14 October 2014

China's new push for deregulation of Foreign Investment Regime

This article was written by Rongkang Wang

As China’s new leadership took office, a raft of broad and comprehensive reforms and policy changes were progressively unveiled to ease foreign investment access and boost foreign capital inflow. In the crucial year of 2014, this new round of reform is gaining pace as the focus shifts from policy development to implementation. Below is a summary of some of the specific moves and actions in connection with the deregulation of the foreign investment regime initiated by the central government recently.

Streamline government administration

Aiming to build a streamlined government administration, the central government (under its new leadership) has taken steps to adopt and promulgate a series of regulations and circulars either revoking the items requiring review and approval by central-level authorities or to delegate the items to provincial or municipal governments. According to statistics revealed in governmental instruments, over 630 items have been revoked or delegated to the next level of government in the past 12 months. Furthermore, the Chinese government has also ordered the relevant commissions and ministries to list all items for which government review and approval are required and release the list to the public. Additionally, the National Development and Reform Commission (“NDRC”) has replaced the “all-round approval” mechanism” with a “limited approval and general filing” system, which means that only certain foreign investment projects are required to receive approval, with all others only being subject to the filing requirement. It is expected that these measures will simplify the tedious approval process and greatly reduce government interference in the market.

Change business registration system

Another focus of the ongoing reform is the business registration system applicable to both domestic and foreign invested enterprises. With the amendment to the Company Law and other relevant regulations in connection with business registration, a more business-friendly and convenient business registration system was established and has been rolled out across all levels of government. Under the original business registration system, companies were required to satisfy a minimum registered capital threshold (RMB30,000 for a limited liability company, RMB100,000 for a sole shareholder limited liability company and RMB5m for a company limited by shares), the cash contribution by investors could not be lower than 30% of the registered capital, and the capital must be entirely paid within a two-year timeframe (five years for investment companies). In contrast, the new business registration system now allows the investors to determine the registered capital amount, capital contribution timeframe as well as the cash ratio for regular business companies. Moreover, the annual inspection system has been replaced by a more self-supervised annual report management. By giving more flexibility and freedom to business, such adjustments will significantly encourage start-ups and energise the economy. A more investment‑friendly climate in China is emerging.

Relax foreign exchange control

In response to the current trend of reform, the State Administration of Foreign Exchange (“SAFE”) has relaxed and integrates the foreign exchange rules concerning foreign investment. In particular, several routine approvals regarding foreign exchange have been eliminated, including approvals for bank account opening, approval for re-investment by foreign investors with their legitimate income generated in China and capital verification inquiries for capital reductions. Correspondingly, SAFE has simplified the application documents and shortened the processing timeline for many SAFE approval matters from 20 working days to 3 or 5 working days.

Innovative foreign exchange rules, such as voluntary settlement of foreign exchange are being tested in some special areas such as the Shanghai Pilot Free Trade Zone (“Shanghai FTZ”) and are expected to be spread across China in the future, which signals a further step towards nation-wide foreign exchange control relaxation.

Next steps?

The above initiatives are an indication of the new leadership’s strong commitment to further liberate the existing foreign investment regime in China and position China as one of the world’s top destinations for global investment. With the deepening of the government reform, we look forward to seeing more concrete and liberal foreign investment rules in place and the opening up of more fields to foreign investment.

KWM are monitoring developments and would be happy to keep you directly informed. Please contact one of the contacts listed below to either discuss this topic further or stay directly informed.

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