24 November 2020

China regulatory and legal round-up | October 2020

Foreign Investment and General Corporate

1. Ministry of Commerce releases Provisions on the Unreliable Entity List

On September 19, 2020, the Ministry of Commerce (“MOFCOM”) released the Provisions on the Unreliable Entity List (《不可靠实体清单规定》) (the “Provisions”), which establish a sanctions regime framework with immediate effect.  

Pursuant to the Provisions, foreign companies and individuals that take actions to block or suspend normal transactions with Chinese enterprises for “non-business purposes” may be added to the Unreliable Entity List.

A MOFCOM working group will be responsible for identifying foreign entities to be added to the Unreliable Entity List and may undertake investigations to determine the measures to be taken against such foreign entities.

In pursuing its various functions, the MOFCOM working group will be empowered to:

  • notify the relevant foreign entity;
  • restrict or prohibit the foreign entity from engaging in its China-related import and export activities;
  • restrict the foreign entity’s investment in the territory of China;
  • restrict the entry of the entity’s staff, or its means of transport, into China;
  • restrict or revoke the entity’s staff's work permits, or qualifications to stay or reside in the territory of China;
  • impose penalties according to the severity of the entity’s unlawful activities; and
  • take any other necessary measures.

2. MIIT strengthens Interim and Ex-Post Supervision on Foreign-funded Telecommunication Enterprises

On October 20, 2020, the Ministry of Industry and Information Technology (“MIIT”) released the Circular on Strengthening Interim and Ex-Post Supervision on Foreign-funded Telecommunication Enterprises (《工业和信息化部关于加强外商投资电信企业事中事后监管的通知》) (the “Circular”). The Circular comes following the issue of the Decision of the State Council on Canceling and Decentralizing a Batch of Administrative License Items (the “Decision”), which was released on September 21, 2020 and which cancelled 29 administrative licensing items and delegated the approval levels for 4 administrative licensing items.    

Pursuant to the Circular, starting from the date of publication of the Decision, MIIT will no longer implement its proactive approval process with respect to foreign investment into telecommunication businesses. Instead, foreign investments into telecommunications services will be subject to examination during the telecommunications license application process.

In addition, the Circular emphasizes that after obtaining a telecommunications license, foreign-funded telecommunication enterprises should comply with the relevant telecommunication regulation requirements. These regulations require telecommunications enterprises to fulfil certain annual reporting obligations and to accept and cooperate with random inspections by the regulator.

MIIT will continue to impose penalties on any telecommunications enterprises which are found to have committed unlawful business activities. Any such enterprises will be added to a list of dishonest entities and may face punishments for serious dishonesty (as imposed by the various government bodies).  

3. Hainan Province releases the Interim Measure on QFLP Domestic Equity Investment

On October 27, 2020, the Financial Supervision Bureau of Hainan Province released the Interim Measures on Launching Domestic Equity Investment by Qualified Overseas Limited Partners (QFLP) (《关于开展合格境外有限合伙人(QFLP)境内股权投资暂行办法》) (the “Interim Measures” ). The Interim Measures aim to promote the development of the Hainan Free Trade Port and the opening up of the financial industry.

By way of background, a Qualified Overseas Limited Partner (“QFLP”) is an overseas investment enterprise that converts overseas funds into Chinese Yuan and invests these funds in the domestic private equity market. These enterprises are required to pass an approval process before qualifying as a QFLP.

The Interim Measures clarify the establishment procedures and business scope of foreign-invested equity investment enterprises, making the application process for these enterprises shorter and reducing the materials required during the process.  The Interim measures also specify preferential policies, such as the terms of enterprise income tax, supporting preferential measures and industrial park location incentives.

It is also worth noting that the Interim Measures set forth the same requirements for domestic and foreign QFLP management enterprises. This allows for greater flexibility with respect to domestic capital management of foreign capital, and foreign capital management of domestic capital.

