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Foreign Investment Bulletin Sep.-Oct. 2016

2016.11.29 MIAO,Qinghui (Catherine) 、Vivian Pan

China will set up seven new free trade zones, bringing the total number to 11 free trade zones across the country.


Authorities including the National Development and Reform Commission and the Ministry of Commerce jointly released a revised draft for public comment of the Catalogue of Priority Industries for Foreign Investment in Central and Western China.


The 22nd session of the Standing Committee of the 12th National People's Congress of the People's Republic of China adopted 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. Accordingly, October 1, 2016 marked the implementation of a new model for applying “National Treatment”1 and “Negative List” regulations on inbound foreign investment.


In order to regulate the services and activities related to mutual market access between the stock markets of Mainland and Hong Kong, the China Securities Regulatory Commission issued the Several Provisions on Mutual Market Access Mechanism between the Stock Markets of Mainland and Hong Kong and relevant implementation rules. 


The Ministry of Commerce decided to abolish sixteen departmental provisions including those related to foreign investment in commercial fields and foreign investment in conference and exhibition companies.


1. China Will Set Up Seven New Free Trade Zones


According to a news report by Xinhua, following the previously established FTZs in Guangdong and Fujian Provinces as well as Shanghai and Tianjin, China will set up seven new free trade zones (the “FTZs”) in Liaoning, Zhejiang, Henan, Hubei, Sichuan and Shanxi Provinces as well as the municipality of Chongqing, bringing the total number to 11 FTZs2.


1.1 Background


In 2013, the State Council launched the first FTZ in Shanghai. In 2015, the State Council launched three more FTZs in Guangdong and Fujian Provinces as well as Tianjin. The main purpose of these four FTZs is to explore new management patterns, as well as to facilitate trading and investment. The success of these four FTZs will now be introduced across the country step by step.


1.2 Legal Review


The State Council has not yet announced the overall plan for the seven new FTZs. As reported, the new FTZs will have different focuses. For example, the FTZ in Zhejiang Province will mainly focus on developing Zhoushan free trade port zone, promoting free trade of bulk commodities and improving the capacity to allocate bulk commodities across the globe; the FTZ in Henan Province will mainly focus on establishing a modern multimodal transportation system and a modern logistic system, linking up the north and the south as well as the east and the west.


1.3 Next Steps


The State Council issued specific overall plans when setting up the FTZs in Guangdong and Fujian Provinces, as well as Shanghai and Tianjin, providing detailed rules on issues such as scope, major targets and measures of the FTZs. We await the content of the overall plan for the seven new FTZs.


2. Call for Public Comment on the Revision of the Catalogue of Priority Industries for Foreign Investment in Central and Western China 


On September 14, 2016, authorities including the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOC”) jointly released a revised draft for public comment of the Catalogue of Priority Industries for Foreign Investment in Central and Western China.


2.1 Background


The Catalogue of Industries for Guiding Foreign Investment and the Catalogue of Priority Industries for Foreign Investment in Central and Western China serve as the basis of applicable policies for guiding the examination and approval of foreign investment projects and foreign-invested enterprises. The first catalogue applies nationwide while the second catalogue only applies to 22 provinces, autonomous regions and municipality in central and western China, each of which issues a specific catalogue for the locale. Foreign-invested enterprises engaging in businesses covered by the Catalogue of Priority Industries for Foreign Investment in Central and Western China may enjoy preferential policies for “encouraged” industry open to foreign investment.


The Catalogue of Priority Industries for Foreign Investment in Central and Western China was implemented on June 16, 2000 and revised in 2004, 2008 and 2013. The current version has been in force since June 10, 2013.


2.2 Legal Review


Set out below are two highlights of the latest revision of the Catalogue of Priority Industries for Foreign Investment in Central and Western China:


Firstly, new foreign investment projects which do not appear in the Catalogue of Industries for Guiding Foreign Investment have been added in the Catalogue of Priority Industries for Foreign Investment in Central and Western China. Some of the newly-added projects show the country’s attempt to encourage upgrading industry in central and western China. For example, development and application projects for new generations of information technology such as cloud computing, big data and mobile internet were added to the local catalogues of Guangxi Autonomous Region, Chongqing Municipality, Guizhou, Yunnan and Hainan Provinces; research and manufacturing projects of new generations of wearable smart devices and VR/AR devices were added on local catalogues of Liaoning, Jiangxi and Sichuan Provinces; research and manufacturing projects of smart robots are added to the local catalogues of Liaoning, Heilongjiang, Anhui, Jiangxi, Sichuan Provinces as well as Chongqing Municipality. 


