This article was written by Xuhua Huang (Partner, Singapore) and Ouou Bao (Registered Foreign Lawyer, Hong Kong).
Since 1995, the PRC government has published catalogues for the guidance of foreign investment industries (Catalogues) once every three to four years. Each Catalogue has reflected the direction of China’s economic development and foreign investment industries.
On 10 March 2015, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly released the Catalogue for the Guidance of Foreign Investment Industries (as amended in 2015) (2015 Catalogue).
There are a number of key changes in the 2015 Catalogue which investors have welcomed, in particular investors from Singapore and other Southeast Asian countries. Singapore has been the second largest source of foreign investment into China (by Singaporean companies and investors through Singapore) in recent years; the aggregate amount of its investment into China in the past 36 years (since the implementation of China’s economic reform and door open policy in 1979) is also predicted to rank #2 by the end of 2015. In fact, manufacturing, real estate, infrastructure, ports, transportation, logistics, financial service, environment protection, hospital/pharmaceutical and education are major industry sectors that have attracted most of Singaporean investments into China.
This article provides a high level summary of the changes that have been made to the most recent Catalogues and will present the likely way forward for future iterations.
2015 Catalogue – increased relaxation and transparency
The 2015 Catalogue came into effect on 10 April 2015, and replaced the previous version issued on 24 December 2011 (2011 Catalogue). Compared with the 2011 Catalogue, the 2015 Catalogue reflects the Chinese government’s policy of further opening up the market to foreign investment and optimising China’s industrial structure. A summary of the changes are set out below:
|Type of restriction
||Number of industries in 2011 Catalogue
||Number of industries in 2015 Catalogue
||Reduced by 41
|"Sino-foreign JV"-only industries
||Reduced by 28
|"Majority Chinese ownership" required
||Reduced by 9
The key changes include:
- Real estate – removed from the restricted category;
- Telecommunications – elimination of ownership limitations on e-commerce;
- Pharmaceutical – the production of certain types of drugs has been removed from the restricted category;
- Clean energy – is now an encouraged industry; and
- Certain manufacturing sectors – elimination of ownership limitations.
A strong indicator of the paradigm shift in the Chinese regulatory regime is the increased degree of transparency under the 2015 Catalogue. In previous versions of the Catalogues, the lists of the different categories were always subject to “specific regulations or industrial policies otherwise promulgated by the State Council”. Such references have now been deleted in the 2015 Catalogue.
Foreign investment still subject to PRC government approval
Since the first Catalogue was issued in 1995, the industries for foreign investment have been divided into four categories in China: encouraged, permitted, restricted and prohibited. The Catalogue itself only lists out the industries that fall within the encouraged, restricted and prohibited categories respectively, and industries that are not included in the Catalogue are permitted for foreign investment.
The Catalogues reflect the PRC government’s guidance of foreign investment industries for relevant time periods. Whether a particular project falls within the “encouraged,” “permitted” or “restricted” industry affects the regulatory approval process for the project and may affect what tax or other incentives may be available. In general, foreign investments in the restricted category are subject to more scrutiny by the government than those in the encouraged or permitted categories. On the level of approval authorities, a project in a restricted industry requires approvals from the Central Government if the total amount of investment is US$50 million or more, while the government authorities at a lower level can approve a project in an encouraged or permitted industry if the total amount of investment is below US$300 million.
Under the current regulatory regime, formation of any company by a foreign investor in China (regardless of its scale, investment amount or industry) and any major change of such company (including but not limited to change of business scope, increase or decrease of registered capital, share transfer and liquidation) are subject to approval by Chinese authorities. Such an extensive and one-by-one approval system can no longer accommodate today’s newer, more open economy, nor is it in favour of market competition or the transformation of government functions.
Negative List in Free Trade Zones
As part of foreign investment administrative system reform, China has relaxed its regulations in recent years, although approvals from government authorities are still generally required for foreign investment projects.
While the main purpose of such relaxation is to streamline the government administration, the reform in the Shanghai Free Trade Zone (FTZ) took a big step to abolish certain approval requirements for foreign investment projects in the Shanghai FTZ. In 2013, the Shanghai Municipal Government issued the Special Administrative Measures (Negative List) for Foreign Investment Access in Shanghai FTZ (2013 Shanghai FTZ Negative List), which listed out the restricted and prohibited industries for foreign investments. Projects not in the industries under the 2013 Shanghai FTZ Negative List are not subject to any governmental approval; instead, record filing with the government is required.
On 8 April 2015, the State Council (PRC’s highest administration authority) issued the Special Administrative Measures (Negative List) for Foreign Investment Access in FTZs (FTZs Negative List), effective as from 8 May 2015. The FTZs Negative List applies to all of the four FTZs in China, namely Shanghai FTZ, Guangdong FTZ, Tianjin FTZ and Fujian FTZ. As with the 2013 Shanghai FTZ Negative List, foreign investment projects in restricted industries under the FTZs Negative List are subject to governmental approvals, while only record filings are required for those projects not under the FTZs Negative List. The number of industries under the FTZs Negative List has been reduced from 190 (under the 2013 Shanghai FTZ Negative List) to 119.
The FTZ Negative List has effectively amended the 2015 Catalogue for the purpose of its application in the FTZs. Undoubtedly, the implementation of regulations and policies in the FTZs will have a model effect nationwide for creating a new administrative system and ultimately abolishing one by one approval requirements for foreign investment projects in China.
Draft Foreign Investment Law – the end of the Catalogue
Foreign invested enterprises (FIEs) in China are primarily regulated by the Chinese-foreign Equity Joint Venture Law, the Chinese-foreign Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprises Law as well as their implementing and ancillary rules (Trio Legislation on FIEs). In January 2015, the MOFCOM published a discussion draft of the Foreign Investment Law (Draft FIL) for public comments. Once enacted, the FIL will eventually replace the Trio Legislation on FIEs, and have a long-lasting impact upon foreign investments in China.
The Draft FIL is not intended to create another form of organization. In fact, all FIEs are required by the Draft FIL to convert their organization forms and structures in accordance with the PRC Company Law, the PRC Partnership Enterprise Law and the Individual Proprietor Enterprise Law within three years from the enactment of the FIL. As a result, all companies in China will need to comply with the same set of laws and regulations. On corporate governance and many other aspects, no FIEs will be treated differently from local companies only because they are foreign invested.
The Draft FIL has abolished one by one approval system set forth by the Trio Legislation on FIEs. For projects in the prohibited or restricted industries for foreign investments, the Draft FIL has adopted special administrative measures in the form of negative list (FIL Negative List). As the new foreign investment access administrative system, the foreign investor and its investment activities, rather than a joint venture contract or articles of association, will be reviewed by the government. For the projects not in an industry under the FIL Negative List, no governmental approval is required.
An information reporting system has been introduced in the Draft FIL, and applies to all foreign investment projects no matter whether or not they fall under the FIL Negative List. The system includes the investment implementation report, the investment amendment report, the quarterly report and the annual report. Although the information reporting obligations are extensive and burdensome for foreign investors and their FIEs, this new system significantly eases the regulatory scrutiny of foreign investments. In addition, the information reporting is a post investment reporting obligation, as such, it is different from pre-investment completion record filing system adopted in Shanghai and other FTZs. In practice, such record filing system might be an approval requirement in disguise.
Once the FIL is enacted, the special administrative measures with the FIL Negative List and the information reporting system will be established. With these new systems coming into effect, the Catalogues with the 2015 Catalogue as the final iteration, will be brought to the end.