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Foreign Investment Bulletin--August

2016.09.22 MIAO,Qinghui (Catherine) 、Vivian Pan、Dora Feng

The National Development and Reform Commission issued the Notice of the National Development and Reform Commission on Effectively Conducting the Reform of Foreign Debt Administration concerning Outbound Credit Assignment, to further clarify the foreign debt registration formalities of the assignment of non-performing credits by domestic financial institutions to overseas investors.


The China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission in principle approved the Shenzhen-Hong Kong mutual stock market access established by the Shenzhen Stock Exchange, the Hong Kong Exchange and Clearing Limited, the China Securities Depository and Clearing Corporation Limited and the Hong Kong Securities Clearing Company Limited.


The Ministry of Commerce and the General Administration of Customs jointly issued the No. 45 Announcement of the Ministry of Commerce and the General Administration of Customs of 2016 which stipulates that from September 1 2016, the approval for processing trade shall be abolished nation-wide.


1. Further Clarification of the Foreign Debt Registration Formalities of Assignment of NPC by DFIs to Overseas Investors


On August 8 2016, the National Development and Reform Commission (the “NDRC”) issued the Notice of the National Development and Reform Commission on Effectively Conducting the Reform of Foreign Debt Administration concerning Outbound Credit Assignment (Fa Gai Wai Zi [2016] No.1712, the “FDR Notice”), to further clarify the foreign debt registration formalities of the assignment of non-performing credits (the “NPC”) by domestic financial institutions (the “DFIs”) to overseas investors.


1.1 Background


The assignment of NPC by DFIs to overseas investors will change the nature of NPC from domestic debt to foreign debt, which is regulated under the foreign debt administration and supervised by the NDRC and the State Administration of Foreign Exchange (the “SAFE”).


On February 1 2007, the NDRC and the SAFE jointly issued the Notice on Record-Filing Administration of the Outbound Assignment of Non-performing Credits by the Domestic Financial Institution (Fa Gai Wai Zi [2007] No.254), which requires the DFIs to file the relevant information concerning outbound credit assignment with the NDRC within 20 working days after signing the agreement of NPC outbound assignment; and the NDRC to issue record-filing confirmation to the DFIs assigning the NPC to overseas investors within 20 working days after receiving all the filing materials. However, such notice was abolished on January 1 2016.


On September 14 2015, to simplify the foreign debt record-filing and registration formalities, the NDRC issued the Notice of the National Development and Reform Commission on Advancing Administrative Reform of the Record-Filing and Registration System for the Issuance of Foreign Debts by Enterprises, which requires the enterprises to conduct record-filing and registration formalities with the NDRC before issuing foreign debts; and the NDRC shall issue the Record-filing and Registration Certificate of Enterprises’ Issuance of Foreign Debts in compliance with the limitation of overall foreign debts quota, within seven working days of receiving the application. However, such notice does not clarify whether the assignment of NPC by the DFIs to overseas investors is subject to the record-filing and registration formalities.


The NDRC issued the FDR Notice which clearly states that the assignment of NPC by the DFIs to overseas investors causes domestic enterprises to owe debts to overseas investors, and therefore such assignment is subject to relevant provisions in the Notice of the National Development and Reform Commission on Advancing Administrative Reform of the Record-Filing and Registration System for the Issuance of Foreign Debts by Enterprises. Accordingly, the assignment of NPC by the DFIs to overseas investors shall be regulated under the NDRC’s Record-Filing and Registration System for Enterprises’ Foreign Debts.


1.2 Legal Review


According to the FDR Notice, the application materials for the assignment of NPC by the DFIs to overseas investors shall include the following:


(1) Information of the NPC to be assigned to overseas investors (book capital, total interests, main composition, geographic distribution, and evaluation opinion by a third party);

(2) Agreement of assignment to overseas investors;

(3) Disposal announcement issued publicly via news or media;

(4) Enterprise registration certificate of overseas investors, relevant written undertakings and credit and achievements supporting documentation. Purchasing NPC via special purpose vehicles (the “SPV”), such SPV shall submit supporting documents of the controlling parent company where it fails to prove its credit or achievement conditions;

(5) Notarization Certificate issued by the notarization organization regarding the assignment process (brief of the NPC, method of assignment, major domestic and foreign investors participating the assignment, and relevant offers); and

(6) Legal opinions issued by the law firm.


We noticed that compared with the abolished Notice on Record-Filing Administration of the Outbound Assignment of Non-performing Credits by the Domestic Financial Institution, the FDR Notice does not include other materials that may be required by the NDRC for application, which limits the discretionary power of the NDRC when receiving the application and contributes to the efficiency of conducting the record-filing formalities of the assignment of NPC.


After receiving a registration certificate issued by the NDRC, the DFIs assigning the NPC may apply for capital remittance with the foreign exchange authorities.