Customs and Foreign Exchange

4. CSRC, PBC and SAFE jointly promulgated the Measures on QFII and RQFII

On September 25, 2020, upon the approval of the State Council, the China Securities Regulatory Commission (“CSRC”), the People's Bank of China (“PBC”) and the State Administration of Foreign Exchange (“SAFE”) issued the Administrative Measures for Investments in Domestic Securities and Futures by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (合格境外机构投资者和人民币合格境外机构投资者境内证券期货投资管理办法) (the “Measures”).

CSRC simultaneously promulgated the supporting rules, the Provisions on Issues Concerning the Implementation of the Administrative Measures for Investments  in Domestic Securities and Futures by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (《关于实施〈合格境外机构投资者和人民币合格境外机构投资者境内证券期货投资管理办法〉有关问题的规定》) (the “Supporting Rules”).

The Measures and Supporting Rules shall both come into force as of November 1, 2020 and both seek to improve the schemes of Qualified Foreign Institutional Investors (“QFII”) and RMB Qualified Foreign Institutional Investors (“RQFII”).

The main revisions set out in the Measures and Supporting Rules are as follows:

  • Lowering the access threshold and facilitating investment operations, including by:
    • consolidating the qualification and system rules of both the QFII scheme and RQFII scheme;
    • relaxing access conditions and implementing simple procedures of administrative licensing;
    • cancelling the restrictions on the number of entrusted intermediaries;
    • optimizing the management of record-filing matters; and
    • reducing the requirements on data submission.
  • Expanding the scope of investment in a steady and orderly manner by:
    • allowing investment in the securities listed on the National Equities Exchange and Quotations, private investment funds, financial futures, commodity futures, options and others; and
    • allowing participation in the bond repurchase, securities margin trading and refinancing securities lending transactions at stock exchanges.
  • Strengthening continuous supervision, including by:
    • strengthening cross-market supervision, cross-border supervision and penetrating supervision;
    • intensifying punishments for irregularities or violations; and
    • refining the regulatory measures applicable to specific cases of irregularities or violations.

It is anticipated that the promulgation of the Measures and the Supporting Rules will enhance the level of opening up of China's capital market, and will further facilitate the participation of foreign institutional investors in China's capital market.

5. China passed the Export Control Law

On October 17, 2020, the Export Control Law of the People's Republic of China (《出口管制法》) (the “Export Control Law”) was officially passed. The Export Control Law will officially come into force on December 1, 2020, thereby establishing a comprehensive framework for restricting exports of military products or dual-use technologies (such as nuclear, biological, chemical and missile technologies).

The Expert Control Law systematically improves the previous export control system, so that the relatively loose existing export control laws and regulations can better coordinate and give full play to their functions.

The Expert Control Law also draws lessons from international common practices, including by:

  • summarizing export control experience;
  • adding licensing facilitation measures;
  • controlling a list of importers, end users and other systems;
  • improving and expanding the scope of export control; and
  • adding unique "services" in the scope of controlled items, while stipulating the "principle of reciprocity".

The formal implementation of the Export Control Law shows that the Chinese government intends to strengthen export control over dual-use items such as nuclear, biological, chemical and missile technologies.  At present, a series of supporting export control administrative regulations, departmental rules and normative documents are being formulated and revised one after another.

6. The Chinese Government removes recycled brass raw materials, recycled copper raw materials and recycled cast aluminum alloy raw materials from the list of solid waste

On October 16, 2020, the Ministry of Ecology and Environment (“MEE”), the General Administration of Customs (“GAC”) and the Ministry of Industry and Information Technology (“MIIT”) jointly issued the Announcement on Regulating the Import Management of Recycled Brass Raw Materials, Recycled Copper Raw Materials and Recycled Cast Aluminum Alloy Raw Materials (《关于规范再生黄铜原料、再生铜原料和再生铸造铝合金原料进口管理有关事项的公告》) (the “Announcement”). The Announcement aims to regulate the import management of certain recycled metals and promote the development of the recycled metal industry.  