Some of the newly-added projects reflect local economic features in the central and western regions. For example, development and operations projects of smart logistic ports and inland ports are added to the local catalogue of Jilin Province; projects for processing green food are added to the local catalogue of Heilongjiang Province.


Secondly, some projects included as “encouraged” industry in the current Catalogue of Industries for Guiding Foreign Investment have been removed from the Catalogue of Priority Industries for Foreign Investment in Central and Western China, including projects for the internet of things and nursing homes.


2.3 Next Steps


The consultation period for the revised draft of Catalogue of Priority Industries for Foreign Investment in Central and Western China ended on 14 October 2016. We await the final content of the revised Catalogue of Priority Industries for Foreign Investment in Central and Western China.


3. The Implementation of the New Model for Applying “National Treatment” and “Negative List” Regulations on Inbound Foreign Investment


On September 3, 2016, the 22nd session of the Standing Committee of the 12th National People's Congress of the People's Republic of China adopted 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 (the “Decision”). According to the Decision, starting on October 1, 2016 for matters such as incorporation and changes of foreign-invested enterprises that do not involve special entry regulatory measures (the “Negative List”) implemented by the regulations of the state should be regulated by record-filings rather than by approvals as they have been previously. In short, new model for applying “National Treatment” and “Negative List” regulations on inbound foreign investment has been implemented. The MOC published the Interim Measures for the Record-filing Administration for the Incorporation and Change of Foreign-invested Enterprises (Draft for Comment) on the same day to solicit public comment.


On September 30, 2016, the State Administration for Industry and Commerce promulgated the Circular of the State Administration for Industry and Commerce on Properly Conducting Registration of Foreign-invested Enterprises Subject to Filing. 


On October 8, 2016, the National Development and Reform Commission and the MOC jointly published the Announcement No. 22 of Year 2016 (“Announcement No. 22”), in which the scope of the “Negative List” was announced. On the same day, the MOC promulgated the Interim Measures for the Record-filing Administration for the Incorporation and Change of Foreign-invested Enterprises (“Record-filing Administration Measures”). The Announcement No. 22 and the Record-filing Administration Measures became effective on the date of their promulgation. 


3.1 Background


Approval for each particular matter has for many years been the regulatory model for inbound foreign investment in China. That means, each particular matter of foreign-invested enterprises and Taiwan compatriot-invested enterprises (together as “FIEs” hereinafter) is approved in accordance with the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People's Republic of China on Sino-foreign Cooperative Joint Ventures and the Law of the People's Republic of China on the Protection of the Investments of Taiwan Compatriots. 


In order to explore the practicability of the model for applying “National Treatment” and “Negative List” regulations on inbound foreign investments, since 2013, the Standing Committee of the National People's Congress has authorized the State Council to temporarily suspend the implementation of administrative approvals for matters such as incorporation and changes of foreign-invested enterprises and Taiwan compatriot-invested enterprises under the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People's Republic of China on Sino-foreign Cooperative Joint Ventures and the Law of the People's Republic of China on the Protection of the Investments of Taiwan Compatriots and to regulate such matters by record-filings gradually in the four FTZs in Shanghai, Guangdong, Tianjin and Fujian. 


On September 3, 2016, the 22nd session of the Standing Committee of the 12th National People's Congress adopted the Decision and changed the method of regulating matters such as incorporation and changes of FIEs that do not involve the “Negative List” from approvals to record-filings. The Decision came into force on October 1, 2016.


3.2 Legal Review


First, the Scope of the Applicability of the Record-filing System


The Decision absorbed the regulations in which the State Council was authorized to temporarily suspend the implementation of administrative approvals in the four FTZs and changed the method of regulating the following matters of FIEs that do not involve the “Negative List” from approvals to record-filings:


(1)the incorporation, division, merger or changes in other important matters or the extension of the duration of operation of a wholly foreign-owned enterprise;

(2)the incorporation, extension of the duration of a joint venture or dissolution of a Sino-foreign equity joint venture;

(3)the incorporation, material contract change, transfer of rights and obligations under the cooperative joint venture contract, entrusting the management to others or extension of the duration of cooperation of a Sino-foreign cooperative joint venture;

(4)the incorporation of a Taiwan compatriot-invested enterprise.

It should be noted that the Announcement No. 22 excluded the incorporation and changes of enterprises involving the merger or acquisition by a foreign investor from the scope where the record-filing system is applicable and expressly required that such matters should be regulated according to the existing regulations. 


