In April 2010, China's State Council issued guidelines aimed at improving the legal environment for foreign investment (Guidelines). The Guidelines do not have a normative value, but they instruct the various governmental departments under the State Council's supervision to update or adopt implementing regulations.
The Guidelines are considered by many as an effort aimed at reassuring foreign investors. Indeed, just a few months before the issue of the Guidelines, foreign investors had expressed concerns about draft regulations on government procurement giving preference to Chinese-owned suppliers. More recently, foreign investors have raised questions about China's new "Plan for National Security Review Mechanism", which finally indicated China's intention to make operational the provisions subjecting foreign investments to a national interest test in the Anti Monopoly Law (AML) and the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (M&A Rules). In this sense, the Guidelines have had a calming effect on Mainland China's FDI community.
However, it remains to be seen what impact the Guidelines will have. The various ministries in charge of their implementation are likely to issue new or revised regulations over the next months, in some cases only after they have sought comments from the public. The National Development and Reform Commission (NDRC), State Administration for Industry and Commerce (SAIC) and Ministry of Commerce (MOFCOM) have already issued circulars implementing some provisions of the Guidelines, but mostly with regard to the establishment of foreign invested enterprises (FIEs).
This article provides a snapshot of the most interesting features of the Guidelines.
- China to be more selective in terms of types of foreign investment projects. Foreign investment will be encouraged in high-end technology and service industries and strictly restricted in "high-polluting, high-energy-consuming and resource-dependent" projects.
- Foreign investment to be redirected toward central and western China. The two catalogues (National Catalogue and Western Catalogue, each jointly issued by NDRC and MOFCOM) will be revised. The Western Catalogue will be revised to include "labour intensive environmentally friendly projects" (which has yet to be defined).
- Treasury functions to be set up in or moved to the PRC. The Guidelines encourage FIEs to set up Regional Headquarters (RHQs), Financial Management Centres, Settlement Centres and Costs and Profits Accounting Centres. This could mean that regulations on foreign-invested holding companies and RHQs may be relaxed, both at national and local level. This could also mean that FIEs - in the long term - will be able to provide more treasury services to subsidiaries or affiliates and that FIEs will rely less on cash pooling arrangements whereby funds are physically moved to or from a number of subsidiaries into a "header account". Such arrangements have been developed by foreign banks to manage liquidity between subsidiaries in China, a traditional problem for FIEs in China. In its implementing Circular, MOFCOM has decentralised the approval for the establishment of holding companies with a registered capital lower than USD300million, and SAIC has expressed in its Circular that it encourages foreign invested holding companies to develop into "conglomerates" or "group companies".
- FIEs to be allowed to issue corporate bonds and medium-term notes. Qualified FIEs will be allowed to issue corporate bonds and medium-term notes. The expansion of FIEs is limited by current restrictions on capital-raising measures such as corporate bond issuance. Currently China only allows a few financial institutions to issue RMB bonds on the domestic market. This will increase the range of investment products on offer to Chinese investors.
- More overseas entities to issue "Panda Bonds". Overseas entities will be allowed to issue RMB bonds on the domestic China market (a.k.a. "Panda Bonds"). So far there have been only two cases of Panda Bonds (International Finance Corp (IFC) and the Asian Development Bank). This will also increase the range of investment products on offer to Chinese investors.
- More FIEs to IPO in China. The listing of qualified FIEs on the Shanghai or Shenzhen stock exchanges will be facilitated. This will have to be implemented by the China Securities Regulatory Commission (CSRC), which has only approved a few such IPOs in the past.
- Acquisitions of PRC listed companies by foreign strategic investors. The Guidelines reiterate that strategic investments by foreign investors in companies listed on the Shanghai or Shenzhen stock exchanges are encouraged. This may indicate that the measures on strategic investments by foreign investors in listed companies (effective since January 2006) will be revised in order to further relax qualification requirements.
- FIEs to get greater access to financing from Chinese banks. Chinese domestic banks will be encouraged to support FIEs. It remains to be seen what specific measures will be promulgated to implement this policy.
- Venture capital and private equity encouraged. The Guidelines encourage the development of venture capital and private equity, and indicate that exit mechanisms will be improved. In its implementing Circular, MOFCOM has delegated to lower levels of government the power to approve the establishment of foreign-invested venture capital enterprises with a total investment lower than USD300million.
- Foreign exchange regime to be simplified. Foreign exchange management rules applying to FIEs will be simplified. It remains to be seen what specific measures will be promulgated to implement this policy.
- Establishment of FIEs to be simplified. The Guidelines instruct MOFCOM and SAIC to delegate to lower levels of government certain approval powers with regard to the establishment of FIEs. Currently, projects of USD100 million or more require central-level approval. After the Guidelines are implemented, foreign investment projects of up to USD300 million will be approved at lower level, and only projects of USD300 million or more will require central-level approvals. However, in its Circular MOFCOM has only decentralised this for holding companies and venture capital enterprises.
- Flexibility for late capital contributions in FIEs. In an effort to mitigate the impact of the financial crisis on foreign investors, the Guidelines indicate that FIEs which have started operation, but for which the registered capital has not been paid on time, would be entitled to extensions of time for such late contributions. The SAIC has implemented this in its Circular, but MOFCOM (the more important of the two regulators) has yet to do so. It remains to be seen whether MOFCOM will decide on a case-by-case basis, or whether it will issue regulations pursuant to which all cases will be eligible to obtain such extensions. It also remains to be seen whether such extensions will go beyond the statutory two-year limit set forth in current regulations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.