Foreign Investment Bulletin May, 2016

The State Administration for Industry and Commerce issued the Decision of the State Administration for Industry and Commerce on Abolishing and Revising Certain Administrative Rules for Industry and Commerce, in which ten departmental rules were abolished and four departmental rules were revised. 

The Shanghai Head Quarters of the People’s Bank of China along with other organizations issued several regulations on the same date providing detailed rules for regulating investment activities of foreign investors in the interbank bond market.

The State Council and the Ministry of Commerce issued new rules to further promote trade liberalization between the Mainland and Hong Kong, as well as the Mainland and Macau.

1. The Decision of the State Administration for Industry and Commerce on Abolishing and Revising Certain Administrative Rules for Industry and Commerce

On April 29, 2016, the State Administration for Industry and Commerce (“SAIC”) issued the Decision of the State Administration for Industry and Commerce on Abolishing and Revising Certain Administrative Rules for Industry and Commerce (“Decision on Abolishing and Revising Administrative Rules”), in which  ten departmental rules were abolished and four departmental rules were revised, namely the Implementing Rules for the Administrative Regulations of the People's Republic of China on the Registration of Enterprise Legal Persons, Administrative Measures for the Registration of Enterprises of Foreign Countries (Regions) Engaging in Production and Operation Activities within the Territory of China, Administrative Measures for Authorized Registration of Foreign-invested Enterprises, and Measures for Equity Pledge Registrations with Administrative Authorities for Industry and Commerce are revised.

1.1 Background

The SAIC initiated a centralized clean-up campaign of departmental rules and issued the Decision on Abolishing and Revising Administrative Rules (Draft for Comment) on March 29, 2016. The Decision on Abolishing and Revising Administrative Rules was officially issued and implemented on April 29, 2016.

1.2 Legal Review

The relevant content for foreign investment of the Decision on Abolishing and Revising Administrative Rules are as follows:

Firstly, the registration rules have been annulled for representative offices of all foreign-invested enterprises. In fact, as of April 24, 2006, according to Implementation Opinions on Several Issues of Administrative Rules on Examination, Approval and Registration of Foreign-invested Enterprises, the registration authorities no longer handle registrations for representative offices of foreign-invested enterprises. SAIC revised the Administrative Regulations of the People's Republic of China on the Registration of Enterprise Legal Persons based on the above implementation opinions.

Secondly, the registration authorities of foreign-invested enterprises engaging in production and operation business within the territory of China have been changed from SAIC and other authorized local administrations for industry and commerce to provincial level administrations for industry and commerce.

Thirdly, the requirements have been lifted for registration authorities to conduct annual inspections on branch offices of foreign banks, and foreign-invested enterprises engaging in operation and management and exploration and exploitation of mineral resources. The rules have been changed so that foreign-invested enterprises are required to submit an annual report for the previous year.

Lastly, the requirement has been lifted for foreign-invested enterprises to obtain approval from approving authorities before conducting equity pledge registrations. However, it is important to note that according to the Several Provisions on Change of Investors' Equity in Foreign-invested Enterprises, any pledge of equity by foreign-invested enterprises is still required to obtain prior approval from the approving authorities before filing with registration authorities, and any pledge of equity without obtaining approval and registering would be invalid. Therefore, although registration authorities would no longer require prior approval from approving authorities when handling equity pledge registration, foreign-invested enterprises should still obtain approval from approving authorities prior to submitting equity pledge registration.

1.3 Next Steps

Foreign-invested enterprises engaging in production and operation activities within the territory of China should note that they are required to submit annual reports for the previous year through Enterprise Credit and Information Publicity System to its original registration authority between January 1 and June 30 each year. If foreign-invested enterprises fail to submit annual reports according to the relevant provisions, they will face the risk of being punished by competent authorities.