Second, the Scope of the “Negative List”


In contrast to the “Negative List” implemented in the four FTZs, the Announcement No. 22 does not enumerate, in an itemized fashion according to industry types, the special entry regulatory measures for foreign investment where the “National Treatment” principle is not applicable. Instead, the Announcement No. 22 generally stipulates that the special entry regulatory measures for foreign investment shall be implemented according to the Catalogue of Restricted Foreign Investment Industries, the Catalogue of Prohibited Foreign Investment Industries and the provisions containing requirements about shareholding or senior management personnel in the Catalogue of Encouraged Foreign Investment Industries, as set forth in the Catalogue for the Guidance of Foreign Investment Industries (Revised in 2015).


Record-filing for the Incorporation and Changes of a FIE


With respect to the incorporation of a FIE (for which the record-filing system is applicable), the investor may carry out the record-filing for the incorporation online either during the period after obtaining the enterprise name prior approval and before the issuance of the Business License, or during the 30 days after the issuance of the Business License.


Where any of the following changes occur to a FIE (for which the record-filing system is applicable), the FIE should carry out the record-filing for the change online within 30 days after the change occurs:


(1)changes in the basic information of the FIE, including changes in name, registered address, type of business, duration of operation, investment industry, business type, business scope, whether or not within the scope of tax exemption or reduction for imported equipment stipulated by the state, registered capital, total investment, organizational structure, legal representative, ultimate actual controlling person of the FIE, contact person and contact information;

(2)changes in the basic information of investors of the FIE, including changes in name, nationality/region or address (place of registration or registered address), license type and number, subscribed capital contribution, form of capital contribution, timing of capital contribution, sources of funds, the type of investor;

(3)changes in equity (shares) or cooperation interest;

(4)merger, division or dissolution;

(5)the FIE mortgaging or transferring its property rights and interests to others;

(6)early recovery of investments by foreign partners of a Sino-foreign cooperative joint venture; 

(7)entrusted management of a Sino-foreign cooperative joint venture.

The record-filing authorities (i.e. the commercial authorities at various levels) will verify the completeness and accuracy in the form of the information filed and will check whether the reported matters fall within the scope of the record-filing system. If the matters fall within the scope of the record-filing system, the record-filing authority will complete the record-filing within 3 working days and will issue a proof of record-filing.


When the Record-filing Administration Measures became effective, the Administrative Measures for the Record-filing of Foreign Investment in Pilot FTZs (for Trial Implementation), implemented in the four FTZs, was repealed at the same time. 


Registration of FIEs


In principle, the jurisdiction for the registration of incorporation and changes (record-filings) and de-registration for FIEs (for which the record-filing system is applicable) should be determined according to the locations. The bureau of the lowest level which is authorized to conduct FIE registrations in the place where the FIE is located should be responsible for the registrations of that FIE. Foreign investors may directly apply to the registration authorities for the registrations of incorporation and changes (record-filing) and de-registration for FIEs and do not need to submit the proof of record-filing issued by the commerce authorities. 


3.3 Next Steps


The Announcement No. 22 does not repeal the “Negative List” currently implemented in the four FTZs. We think that the Announcement No. 22 may be merely a “Negative List” for the current stage and that the state may enumerate, in an itemized fashion according to industry types, the special entry regulatory measures for foreign investment where the “National Treatment” principle is not applicable on the basis of the trial results from the four FTZs as well as the Announcement No. 22. We should pay attention to the development of any further revisions to the “Negative List”. 


4. Further issuance and implementation of rules related to the mutual market access mechanism between the stock markets of Mainland and Hong Kong


On September 30, 2016, in order to regulate the services and activities related to the mutual market access between the stock markets of Mainland and Hong Kong, the China Securities Regulatory Commission (the “CSRC”) issued the Several Provisions on Mutual Market Access Mechanism between the Stock Markets of Mainland and Hong Kong (the “Mutual Access Provisions”). The Mutual Access Provisions took effect on the date of issuance, upon which the Several Provisions on Mutual Market Access Mechanism between the Stock Markets of Shanghai and Hong Kong (the “Shanghai-HK Connect Provisions”) was abolished. 


In order to guarantee the implementation of the Mutual Access Provisions, the CSRC has reissued the Record-Filing Provisions on Share Placement and Issuance of Companies Listed in Hong Kong to Their Original Mainland Shareholders under the Hong Kong Stock Connect and the Guidelines for Securities and Funds Operational Organizations in Participating in the Mutual Market Access between the Stock Markets of Mainland and Hong Kong. 


