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Foreign Investment Bulletin June, 2015

2015.07.24 MIAO, Qinghui (Catherine) 、 PAN, Yiming、LI, Yuming、PENG, Huiying

The China Banking Regulatory Commission (“CBRC”) released the Measures for the Implementation of Administrative Licensing of Foreign-funded Banks (2015 Revision) (the “Measures for Administrative Licensing of Foreign-funded Banks”), which significantly revised the Measures for Administrative Licensing of Foreign-funded Banks (2014 Revision).  


The National Development and Reform Commission (“NDRC”) released the Regulation on the Administration of Investment Projects Subject to Government Verification and Approval and Investment Projects Subject to Government Record-filing (Draft for Comments) (the “Regulation on Verification and Record-filing”), which will be the first administrative regulation applicable to the government’s administration of investment projects by way of verification and approval and record-filing.  


The Ministry of Industry and Information Technology (“MIIT”) released the Circular of the Ministry of Industry and Information Technology on Liberalizing the Restrictions on Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (For E-commerce Business) (MIIT Circular [2015] No. 196) (the “No. 196 Circular”) to remove restrictions on foreign shareholding  in E-commerce.


1. CBRC Further Revised the Measures for Administrative Licensing of Foreign-funded Banks


In accordance with the Regulation of the People’s Republic of China on the Administration of Foreign-funded Banks (2nd Revision in 2014) effective from January 1, 2015 (the “2015 Regulation on Foreign-funded Banks”), the CBRC released the revised Measures for Administrative Licensing of Foreign-funded Banks on June 5, 2015, which significantly revised the 2014 Measures for Administrative Licensing of Foreign-funded Banks.


1.1 Background


CBRC formulated the Measures for the Implementation of Administrative Licensing of Foreign-funded Financial Institutions, which became effective from February 1, 2006.  Such measures seek to regulate the administrative licensing of foreign-funded financial institutions by CBRC and its branches, clarify the matters subject to administrative licensing and the conditions, operational procedures and time limits for administrative licensing, and protect applicants’ legitimate rights and interests.


On September 30, 2013, CBRC released the Measures for the Implementation of Administrative Licensing of Foreign-funded Banks (Draft for Comments) to seek public comments on the revisions to the Measures for the Implementation of Administrative Licensing of Foreign-funded Financial Institutions.  Based upon the comments from various sectors, the Measures for the Implementation of Administrative Licensing of Foreign-funded Financial Institutions was revised and renamed the Measures for the Implementation of Administrative Licensing of Foreign-funded Banks, and became effective on September 11, 2014.


To respond to the demand of the State Council to further streamline administration and delegate power to lower levels and to reform the administrative licensing system, CBRC further revised the Measures for Administrative Licensing of Foreign-funded Banks and released the draft for comments on April 10, 2015.  The 2015 Measures for Administrative Licensing of Foreign-funded Banks was implemented from June 5, 2015.


1.2 Legal Review


The highlights of this revision by CBRC are as follows.


First, to maintain alignment with the 2015 Regulation on Foreign-funded Banks, the 2015 Measures for Administrative Licensing of Foreign-funded Banks provides in relevant parts as follows: (i) for establishing a branch of a foreign bank, removal of the requirement to maintain a representative office in China for two years; (ii) for the working capital of the branches, removal of the requirement that the head office of the wholly foreign-owned bank or Chinese-foreign joint venture bank must “allocate without compensation not less than RMB100 million or the equivalent amount of freely convertible currency”; (iii) the condition for the first application of a foreign-funded bank to operate the Renminbi business was changed from “having been in business operation within China for three years or longer prior to the application” to “having been in business operation within China for one year or longer prior to the application”.


Second, the examination and approval authority was divided between CBRC and local banking regulatory bureaus.  Matters subject to examination and approval by CBRC may be classified into the following four categories.  


The first category consists of matters to be submitted to, examined and decided by CBRC, such as applications for the verification and approval of the qualification of chairmen, presidents and other personnel who have decision-making power over business and management matters or who play an important role in the risk control of “foreign-funded banks under the direct supervision of CBRC” and applications for changing the names of wholly foreign-owned banks, Sino-foreign joint venture banks, or branches of foreign banks.  The term “foreign-funded banks under the direct supervision of CBRC” was introduced in this revision, and means foreign-funded banks, including wholly foreign-owned banks, Sino-foreign joint venture banks and institutions of foreign-funded banks, that establish tier-one branches in 15 or more provinces, autonomous regions and/or municipalities.)