2. Issuance of Several Regulations Governing Investment Activities of Foreign Investors in the Interbank Bond Market

On May 27, 2016, the Shanghai Head Quarters of People’s Bank of China (hereinafter “Shanghai HQ”) issued the Implementing Rules of Record-filing Administration of Investments of Foreign Institutional Investors in the Interbank Bond Market (Zhong Guo Ren Min Yin Hang Shang Hai Zong Bu Gong Gao [2016] No. 2) (hereinafter “No. 2 Rules”) which clarifies in detail record-filing administration of investments of foreign institutional investors in the interbank bond market. On the same date the State Administration of Foreign Exchange issued the Circular of the State Administration of Foreign Exchange on Foreign Exchange Questions Relating to Investments of Foreign Institutional Investors in the Interbank Bond Market (Hui Fa [2016] No. 12) (hereinafter “No. 12 Circular”). The China Central Depository & Clearing Co., Ltd. (hereinafter “CCDC”), the National Interbank Funding Center (hereinafter “NIFC”) and the Interbank Market Clearing Joint Stock Company (hereinafter “Clearing House”) jointly issued the Guide for Foreign Institutional Investors to Enter into the Interbank Market Network and Account Opening (hereinafter “NAO Guide”). No. 12 Circular and NAO Guide regulate the foreign exchange registration and remittance and exchange of capital, and account opening and networking.

2.1 Background

People’s Bank of China issued the Circular on Further Improving the Investments by Foreign Institutional Investors in the Interbank Bond Market (hereinafter “Circular”) on February 17, 2016. The Circular mainly clarifies the scope and requirements for qualified foreign institutional investors to invest in the interbank bond market, and system of trading and settlement by the clearing agents for the foreign investors.

Furthermore, the Circular also stipulates that the duties of relevant organizations in investment activities of the foreign institutional investors in the interbank bond market, including: (1) remittance and exchange of capital by the foreign institutional investors according to administrative rules of foreign exchange; (2) the Shanghai HQ is responsible for record-filing of foreign institutional investors and strengthening the interim and post surveillance and administration of foreign institutional investors and clearing agents; and (3) provisions of satisfactory services and surveillance by the interbank lending and borrowing center and bond registration, management and clearance organization. The No. 2 Rules, the No. 12 Circular and the NAO Guide correspond with the above provisions in the Circular. To date, the investments of foreign institutional investors in the interbank bond market under the framework of the Circular have been further regulated on an operation level.

2.2 Legal Review

As the implementing rules of the Circular, No. 2 Rules formulates two investment record-filing forms for juristic-person and non-juristic-person investors according to the Circular and further clarifies and specifies relevant provisions in the Circular, which mainly includes the follows:

(1) The Circular stipulates that for foreign institutional investors to enter into the interbank bond market, they shall apply for record-filing procedure via clearing agents with the Shanghai HQ. The No. 2 Rules further clarifies that the Shanghai HQ when upon receiving such record-filing application shall issue the notice of record-filing within 20 work days, and such notice of record-filing will be effective for three months from the date of issuance. At the same time, the No. 2 Rules stipulate that for foreign investors to alter the record-filing information or withdraw from the interbank bond market, they shall file application via clearing agents. If the foreign institutional investors fail to remit 50% or less of the intended investment amount in the record-filing within 9 months from the date of completion of record-filing, they shall resubmit relevant information regarding intended investment scale.

(2) The Circular stipulates that the Shanghai HQ is responsible for strengthening the interim and post surveillance and administration of the foreign institutional investors and clearing agents. Regarding this matter, the No. 2 Rules set out detailed measures for interim and post surveillance and administration, including: requiring the clearing agents to submit relevant information regarding the foreign institutional investors represented and report on operation of investment business of last month on a monthly basis; requiring the CCDC, the NIFC and the Clearing House to submit the report on operation of business operation of foreign institutional investors of last month on a monthly basis; the Shanghai HQ has the direction in conducting surveillance and administration of the foreign institutional investors and clearing agents by interviews and on-site inspections, and may adopt administration measures and administration punishments for its breaching of relevant rules and regulations, including admonishing communication, warning, suspension of business, and forced withdrawal.