Shenzhen Stock Exchange issued the Implementation Measures of Shenzhen Stock Exchange on Shenzhen-Hong Kong Stock Connect, and the Administrative Guidelines of Shenzhen Stock Exchange on Investor’s Eligibility under Hong Kong Stock Connect; the Shanghai Stock Exchange updated and reissued the Implementation Measure of Shanghai Stock Exchange on Shanghai-Hong Kong Stock Connect (2016 Second Revision) and the Administrative Guidelines of Shanghai Stock Exchange on Investor’s Eligibility under Hong Kong Stock Connect (2016 Revised); the China Securities Depository and Clearing Co., Ltd has issued the Implementation Rules of Securities Registration, Depository and Clearing Services under the Mutual Market Access between the Stock Markets of Mainland and Hong Kong and other relevant implementation rules. 


4.1 Background


On April 10, 2014, in order to facilitate the mutual development of stock markets in Mainland and Hong Kong, the CSRC, Hong Kong Securities and Futures Commission (the “SFC”) decided to commence the trial mutual market access mechanism between stock markets of Shanghai and Hong Kong (the “Shanghai-Hong Kong Stock Connect”). In order to regulate the Shanghai-Hong Kong Stock Connect, the CSRC issued the Provision on Shanghai-Hong Kong Stock Connect on June 13, 2014.


On August 16, 2016, the CSRC and the SFC decided to establish the mutual market access mechanism between stock markets of Shenzhen and Hong Kong (the “Shenzhen-Hong Kong Stock Connect”). After the commencement of the Shenzhen-Hong Kong Stock Connect, the mutual access mechanism between the stock markets of Mainland and Hong Kong consisted of four parts, Northbound Shanghai Trading Link, the Southbound Hong Kong Trading Link under Shanghai-Hong Kong Stock Connect, the Northbound Shenzhen Trading Link and the Southbound Hong Kong Trading Link under Shenzhen-Hong Kong Stock Connect. 


4.2 Legal Review


Since the formal launch of the Shanghai-Hong Kong Stock Connect on November 17, 2014, its operation was stable and in order, which provides the foundation and conditions for the launch of the Shenzhen-Hong Kong Stock Connect. The arrangement and framework of Shenzhen-Hong Kong Stock Connect Mechanism basically follows that of the Shanghai-Hong Kong Stock Connect. The Shanghai-Hong Kong Stock Connect and the Shenzhen Hong Kong Stock Connect jointly constitute the mutual market access mechanism between stock markets of Mainland and Hong Kong. The Mutual Access Provisions also mainly adopted the provisions in the Provision on Shanghai-Hong Kong Stock Connect by merely extending its scope to cover the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect and revising a few individual provisions thereto. 


Two newly added points in the Mutual Access Provisions are noteworthy: first of all, administrative requirements for investor eligibility for the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect was added. The Mutual Access Provisions requires the investors to comply with the investor eligibility requirements and service rules where its authorized securities companies or agents are located. In order to ensure the implementation of these administrative requirements, the Shanghai Stock Exchange and the Shenzhen Stock Exchange have issued the guidelines of investor eligibility under the Hong Kong Stock Connect. Secondly, provisions to provide room for a currency exchange mechanism in the future have been added. The Mutual Access Provisions added the provision under which trading and payment with currencies other than Renminbi shall comply with regulations issued by the People’s Bank of China. 


4.3 Next Steps


The preparatory period for the Shenzhen-Hong Kong Stock Connect is around 4 months, from August 16, 2016 to its formal implementation. It was mentioned by the CSRC when answering questions related to the Mutual Access Provisions on October 2, 2016, that the CSRC will further issue the Provision on Shareholders’ Meeting of Listed Companies, the Guidelines on Articles of Association of the Listed Companies, the Notice of the People’s Bank of China Chinese Securities Regulatory Commission regarding Questions relating to the Mutual Market Access Mechanism between the Stock Markets of Mainland and Hong Kong and other implementation rules. We are awaiting the implementation rules to be issued by the CSRC, the People’s Bank of China, the Shenzhen Stock Exchange, the Shanghai Stock Exchange and other related organizations. 


5. The Ministry of Commerce decides to abolish sixteen departmental provisions including those related to foreign investment in commercial fields and foreign investment in conference and exhibition companies


On November 3, 2016, the MOC issued the Decisions of the Ministry of Commerce on Abolishing Several Provisions to abolish sixteen departmental provisions including but not limited to foreign investment in commercial fields and foreign investment in conference and exhibition companies, which took effect on the date of issuance.


5.1 Background


From 2004 to 2012, the MOC issued the Administrative Measures on Foreign Investment in Commercial Field and six supplementary rules. Foreign invested commercial enterprises refer to foreign invested enterprises providing business services such as commission agency, wholesale, retail and franchising. Incorporation and shop opening of foreign invested commercial enterprises shall comply with relevant legal requirements and shall be approved by the commerce departments. Foreign invested commercial enterprises managing special goods including books, newspapers, refined oil, grain and vegetable oil were subjected to shareholding restrictions for foreign investors formulated by the MOC separately.