1.3 Next Steps


Based on the main regulatory data issued by the China Bank Regulatory Commission, by the end of the second quarter of 2016, the balance of the non-performing debts of commercial banks in China was 1,437.3 billion, an increase of 45.2 billion compared with the last quarter. On one hand, the fast-increasing enormous amount of balance of non-performing debts attracts the attention of many foreign investors. On the other hand, the assignment amount of NPC by the DFIs to overseas investors is rather limited. It is worth our continuous attention on whether issuance of the FDR Notice may increase the participation of overseas investors in the disposal of domestic non-performing credits.


2.  Formal Launch of Shenzhen-Hong Kong Stock Connect


On August 16 2016, the China Securities Regulatory Commission (the “CSRC”) and the Hong Kong Securities and Futures Commission (the “SFC”) signed the Joint Announcement of the China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission (the “Joint Announcement”), which in principle approves the Shenzhen-Hong Kong mutual stock market access (the “SZHK Stock Connect”) established by the Shenzhen Stock Exchange (the “SZSE”), the Hong Kong Exchange and Clearing Limited (the “HKEX”), the China Securities Depository and Clearing Corporation Limited (the “ChinaClear”) and the Hong Kong Securities Clearing Company Limited (the “HKSCC”), and marks the formal launch of the preparation and implementation of the SZHK Stock Connect.


2.1 Background


On April 10 2014, the CSRC and HKSFC issued a joint announcement, which in principle approves the trial of Shanghai-Hong Kong mutual stock market access (the “SHHK Stock Connect”) by the Shanghai Stock Exchange (the “SHSE”), the HKEX, the ChinaClear and the HKSCC. On November 17 2014, the launching ceremonies of SHHK Stock Connect took place simultaneously in Shanghai and Hong Kong, when the SHHK Stock Connect was formally launched.


After two years of trials, on August 16 2016, the CSRC and the SFC signed the Joint Announcement. Shortly after, the CSRC issued a notice on August 26, seeking public opinion for amending the Several Provisions on the Pilot Program of an Interconnection Mechanism for Transactions in the Shanghai and Hong Kong Stock Markets to become the Several Provisions on the Interconnection Mechanism for Transactions in the Mainland and Hong Kong Stock Markets. On the same day, the SZSE issued the Implementation Rules of Shenzhen Stock Exchange on Conducting Shenzhen-Hong Kong Stock Connect Services (Exposure Draft) (the “Implementation Rules”), the Administrative Guide of Shenzhen Stock Exchange on Fitness of Shenzhen-Hong Kong Stock Connect Investors (Exposure Draft), and the Mandatory Clauses of Risk Disclosure Statement of Hong Kong Stock Connect (Exposure Draft) (the “Fitness Guide”) for public opinions.


2.2 Legal Review


(1) Introduction of SZHK Stock Connect


The Implementation Rules are the fundamental rules for the SZHK Stock Connect, and are the main principles for the members of the SZSE and investors to participate in the SZHK Stock Connect. The Implementation Rules mainly include:


(a) Shenzhen Stock Connect: setting out the participation requirements of the stock trade and services companies by the HKEX and their relevant responsibilities, and the scope of stocks eligible for Shenzhen Stock Connect and  the rule of inclusion and exclusion of stocks and so on.

(b) Hong Kong Stock Connect: setting forth the requirements and obligations for SZEX members to participate in Hong Kong Stock Connect; the scope of stocks eligible for Hong Kong Stock Connect and the rule of inclusion and exclusion of stocks; the calculation methods of daily quota and supervision methods and so on.

(c) Management of Abnormal Trading Events: by reference to the Trading Rules of the SZEX and HKEX, stipulating matters including the management body, measures, market announcement and responsibility waiver.

(d) Self-discipline Management: setting identification standards, supervision body, investigation of violation of relevant regulatory rules and other self-disciplinary rules for possible abnormal trade, violation of information disclosure requirements and other violations.


Although the SZHK Stock Connect sets a limitation on daily quota, it no longer sets a total quota for stock trading, which further opens the financial market and facilitates the international and capital account convertibility of RMB.


(2) Principle of Conforming with the Basic Framework and Model of SHHK Stock Connect


On August 29 2016, in its response to news reporters, the SZEX stated that the SZHK Stock Connect is designed on the principle of conforming to the basic framework and model of SHHK Stock Connect for the purpose of keeping institutional continuity by following the successful experiences of SHHK Stock Connect. Therefore trade clearing methods, the management of investment quotas, fitness requirements of Hong Kong Stock Connect investors, market supervision and disciplinary management and other major operation mechanisms and regulatory arrangements conform to the SHHK Stock Connect.


The Implementation Measure basically conforms to that of SHHK Stock Connect regarding its structure and presentation, and the Fitness Guide for Hong Kong Stock Connect is the same as that of the SHHK Stock Connect.


(3) Major Differences


(a) Stock scope of SZHK Stock Connect is ascertained based on the daily average value of A Share


Scope of the SZHK Stock Connect includes (i) constituent stocks of SZSE Component Index and SZSE Innovation Index and subject to regular inspection requiring that the daily average value of such A share shall be not less than RMB 6 billion prior to the inspection date; for shares initially offered on the market for less than six months, calculated based on the actual traded period; and (ii) A shares listed on SZEX of listed companies of A+H shares and their H shares listed on the mainboard of HKEX.