The second category consists of applications for changing the registered capital, applications for operating Renminbi business or expanding the scope of recipients of Renminbi business and other applications made by “foreign-funded banks under the direct supervision of CBRC”.


The third category consists of applications made by the other wholly foreign-owned banks and Sino-foreign joint venture banks that are not under the direct supervision of CBRC, such as the following applications by wholly foreign-owned banks and Sino-foreign joint venture banks: dissolution, change in shareholders or adjustments to shareholding percentages of shareholders, and issuing debts and capital replenishing instruments. 


The fourth category consists of matters to be submitted to and preliminarily examined by local banking regulatory bureaus and to be examined and decided by CBRC, such as applications for the verification and approval of the qualification of chairmen, presidents (chief executive officers or general managers) of wholly foreign-owned banks and Sino-foreign joint venture banks that are not under the direct supervision of CBRC.  Prior to the implementation of the 2015 Measures for Administrative Licensing of Foreign-funded Banks, most applications must be submitted first to the local banking regulatory bureaus for preliminary examination and then to CBRC for final examination and decision. 


Under the 2015 Measures for Administrative Licensing of Foreign-funded Banks, applications in categories (3) and (4) must still be submitted first to local banking regulatory bureaus for preliminary examination and then to CBRC for examination and decision, but applications in categories (1) and (2) can be submitted to CBRC directly.


Meanwhile, CBRC delegated the examination and approval authority for certain matters to local banking regulatory bureaus, such as  applications for the following actions: (1) changing registered capital and operating Renminbi business or expanding the scope of recipients of Renminbi business made by other wholly foreign-owned banks and Chinese-foreign joint venture banks that are not under the direct supervision of CBRC; (2) modifying working capital made by branches of foreign banks, (3) changing names made by  the representative offices of foreign banks; commencement of business operations made by wholly foreign-owned banks and Sino-foreign joint venture banks;(4) commencement of business operations made by branches of foreign banks;(5) establishment of representative offices made by foreign banks; (6) verification of the qualification of the chairmen or presidents (chief executive officers or general managers) of wholly foreign-owned banks or Chinese-foreign joint venture banks who are appointed for the first time upon the establishment of the same.


Third, the 2015 Measures for Administrative Licensing of Foreign-funded Banks only require verification of the qualification of presidents of managing sub-branches (meaning sub-branches that have partial or complete jurisdiction over the management of organizations, business, personnel, etc. of such sub-branches as well as other sub-branches or offices under such sub-branches), and removed the requirement for verification of the qualification of presidents of operating sub-branches (meaning sub-branches not bearing management duties for other sub-branches or offices under sub-branches).


Fourth, the 2015 Measures for Administrative Licensing of Foreign-funded Banks provide that an audit report for departure is not required where a proposed person, who is qualified to hold the post of senior executive and has not ceased to hold the position for one consecutive year or longer, is transferred to another position within the same legal person at the same or lower level.


1.3 Next Step


CBRC released the Implementing Rules for the Regulation of the People’s Republic of China on the Administration of Foreign-funded Banks (Revision Draft for Comments) on March 12, 2015.  It is worth focusing on the legislation and practice in support of the implementation of the 2015 Regulation on Foreign-funded Banks.


2. NDRC Seeks Comments on the Regulation on Verification and Record-filing


On June 12, 2015, NDRC released the Regulation on Verification and Record-filing (Draft for Comments).  The Regulation on Verification and Record-filing will govern fixed asset investment projects that are constructed within China by various types of enterprises without using government investment funds, and outbound investment projects that are constructed by various types of Chinese domestic enterprises on their own and via overseas enterprises or institutions.


2.1 Background


On July 16, 2004, the State Council issued the Decision of the State Council on Investment System Reform (the “Decision on Reform”) to reform the government’s administration system for enterprise investments. It provides that projects not using government investment funds will be subject to the verification and approval system or the recording-filing system (as the case may be), instead of the examination and approval system.  Meanwhile, the State Council also formulated the Catalogue of Investment Projects Subject to Verification and Approval by the Government (2004) to strictly limit the scope of investment projects subject to verification and approval by the government.