The Announcement took effect on November 1, 2020 and clearly stipulates that recycled brass raw materials, recycled copper raw materials and recycled cast aluminum that meet the requirements of relevant national standards (GB/T 38470-2019, GB/T 38471-2019, GB/T 38472-2019) do not belong to the solid waste import regime and can be imported freely.

7. The Chinese Government releases the Second Batch of Anti-cancer Drugs and Rare Disease Drugs that are Subject to Value-added Tax Policies

On September 30, 2020, the Ministry of Finance (“MOF”), the General Administration of Customs (“GAC”), the State Administration of Taxation (“SAT”), and the National Medical Products Administration (“NMPA”) released the Second Batch of Anti-Cancer Drugs And Rare Disease Drugs That Are Subject To Value-Added Tax Policies (关于发布第二批适用增值税政策的抗癌药品和罕见病药品清单的公告》) (the “Second Batch”).

The Second Batch aims to encourage the development of the pharmaceutical industry and reduce the cost of medication by reducing the value-added tax (“VAT”) to 3% on the import, production and sale of any listed medications. With the release of such list, Cotinib, Olapali and other preparations and APIs are subject to the preferential VAT rate of 3% from October 1, 2020.

Data Protection

8. The Draft Personal Information Protection Law Debut Release

On October 21, 2020, the Draft Personal Information Protection Law of the People's Republic of China (《个人信息保护法草案等多部法律草案公开征求意见》) (the “Draft PIPL”) was published on the National People's Congress website for public consultation by November 19, 2020.  

The Draft PIPL establishes a series of rules for the processing of personal information with "notification-consent" as the core principle. The Draft PIPL also clarifies the obligation of government to protect personal information, and comprehensively strengthens the legal protections currently afforded to personal information.  In particular, the Draft PIPL expands the legal definitions of “processing” and “personal information”, which may bring significant changes to commercial practices.

We recommend that enterprises in China pay particular attention to the protection of users' personal information when providing products or services, and continuously focus on the development of the Personal Information Protection Law.

9. Beijing announces Implementation Plan for the Establishment of Beijing International Big Data Exchange

On September 18, 2020, the Beijing Local Financial Supervision and Administration and the Beijing Municipal Bureau of Economy and Information Technology jointly released the Implementation Plan for the Establishment of Beijing International Big Data Exchange (《关于印发北京国际大数据交易所设立工作实施方案的通知》) (the “Implementation Plan”).

The Implementation Plan proposes that municipal state-owned enterprises with high-quality data resources reorganize the existing exchange and rename it to Beijing International Big Data Exchange (the “BIBD Exchange”). Strategic investors, such as central enterprises and Internet enterprises, are proposed to be introduced to the BIBD Exchange in order to increase registered capital and change the business boundaries and the varieties of transactions. The BIBD Exchange will provide a mechanism for the development of the digital economy in Beijing.

The proposed services of the BIBD Exchange will include a data information registration service, a data product transaction service, a data operation management service, a data assets financial service and a data assets financial technology service.

Given the emerging nature of big data transactions, we suggest that enterprises in China, especially those in Beijing, continue to pay attention to the implementation of the Implementation Plan and other relevant laws or regulations, and the evolving regulatory requirements for big data transactions.

10. Shenzhen to take lead in improving the Data Property Rights System and promoting data-sharing in Government

On October 11, 2020, the General Office of the CPC Central Committee and General Office of the State Council issued the Plan on Building Shenzhen Into Socialist Demonstration Area (2020-2025) (《深圳建设中国特色社会主义先行示范区综合改革试点实施方案20202025年)) (the “Shenzhen Plan”).