The No. 12 Circular passed by the State Administration of Foreign Exchange regulates the investment activities of the foreign institutional investors in the interbank bond market in mainly three aspects: the first aspect is to conduct registration administration of foreign institutional investors and to require the foreign institutional investors to undergo foreign exchange registration, alteration, and deregistration procedure via the clearing agents; the second aspect is not to set a limit for any single organization or a total limit, and the foreign institutional investors can apply for remittance of capital, and settlement and purchase of foreign exchange at the banks with relevant registration information without obtaining examination or approval from foreign exchange authorities; the third aspect is to require the foreign institutional investors to keep the ratio of foreign-domestic currency of the outgoing capital the same as that of the incoming capital, with the difference not exceeding 10%.

2.3 Next Steps

Although the Circular sets out that the qualified foreign institutional investors can decide the investment scale on their own without a limit on their investment and the Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) have been accepted by the Circular as the qualified foreign institutional investors to invest in the interbank bond market. However, the No. 12 Circular passed by the State Administration of Foreign Exchange stipulates that the QFII and the RQFII investing in the interbank bond market shall still follow the foreign exchange rules currently applicable to them. Hence, the QFII and RQFII are still restricted in aspects including investment limit, ratio and remittance and exchange of currency.

3. To Further Promote Trade Liberalization between the Mainland and Hong Kong, as well as the Mainland and Macau

In order to implement the Agreement on Trade in Services under the framework of the Mainland and Hong Kong Closer Economic Partnership Arrangement and the Agreement on Trade in Services under the framework of the Mainland and Macau Closer Economic Partnership Arrangement signed by the Mainland and Hong Kong, as well as the Mainland and Macau in November 2015 respectively (collectively referred to as “Agreements on Trade in Services” hereunder), the State Council issued the Decision of the State Council on Temporarily Adjusting the Administrative Approvals and the Special Administrative Measures on Market Access concerning Hong Kong and Macau Service Providers in Mainland China, and the Ministry of Commerce issued the Administrative Measures for the Filing of Investments by Hong Kong and Macau Service Providers in Mainland China (for Trial Implementation), both effective on June 1, 2016.

3.1 Background

In 2003, in order to strengthen trade and investment cooperation between the Mainland and Hong Kong, as well as the Mainland and Macau, the Mainland and Hong Kong Closer Economic Partnership Arrangement and the Mainland and Macau Closer Economic Partnership Arrangement were signed by the Mainland and Hong Kong, as well as the Mainland and Macau respectively (collectively referred to as “CEPA” hereunder). It is CEPA’s intention to promote development in product trade, service trade, and trade and investment facilitation between the Mainland and Hong Kong, as well as the Mainland and Macau.

To promote achievement of basic liberalization of trade in services between the Mainland and Hong Kong, as well as the Mainland and Macau, the Agreement between the Mainland and Hong Kong on Achieving Basic Liberalization of Trade in Services in Guangdong and the Agreement between the Mainland and Macau on Achieving Basic Liberalization of Trade in Services in Guangdong (collectively referred to as “Guangdong Agreements” hereunder) were signed between the Mainland and Hong Kong, as well as the Mainland and Macau in 2014. The Guangdong Agreements were effective on March 1, 2015. To implement Guangdong Agreements, the State Council drafted the Decision of the State Council on Temporarily Adjusting the Administrative Approvals and the Special Administrative Measures on Market Access concerning Hong Kong and Macau Service Providers in Mainland China, which provides that, other than the restricted measures, establishment of and change in telecommunication enterprises, companies engaging in cultural areas and financial institutions, and establishment of and change in commercial presence that are not in the form of companies as specified in the Guangdong Agreements, for Hong Kong and Macau service providers investing in service trade areas in Guangdong opened to Hong Kong and Macau as specified in Guangdong Agreements, the approval requirements on joint venture agreements and articles of association in relation to the establishment of and change in companies as specified in regulations related to foreign investment are temporarily suspended, and filing requirements on joint venture agreements and articles of association in relation to the establishment of and change in companies are implemented. The Ministry of Commerce also drafted the Administrative Measures for the Filing of Investments by Hong Kong and Macau Service Providers in Mainland China (for Trial Implementation), setting out provisions on filing management for Hong Kong and Macau service providers investing in service trade areas in Guangdong opened to Hong Kong and Macau under the Guangdong Agreements.
On the basis of the Guangdong Agreements, the Mainland and Hong Kong, as well as the Mainland and Macau signed the Agreements on Trade in Services in 2015 respectively, extending the geographical coverage to the whole Mainland for basic liberalization of trade in services. The Agreements on Trade in Services went into effective on June 1, 2016.