With respect to foreign investment projects, in accordance with the Decision on Reform and the Catalogue of Investment Projects Subject to Verification and Approval by the Government (2004), NDRC issued the Interim Measures for the Administration of Verification and Approval of Foreign Investment Projects on October 9, 2004.  Since then, China adopted a unified verification and approval system for the administration of foreign investment projects.  The Interim Measures for the Administration of Verification and Approval of Foreign Investment Projects identified the verification and approval authorities in charge of the administration of foreign investment projects according to the classification under the Catalogue of Industries for Guiding Foreign Investment (namely, encouraged, permitted and restricted categories) and the total investment (including incremental amount of the investment).  For encouraged projects or permitted projects with total investment not less than USD100 million and for restricted projects with total investment not less than USD50 million, project applications shall be verified and approved by NDRC.  For encouraged projects or permitted projects with total investment less than USD100 million and for restricted projects with total investment less than USD50 million, project applications shall be verified and approved by the local branches of NDRC, in which restricted projects shall only be verified and approved by provincial branches of NDRC.  Since May 4, 2010, NDRC delegated the verification and approval authority for encouraged projects and permitted projects with total investment less than USD300 million to provincial branches of NDRC, except as otherwise required to be verified and approved by departments of the State Council under the Catalogue of Investment Projects Subject to Verification and Approval by the Government.


NDRC issued the Measures for the Administration on Verification and Approval and Record-filing of Foreign Investment Projects (the “Measures on Verification and Record-filing”) on May 20, 2014, whereby the government changed the unified verification and approval system to the verification and approval system and record-filing system for the administration of foreign investment projects.  The Measures on Verification and Record-filing classified foreign investment projects into: (1) the category of foreign investment projects subject to verification and approval and (2) the category of foreign investment projects subject to record-filing, according to the (i) classification under the Catalogue of Industries for Guiding Foreign Investment, (ii) the total investment and (iii) the classification under the Catalogue of Investment Projects Subject to Verification and Approval by the Government.  


Foreign investment projects subject to verification and approval include: (1) projects subject to the verification and approval by NDRC: encouraged projects with a total investment of USD300 million or more that must be controlled (including relatively controlled) by Chinese shareholders, and restricted projects with a total investment of USD 50million or more (excluding real estate projects); (2) projects subject to verification and approval by provincial branches of NDRC: real estate projects under restricted industries and other restricted projects with a total investment of less than USD50 million; (3) projects subject to verification and approval by municipal branches of NDRC: encouraged projects with a total investment of less than USD300 million that must be controlled (including relatively controlled) by Chinese shareholders; and (4) foreign investment projects other than the foregoing that are listed in Catalogue of Investment Projects Subject to Verification and Approval by the Government, which shall be subject to verification and approval in accordance with the relevant provisions thereof.  


Those foreign investment projects that do not fall in the scope of projects subject to verification and approval shall be subject to record-filing by the competent departments of local governments.  The Regulation on Verification and Record-filing issued by NDRC is the first administrative regulation to regulate the administration of foreign investment projects by way of verification and approval as well as record-filing by the government.


2.2 Legal Review 


Compared to the Measures on Verification and Record-filing currently in effect, the Regulation on Verification and Record-filing is different in the following aspects.


First, the Regulation on Verification and Record-filing will be enacted as an administrative regulation, with a higher position in the legislative hierarchy than that of the two departmental regulations issued in 2004 and 2014, respectively. This demonstrates that the government is paying more attention to the administration of project approval.


Second, the Regulation on Verification and Record-filing will be generally applicable to investment projects within China by foreign-invested enterprises, investment projects within China by domestic enterprises and outbound investment projects by Chinese enterprises. This means that NDRC and its branches will follow the national treatment principle to treat project applications made by domestic enterprises and foreign-invested enterprises equally.


Third, with respect to foreign investment projects subject to verification and approval, the Regulation on Verification and Record-filing introduces more conditions, compared to the Measures on Verification and Record-filing.  Such conditions include examining whether the foreign investment project is in compliance with the Catalogue of Industries for Guiding Foreign Investment, the Catalogue of Priority Industries for Foreign Investment in Central and Western China and relevant provisions of the State on capital account management and external debt management; whether the project is in compliance with development planning, industry policies and industry entry standards; whether the project will rationally develop and effectively utilize resources; whether the project  will not affect national security and ecological security; whether the project  will not have any material adverse impact on public interests. The verification and approval authorities must additionally examine whether the project is in compliance with relevant laws and regulations, macro control policies and technical policies of the State.