The Shenzhen Plan sets out a detailed plan for comprehensive pilot reforms to be implemented in Shenzhen with an aim to increase innovation and competitiveness within the city.  This includes a number of reforms designed to speed up the establishment of a market-orientated international business environment, including reforms focusing on:

  • improving the data property rights system;
  • exploring new mechanisms for data property right protection and utilization;
  • establishing a data privacy protection system;
  • promoting the open sharing of government data;
  • supporting the construction of the Guangdong-Hong Kong-Macao Greater Bay Area data platform;
  • carrying out data transactions; and
  • a statistical accounting pilot of data production factors.  

Earlier this year, in July, Shenzhen issued the Shenzhen Special Economic Zone Data Regulations (Draft for Comment) (the “Draft Shenzhen Regulations”), stipulating that natural persons are entitled to rights over their personal data. The Shenzhen Plan provides Shenzhen with an opportunity to make its first steps towards improving data property rights and other aspects of data protection, in line with the intent of the Draft Shenzhen Regulations.

We recommend that enterprises in China, especially those in Shenzhen, continue to follow up the implementation of the Shenzhen Plan and study the trend of data compliance in the industry.

11. The State Administration of Market Regulation issued the Administrative Measures for Online Transactions (Draft for Comment)

On October 20, 2020, the State Administration of Market Regulation (“SAMR”) issued the Administrative Measures for Online Transactions (Draft for Comment) (《网络交易监督管理办法(征求意见稿)》) (the “Draft Measures”) for public comment. 

The Draft Measures aim to implement e-commerce law and further regulate online transactions. In relation to the supervision of online transactions, the Draft Measures indicate that supervision by network transaction operators promotes the healthy development of the digital economy, including by adhering to the following principles:

  • encouragement of innovation, tolerance and prudence;
  • adherence to the bottom line; and
  • integration of online and offline regulation.

However, the Draft Measures clearly stipulate that if sensitive information, such as biometric information and personal data, is to be collected and used by the network operator, the operator must gain the authorized consent of the individual. Such consent must be gained on an item by item basis and not by means of a one-off general authorization method.  

The Draft Measures also emphasize that network transaction operators are not allowed to disguisedly force consumers to agree to the collection and use of sensitive information which is not directly related to their business activities (e.g. by means of default authorization or by threatening the suspension of the relevant network transaction platform).

We recommend that enterprises in China continue to pay close attention to the formulation of the Administrative Measures for Online Trading and any related legislative developments. In particular, enterprises should focus on their compliance with respect to obtaining informed consent before processing the sensitive information of consumers.

12. Six banks fined over RMB40,000,000 for personal information violation

Recently, the People’s Bank of China (“PBC”) investigated certain financial institutions’ violations of consumer financial information security.

In accordance with the relevant provisions of the Law of the People's Republic of China on the Protection of Consumer Rights and the Anti-Money Laundering Law of the People's Republic of China, PBC issued warnings and imposed fines of a total amount of RMB41.88 million on the following bodies:

  • the Jiangbei Sub-branch of Jilin City of Agricultural Bank of China;
  • the Shizuishan Branch of Bank of China;
  • the Deyang Branch of China Construction Bank;
  • the Loudi Branch of China Construction Bank;
  • the Dongying Branch of China Construction Bank;
  • the Jiande Sub-branch of China Construction Bank; and
  • the relevant responsible persons from each of the aforementioned branches and sub-branches.

The fines were imposed following investigations into infringements and violations of the consumer protection law and the anti-money laundering regulations in relation to the disclosure of customers’ information.

Given PBC’s stated “zero tolerance” approach to violations of consumer financial information security, we recommend that financial institutions in China:

  • continue to improve upon their existing protection mechanisms with respect to consumer financial information security;
  • implement information confidentiality requirements in accordance with the relevant laws and regulations; and
  • effectively protect the fundamental interests of financial consumers.

13. The PBC officially issued the Financial Data Security - Data Security Classification Guidelines

On September 23, 2020, PBC officially issued the financial industry standard JR/T 0197-2020 Financial Data Security - Data Security Classification Guidelines (《金融数据安全 数据安全分级指南》) (the “Guidelines”).   