Compared with the scope of SHHK Stock Connect, which requires constituent stocks of SHEX 180 Index and SHEX 360 Index, the Implementation Rules feature more flexibility.


(b) Wider stock scope of Hong Kong Stock Connect under the SZHK Stock Connect


Scope of Hong Kong Stock Connect under the SZHK Stock Connect includes (1) constituent stocks of the HS Composite LargeCap Index; (2) constituent stocks of the HS Composite MidCap Index; (3) constituent stocks of HS Composite SmallCap Index with the market value of no less than HKD 5 billion; and (4) H shares of companies of A+H shares listed on the mainboard of the HKEX, excluding H shares where its corresponding A shares are subject to risk warning, suspension or delisting procedures by the SZEX.


Compared with the SHHK Stock Connect, the SZHK Stock Connect expands the scope of the shares eligible for Hong Kong Stock Connect by adding constituent stocks of HS Composite SmallCap Index with the market value of no less than HKD 5 billion, and by including H shares of companies of A+H shares listed on the SZEX, SHEX and HKEX.


2.3 Next Steps


From August 16 2016 to the formal implementation of SZHK Stock Connect, there is a four-month period of preparation. It is expected that the issuance of the detailed rules of SZHK Stock Connect will happen soon and that the SZHK and SHHK Stock Connect will further advance the capital account convertibility of RMO.


3.  Nation-Wide Abolishment of Administrative Approval for Processing Trade


On August 25 2016, the Ministry of Commerce (the “MOC”) and the General Administration of Customs (the “GAC”) jointly issued the No. 45 Announcement of the Ministry of Commerce and the General Administration of Customs of 2016 (the “No.45 Announcement”) which stipulates that from September 1 2016, the approval for processing trade shall be abolished nation-wide, and replaced with interim and ex post supervision.


3.1 Background


According to the Customs Law of the People's Republic of China (the “Customs Law”) and the Interim Measures for the Management of Examination and Approval of Processing Trade, for enterprises to conduct processing trade, they shall first apply for approval from the foreign trade and economic authorities and then file the record with the customs; and for bonded imported materials and products under processing trade to be sold domestically, such transactions shall be subject to approval from the foreign trade and economic authorities and then the record-filing with the customs.


On December 28  2012, the Standing Commission of the National People’s Congress authorized the State Council to temporarily suspend serval administrative approval matters under the laws and regulations in Guangdong Province, including the temporary suspension of approval for enterprises engaging in processing trade and approval for selling domestically  bonded imported materials and products under processing trade and replacing such approvals by other supervision measures currently adopted by the customs and foreign trade and economic authorities. The period for such suspension is three years and if proved to be feasible, such measures shall be implemented and the relevant laws and regulations shall be amended accordingly; and if proved to be infeasible, the relevant laws and regulations shall be re-implemented.


Since July 15 2013, Guangdong Province has temporarily suspended the approval for enterprises engaging in processing trade and approval for selling domestically bonded imported materials and products under processing trade for a trial period of three years; during the trial, enterprises in Guangdong Province shall complete customs processing trade goods recording-filing formalities by providing the Certificate of Operation Condition and Production Ability of Processing Trade Enterprises issued by the foreign trade and economic authorities and other relevant documents required by customs. For bonded imported materials and products under processing trade to be sold domestically, the relevant customs shall levy taxes and defer tax interests in compliance with the law.


On January 4 2016, the State Council summarized the trial experiences of Guangdong Province on abolishing the administrative approval for processing trade and conduct reform on abolishing the administrative approval for processing trade.


On August 25 2016, the MOC and GAC jointly issued the No. 45 Announcement to abolish the approval for processing trade nation-wide.


3.2 Legal Review


Based on the trial experience of Guangdong Province on the temporary suspension of the approval for enterprises engaging in processing trade and approval for selling domestically  bonded imported materials and products, the No. 45 Announcement abolishes the commerce approval for enterprises engaging in processing trade and approval for selling domestically  bonded imported materials and products nation-wide. For enterprises conducting processing trade, they shall conduct formalities of establishing (changing) the processing trade handbooks (or record books) with the customs by providing the Certificate of Operation Condition and Production Ability of Processing Trade Enterprises issued by the commerce department or local administrative committee for customs special supervisory district. For bonded imported materials and products under processing trade to be sold domestically, the relevant customs shall levy tax and deferred tax interests in compliance with the law.


3.3 Next Steps


The Customs Law currently applicable still requires enterprises conducting processing trade to file records with the customs by providing the relevant approval documentation and processing trade contract; for bonded imported materials and products under processing trade to be sold domestically, the customs shall issue approval for domestic sale and levy tax for bonded imported materials in compliance with the law.


Since the No.45 Announcement is issued by the departments of the State Council and therefore does not have the effect of amending the Customs Law. It is expected that the National People’s Congress will amend the Customs Law promptly by deleting the relevant provisions requiring approval for enterprises engaging in processing trade and approval for selling domestically bonded imported materials and products

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