storage devices must be located within the territory of the People’s Republic of China.
c. Prohibition and restrictions imposed on foreign investments
i. Prohibition on foreign direct investments in the online publishing service sector
Article 10, sub-article 1 of the Administrative Provisions on Online Publishing provides that, “Equity joint ventures, cooperative joint ventures and foreign-funded enterprises shall not engage in online publishing services.” Although the Interim Administrative Provisions on Internet Publishing implemented in 2002 did not prohibit foreign investments in online publishing
service sector, the Several Opinions on Introduction of Foreign Investment in Cultural Fields jointly issued by the Ministry of Culture, the State Administration of Radio, Film, and Television, the General Administration of Press and Publication, the National Development and Reform Commission and the Ministry of Commerce in 2005 specifically prohibit foreign investors from engaging in internet publishing business through information networks. In 2009, the General Administration of Press and
Publication, the National Copyright Administration and the National Working Group on Eliminating Pornographic and Illegal Publications issued the Circular on Implementing the Provisions of “Three Decisions” of the State Council and Relevant Interpretations of the State Commission Office for Public Sector Reform and Further Strengthening Pre-Approval of Online Game and Approval Management of Imported Online Game, prohibiting foreign investors from engaging in online game operation services in any form, including: (i) investing in online game operation service within the territory of the People’s Republic of China by way of sole proprietorship, joint ventures, and cooperation; (ii) imposing indirect control over or engagement in domestic online game operator by establishing other joint ventures, entering into relevant agreements or providing technical support; and (iii) imposing disguised control over or engagement in online game operation by connecting user registration, account management or game card consumption with game network or platforms actually controlled or owned by foreign investors.
Despite that both revised versions of Catalogue for Guidance of Foreign Investment in 2007 and 2011 did not classify online publishing service into the prohibited service, the most recent Catalogue for Guidance of Foreign Investment (Revised in 2015) specifically classifies online publishing service into the prohibited service. The Administrative Provisions on Online Publishing follows the provisions of Catalogue for Guidance of Foreign Investment (Revised in 2015) in this regard.
ii. Pre-approval system was established for foreign indirect investment in online publishing service sector
Article 10, sub-article 2 of the Administrative Provisions on Online Publishing provides that: “Any entity providing online publishing services shall report in advance to the SAPPRFT for approval of any project cooperation relating to online publishing services with a domestic equity joint venture, cooperative joint venture or foreign-funded enterprise, or an overseas organization or individual.” In addition, Article 32 of the Administrative Provisions on Online Publishing provides that any online game publications authorized by an overseas copyright owner shall first apply for approval from the appropriate publication authorities at provincial, autonomous region or municipal level; after approved by the above publication authorities, the application shall be then filed with the SAPPRFT for approval.
d. Detailed administration requirements apply to online publishing service
The Administrative Provisions on Online Publishing put forward more detailed administration requirements on the online publishing service, including but not limited to: (i) a “publication content review responsibility policy” shall be implemented by online publishers; (ii) lending, renting, selling or transferring the Online Publishing Service Permit in any form is prohibited; and (iii) online publishers are not allowed to permit other internet information service providers to provide online publishing service under the names of such online publishers.
e. Supervision during and after provision of online publishing service are strengthened, and heavier punishments are imposed
The Administrative Provisions on Online Publishing makes “Supervision and Administration” a separate chapter, where duties of local publication authorities and details of annual inspection system (such as timeline, content, procedures and legal consequences) are clearly set out. Provisions relating to legal responsibilities are revised, which leads to heavier punishments on illegal acts.
2.3 Next Step
The Administrative Provisions on Online Publishing establishes a pre-approval system on project cooperation between online publishers and domestic equity joint ventures, cooperative joint ventures and foreign-funded enterprises, and overseas entities and individuals for the first time. Since The Administrative Provisions on Online Publishing merely sets out principles of such pre-approval system without providing implementing rules or practical guidance, the likelihood of whether pre-approval would be granted for foreign indirect investments in online publishing service sector in future practice is noteworthy.
3. No. 3 Announcement regulating investments by foreign institutional investors in interbank bond market
On February 17, 2016, the People’s Bank of China (“PBOC”) promulgated and implemented Announcement of the People's Bank of China [2016] No. 3 (“No. 3 Announcement”), allowing foreign institutional investors eligible under such Announcement to invest in the interbank bond market via authorizing settlement agents of the interbank bond market to conduct investments and settlement. The PBOC encourages foreign institutional investors to invest in the interbank bond market as long-and-medium-term investors, and exercises macro-prudential supervision over investment behaviors of foreign institutional investors.