The Guidelines are particularly applicable to financial institutions which carry out data security classification and third-party evaluation institutions which carry out the inspection and evaluation of data security.

The Guidelines fill in the gaps in the financial data protection system, including by:

  • setting out the goals, principles and scope of financial data security classification;
  • clarifying the elements, rules and processes of financial data security; and
  • providing practical examples of typical data classification systems across financial institutions.

The Guidelines lay the foundation for financial institutions to establish a framework which protects financial data across its lifecycle. The Guidelines may also assist financial institutions to implement targeted data security management.

We recommend that financial sector enterprises in China refer to the relevant requirements of the Guidelines when carrying out financial data classification, so as to ensure the safety of financial data.

IP

14. Supreme People’s Court releases Trade Secret Judicial Interpretation

On September 10, 2020, the Supreme People’s Court (“SPC”) released a judicial interpretation on the civil enforcement of trade secrets (《关于审理侵犯商业秘密民事案件适用法律若干问题的规定》) (the “Trade Secret JI” ). The Trade Secret JI came into effect on September 12, 2020.

The Trade Secret JI consists of 29 articles, including guidance on:

  • the elements of a trade secret and, more particularly, to the elements of “secrecy” (Arts. 3-4), “reasonable efforts to preserve secrecy” (Arts. 5-6), and “business value of the trade secret” (Art. 7);
  • the factors for determining “substantial similarity” in circumstances where a plaintiff seeks to use indirect circumstantial evidence to prove that there has been misappropriation of a trade secret and that there is a substantial similarity of the accused invention (Art.13);
  • the SPC’s approach to reverse engineering defenses (Art. 14);
  • injunctive-type relief and the increased availability of such relief (Arts. 15, 17-18);
  • factors for determining the amount of damage award (Arts. 19-20); and
  • the timing of trade secret identification (Art. 27)

15. Supreme People’s Court and Supreme People's Procuratorate release Criminal IP Judicial Interpretation

On September 12, 2020, the SPC and the Supreme People's Procuratorate issued a judicial interpretation on the criminal enforcement of intellectual property rights (《关于办理侵犯知识产权刑事案件具体应用法律若干问题的解释(三)》) (the “Criminal IP JI). The Criminal IP JI came into effect on September 14, 2020.

Among the twelve articles of the Criminal IP JI, Articles 3-5 address criminal trade secret issues and Articles 8-10 address the factors and criteria for determining sentences and fines. The other articles provide guidelines on offense elements.  For example, Article 1 elaborates on the factors for determining mark similarity, which is an element of the crime of trademark counterfeiting and Article 2 contains guidelines on “without permission of the copyright holder”, which is an element of the crime of copyright infringement.

Relevantly, the Criminal IP JI generally lowers the threshold for imposing criminal liabilities in respect of intellectual property rights.

16. Supreme People’s Court releases Judicial Interpretation on Judicial Review of Patent Reexamination Proceedings

On September 10, 2020, the SPC issued a judicial interpretation on judicial review of patent reexamination proceedings at the Patent Reexamination and Invalidation Department of the China National Intellectual Property Administration (《关于审理专利授权确权行政案件适用法律若干问题的规定(一)》) (the “Judicial Review JI”). The Judicial Review JI came into effect on September 12, 2020.

The Judicial Review JI contains 32 articles, including guidance on:

  • the priority of intrinsic evidence in claim construction (Art. 2);
  • circumstances where correction of drafting errors are allowed in court (Art. 4);
  • circumstances where a claim fails the sufficiency of disclosure/enablement requirement (Art. 6); and
  • allowing admission of supplemental data tor patentability (Art. 10).

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Should you need any additional information, or if you would like to discuss how recent updates in Chinese law may affect your business, please feel free to contact us.

 

Disclaimer

This client alert is not intended to be legal advice. Readers should seek specific legal advice from KWM legal professionals before acting on the information contained in this alert.

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