3.2 Legal Review

In order to implement the Agreements on Trade in Services, the State Council issued the Decision of the State Council on Temporarily Adjusting the Administrative Approvals and the Special Administrative Measures on Market Access concerning Hong Kong and Macau Service Providers in Mainland China, and the Ministry of Commerce issued the Administrative Measures for the Filing of Investments by Hong Kong and Macau Service Providers in Mainland China (for Trial Implementation), both effective on June 1, 2016. The Decision of the State Council on Temporarily Adjusting the Administrative Approval and Special Administrative Measures on Market Access for Hong Kong and Macau Service Providers in Guangdong Province and the Administrative Measures for the Record-filing of Investments Made by Hong Kong and Macau Service Providers in Guangdong Province (for Trial Implementation) have been abolished since June 1, 2016.

Other than the restricted measures, establishment of and change in telecommunication enterprises, companies engaging in cultural areas and financial institutions, and establishment of and change in commercial presence that are not in the form of companies as specified in the Agreements on Trade in Services, for Hong Kong and Macau service providers investing in service trade areas in the Mainland opened to Hong Kong and Macau service providers as specified in the Agreements on Trade in Services, approval requirements on joint venture agreements and articles of association in relation to the establishment of and change in their companies have been changed to filing requirements.

Administrative approvals and special administrative measures such as qualification requirements, restrictions on equity proportion, and restrictions on business scope are temporarily adjusted for Hong Kong and Macau service providers in the Mainland. Specifically, (i) Hong Kong and Macau service providers are allowed to engage in telecommunication service, shipping transportation service, non-diploma professional training service, convention and exhibition service, and air transportation support service; (ii) Hong Kong and Macau service providers are allowed to invest and establish joint venture cultural and artistic performance group controlled by local government in Mainland; (iii) Chinese citizens with permanent residency in Hong Kong or Macau are allowed to establish individual business to operate individual performance brokers without obtaining approval on foreign investments in the Mainland; (iv) Hong Kong and Macau service providers are allowed to set up wholly-owned entertainment places in Guangdong Province; and (v) detailed administrative rules are to be drafted by relevant departments and committees of the State Council and the People’s Government of Guangdong Province.

The filing of joint venture agreements and articles of association in relation to establishment of and change in enterprises invested by Hong Kong and Macau investors are handled by competent commerce authorities of all provinces, autonomous regions, municipalities directly under the central government, cities under separate planning, Xinjiang Production and Construction Corps, and central cities at vice provincial level. Hong Kong and Macau service providers or enterprises invested by Hong Kong and Macau investors should file online through the Foreign Investments (for Hong Kong, Macau and Taiwan investors) Filing Information System developed by the Ministry of Commerce. If the enterprises established by Hong Kong and Macau investors are within the scope of filing, all investors should complete filing procedures after obtaining the Notice of Pre-approval of the Name of Enterprise. Any changes in basic information of enterprise invested by Hong Kong and Macau investors, change in basic information of investors, change in or transfer of equity, pledge of equity, merges, spin-offs and terminations of enterprises should be filed with the competent authorities. If changes occurred before June 1, 2016, enterprises invested by Hong Kong and Macau service providers should complete filing procedures, and any Certificate of Approval for Establishment of Enterprises with Investment of Taiwan, Hong Kong, Macau and Overseas Chinese in the People’s Republic of China should be returned and destroyed.

3.3 Next Steps

The State Council requires that detailed administrative rules concerning temporary adjustments on implementation of the administrative approvals and the special administrative measures be drafted by relevant departments and committees of the State Council. The legislation progress and detailed content of relevant departmental rules is worth our continued attention.