3.1 Background
In August 2010, to advance the trial of Renminbi settlement for cross-border trading, and to facilitate Renminbi repatriation, the PBOC issued the Yin Fa [2010] No. 217 Announcement, to conduct a trial on investments in the interbank bond market by foreign Renminbi settlement bank and other two institutions using Renminbi, which clarifies the entry requirements and investment quota approval system for foreign institutional investors investing in the interbank bond market. In March 2013, the PBOC issued the Circular on Matters Relating to Qualified Foreign Institutional Investors' Investment in the Interbank Bond Market which, based on the entry requirements and quota approval system as mentioned above, further includes more investment participants and clarifies that eligible investors are able to participate in the interbank bond market if approved as eligible investors by China Securities Regulatory Commission and with investment quota approved by State Administration of Foreign Exchange. In July 2015, to improve the efficiency of investment in the interbank bond market by the foreign central banks, monetary authorities, international financial institutions and sovereign wealth funds, the PBOC issued the Announcement of the People's Bank of China on Matters Concerning Trial Renminbi Investments by Foreign Central Banks, International Financial Organizations and Sovereign Wealth Funds in the Interbank Bond Market (Yin Fa [2015] No. 220, “No. 220 Announcement”), to implement an investment filing system for these three types of investment bodies, different from the entry requirements and quota approval system, and to enable relevant investment institutions to decide their own investment scale. The above developments indicate a trend that the interbank bond market is being gradually opened to foreign institutional investors.
Nevertheless, the 2015 Statistic Analytical Report of Bond Market issued by the China Securities Depository and Clearing Corporation Limited earlier this year noted that as of December 31, 2015, the bond holding rate by foreign institutions is around 1.72%, indicating that participation by foreign institutions is still relatively low.
3.2 Legal Review
Compared with the above regulations, No.3 Announcement includes more foreign institutional investment participants and simplifies the management of market entry procedure.
First, while restating the continuing effectiveness of No. 220 Announcement, No. 3 Announcement clarifies that the interbank bond market will be opened to the following eligible entities:
(i) financial institutions legally registered and incorporated outside China, including commercial banks, insurance companies, securities companies, fund management companies and other assets management companies;
(ii) investment products issued by the above financial institutions legally to their clients; (iii) pension funds, charity funds, donation funds and other long-and-medium-term institutional investors approved by the PBOC; and (iv) the QFII and Renminbi Qualified Foreign Institutional Investors (“RQFII”).
Secondly, the No. 3 Announcement replaces the pre-entry approval system for foreign institutional investors to enter into interbank bond market with the post-entry filing system (note: although No. 220 Announcement introduces a filing system, No. 220 Announcement states that foreign institutional investors shall only conduct investment behaviors after competition of filing procedures). Furthermore, regarding whether investors satisfy the requirements for investment participants under the No. 3 Announcement, such issues will be handled by a settlement agent authorized for foreign institutional investors to provide investment and settlement services. The No. 3 Announcement states that foreign institutional investors shall authorize an interbank bond market settlement agent with the ability to conduct international settlement services to complete the investment filing procedures; and before authorization, the settlement agents are obliged to conduct examination and inspection of foreign institutional investors according the PBOC regulations and shall only accept the authorization by eligible foreign institutional investors.
3.3 Next Step
The No. 3 Announcement fails to clarify the types of investment opened to foreign institutional investors and only states that eligible foreign institutional investors may conduct “transactions approved by the PBOC, such as cash bond transactions”, in the interbank bond market. In comparison, types of investment allowed to be conducted by central banks, international financial institutions and sovereign wealth funds in the No. 220 Announcement are clearer and broader. Hence, it is still unclear whether the types of investment eligible for central banks, international financial institutions and sovereign wealth funds are the same as those eligible under No. 3 Announcement for foreign institutional investors. Since the No. 3 Announcement states that the PBOC Shanghai Head Office shall formulate and implement rules based on such Announcement, it is hopeful that equirements that foreign institutional investors shall comply with to invest in the interbank bond market and specific types of bond investments can be further clarified with the implementation of the rules.
1 http://www.cac.gov.cn/2016-02/17/c_1118075775.htm
2 http://www.gov.cn/gzdt/2012-12/19/content_2293811.htm
For further information, please contact:
Catherine Miao, Partner, Jun He
miaoqh@junhe.com