2.3 Next Step


The State Council has not released the new Catalogue of Investment Projects Subject to Verification and Approval by the Government revised in connection with the Regulation on Verification and Record-filing.  We will monitor whether the new Catalogue will expand or contract the scope of the 2014 Catalogue.


In addition, the Regulation on Verification and Record-filing introduces online examination and approval regulatory platforms for investment projects, a unified code system for investment projects, a system of online submission of investment project information for record-filing, a system of abnormal credit records and a "blacklist" system.  We will monitor the progress and effects of such systems.


3. MIIT Removed Restrictions on Foreign Shareholding in Online Data Processing and Transaction Processing Business (For E-commerce Business)


MIIT issued the No. 196 Circular on June 19, 2015, deciding to, on the basis of the pilot program in the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”), liberalize the restrictions on foreign shareholding in E-commerce nationwide, which foreign shareholding now be up to 100%.  The No. 196 Circular is effective from the date of issuance.


3.1 Background


The online data and transaction processing business refers to the provision of online data processing and transaction/matter processing services for users through the communication network by means of various data and transaction/matter processing application platforms that are connected to the communication network.  The online data and transaction processing services include transaction processing services, electronic data interchange services and network/electronic equipment data processing services.  Online data and transaction processing is a value-added telecommunications business.  


Foreign investment in value-added telecommunications business has evolved from prohibition to gradual liberalization in China.


Since January 1, 1998, telecommunications businesses were classified as prohibited foreign investment projects.  From December 11, 2001, to implement China’s commitments upon joining the Word Trade Organization, China permitted foreign investment in value-added telecommunications businesses with foreign shareholding not exceeding 30% and promised to permit foreign shareholding not exceeding 49% no later than December 11, 2002, and to permit foreign shareholding up to 50% no later than December 11, 2003.  From January 1, 2002, foreign shareholding cannot exceed 50% for foreign-invested telecommunications enterprises engaged in the value-added telecommunications business.  Since then, this restriction on foreign shareholding has not been further liberalized.


After the establishment of the Shanghai FTZ in 2013, China gradually liberalized the restriction on foreign shareholding in E-commerce in the Shanghai FTZ. From January 6, 2014, foreign shareholding in E-commerce was permitted to be increased to up to 55%.  From January 13, 2015, foreign shareholding was further permitted to be increased to 100%.


Under the Catalogue of Industries for Guiding Foreign Investment revised on April 10, 2015, foreign shareholding in value-added telecommunications businesses still cannot exceed 50%. Due to the experience of the pilot program in the Shanghai FTZ, however, the restriction on foreign shareholding in E-commerce was removed. MIIT issued No. 196 Circular accordingly. 


3.2 Legal Review


Though No. 196 Circular removed restrictions on the foreign shareholding in E-commerce, when applying for the permit for operating the same, foreign investors must still satisfy other conditions and follow the relevant examination and approval procedures as required by the Provisions on the Administration of Foreign-invested Telecommunications Enterprises. The conditions mainly include: (i) the minimum registered capital for a foreign-invested telecommunications enterprise (specifically, for operating value-added telecommunications services nationwide or in more than one province, autonomous region, or municipality, the registered capital is no less than RMB10 million; for operating value-added telecommunications services within a province, autonomous region, or municipality, the registered capital is no less than RMB1 million); and (ii) the qualification of the primary foreign investors (specifically, the foreign investors must have a good record of and experience in operating value-added telecommunications businesses).


3.3 Next Step


At the executive meeting of the State Council held on June 4, Li Keqiang, the Prime Minister, said that the government would promote domestic listings of start-up firms with “special ownership structure” .  No. 196 Circularis considered as a major positive policy to promote the delisting of VIEs from overseas stock exchanges and to return to the domestic stock exchanges for listing.


At the same time, though No. 196 Circular liberalized restrictions on foreign shareholding in E-commerce, the primary foreign investor must have a good record of and experience in operating value-added telecommunications businesses.  Certain overseas private equity funds or venture capital funds may not satisfy these conditions.  It is worth monitoring whether the Chinese telecommunications authorities will further liberalize the conditions for access by foreign investors to E-commerce.

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