From 2004 to 2007, the MOC issued the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules, which sets out detailed provisions regarding operations, services, conditions for incorporation, procedures of approval and other matters related to foreign invested conference and exhibition companies. 


5.2 Legal Review


First of all, abolishing the Administrative Measures on Foreign Investment in Commercial Field and six supplementary rules by the MOC complies with the latest change of the Catalogue for the Guidance of Foreign Investment Industries and implementation of the record-filing system. 


On one hand, during the period from the implementation of the Catalogue for the Guidance of Foreign Investment Industries (2002 revised) to the period before the Catalogue for the Guidance of Foreign Investment Industries (2015 revised), there were various restrictions over foreign investment in commercial fields in China. The situation was changed by the promulgation of the Catalogue for the Guidance of Foreign Investment Industries (2015 revised).


For example, in the Catalogue for the Guidance of Foreign Investment Industries (2011 revised), the items under the restricted categories relating to wholesale and retail included: (1) direct sale; purchase by post; online sales; (2) bulk purchase of food and wholesale, retail and distribution of food, cotton, vegetable oil, edible sugar, tobacco, crude oil, pesticide, agricultural film and fertilizer (The Chinese party shall be in the holding position of chain stores which has established more than 30 branches, and are selling goods of different types and brands from various suppliers); (3) construction and management of large agricultural products wholesale market; (4) distribution of audiovisual products (except for movies); (5) shipping agencies (with Chinese party in the holding position) and ocean shipping tally (limited to the formation of joint equity or joint cooperation); and (6) construction and management of wholesale refined oil and gas stations (chains of gas stations established by the same foreign investors with more than 30 branches and selling refined oil of different types and brands from various suppliers).


The items under the restricted categories relating to wholesale and retail were largely reduced the Catalogue for the Guidance of Foreign Investment Industries (2011 revised). Currently, the items under the restricted categories relating to wholesale and retail only include (1) bulk purchase of food and wholesale food and cotton, construction and management of large agricultural products for wholesale markets; (2) shipping agencies (with Chinese party in the holding position) and ocean shipping tallies (limited to the formation of joint equity or joint cooperation); (3) construction and management of wholesale refined oil and gas stations (chains of gas stations established by the same foreign investors with more than 30 branches and selling refined oil of different types and brands from various suppliers). Except for wholesale and retail of tobacco, cigarette, refined tobacco leaf and other tobacco products which are categorized as under the prohibited category, the rest of the above restricted items under the Catalogue for the Guidance of Foreign Investment Industries (2011 revised) are re-categorized as permitted projects, in particular the wholesale, retail and distribution of vegetable oil; distribution of audiovisual products and so on. 


On the other hand, requirements for approval by the MOC regarding incorporation and establishing branches of foreign invested commercial enterprises under the Administrative Measures on Foreign Investment in Commercial Field and six supplementary rules seemingly contradict the regulation on the record-filing system.


Secondly, abolishing the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules by the MOC complies with the implementation of the record-filing system. Foreign investment in conference and exhibition companies has been categorized as permitted projects all along. The requirements for approval by the MOC regarding incorporation of foreign invested conference and exhibition companies under the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules which seemingly contradicts the regulations on the record-filing system.


After the MOC abolished the Administrative Measures on Foreign Investment in Commercial Field, the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules, incorporation of foreign invested commercial enterprises conducting business other than restricted or prohibited projects under the Catalogue for the Guidance of Foreign Investment Industries (2015 revised) or incorporation of foreign invested conference and exhibition companies only require record-filing formalities online without the need to obtain approval from the commerce departments, which will be a great convenience for foreign investors incorporating and establishing branches of foreign invested commercial enterprises and incorporating foreign invested conference and exhibition companies.


5.3 Next Steps


We await whether in the implementation of record-filing system, the MOC and other departments of the State Council will further abolish or modify its departmental provisions which conflict with the record-filing system (for example, the Opinions of Ministry of Construction, Ministry of Commerce, the National Development and Reform Commission, the People's Bank of China, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange on Regulating Access to and Administration of Foreign Investment in the Real Estate Market issued by the MOC and other six state departments on July 11, 2006 regarding approval for incorporation of foreign invested real estate enterprises).



1. The term “National Treatment” (in Chinese, 国民待遇) refers to an important principle of fairness, whereby foreign parties are subject to the same treatment as their domestic counterparts and neither enjoys an unfair advantage.

2. http://news.xinhuanet.com/politics/2016-08/31/c_1119489130.htm

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