China: Overhaul Of The PRC's Foreign Investment Approval System

On May 17, 2014, the National Development and Reform Commission (NDRC) of the People's Republic of China (PRC), a primary regulatory authority for foreign investments in the PRC, issued the Measures for the Administration of Approval and Filing of Foreign Investment Projects (the New Measures). The New Measures, which came into effect on June 17, 2014, repealed and replaced the previous rules issued by the NDRC on this topic in 2004. Compared with the 2004 measures, the New Measures have simplified the regulatory requirements and procedures in some significant respects, thus representing the largest overhaul of the PRC's foreign investment regulatory system in a decade. Please find below a brief summary of the key changes in the New Measures.

Narrowing the scope of projects requiring NDRC approval

The New Measures have narrowed the scope of foreign investment projects requiring approval by the NDRC (which is part of the central government) and correspondingly expanded the powers of local governments and the state-owned enterprises owned by the central government. Under Article 4 of the New Measures, the split of approval powers among authorities at different levels is now drawn as follows:

Types of projects

Approval authority

  • Projects in the Encouraged Category that are required to be controlled or relatively controlled by Chinese entities and with a total investment amount of more than US$300 million
  • Projects in the Restricted Category (excluding real estate projects) with a total investment amount of more than US$50 million
NDRC
  • Projects in the Restricted Category with a total investment amount of less than US$50 million
  • Real estate projects
Provincial governments
  • Projects in the Encouraged Category that are required to be controlled or relatively controlled by Chinese entities and with a total investment amount of less than US$300 million
Local governments
  • Projects in specific industrial sectors listed in Sections 1-11 of the Catalogue of Investment Projects Subject to Government Verification and Approval (2013)
  • For example, development of rare earth mines must be approved by the Ministry of Industry and Information Technology (the relevant industrial regulator in this case), while nuclear power plants must be approved by the State Council.
The specific approval authorities named in the Catalogue

Shifting from "approval" to "approval + registration"

Under the Interim Measures, all foreign investment projects were subject to the approval of the NDRC or its local counterparts. Under the New Measures, however, only the projects referred to above require approval by the NDRC or the other authorities. Other projects merely require "registration" with such authorities. Compared with the "approval" process, the registration process is relatively simple and straightforward, and requires less documentation.

For example, the registration applicant is only required to submit a registration form in the format prescribed by the NDRC, but is not required to submit a "project application report" as is required when seeking approval for a project. Furthermore, the registration process does not involve the NDRC's consultation with relevant industry regulators or external evaluation firms, or seeking public opinion in the review process, which are all part of the project approval process. Consequently, the timeframe for the registration process is much shorter than the approval process. The NDRC or the other authorities are required to issue a registration notice within seven working days of receiving complete documents from the registrant, compared with 20 working days for approval of a project (which time may be extended to 30 working days, but excludes time taken by external evaluation firms and public consultation).

Emphasizing post-approval/registration supervision

The New Measures contain provisions that emphasize post-approval/registration supervision by the regulatory authorities. Under the New Measures, the NDRC and its local counterparts shall, in conjunction with the relevant industrial regulators—such as those regulating urban and rural planning, land resources, financial supervision and work safety—carry out examination and inspection of the projects that have been approved or registered. These authorities shall also share information regarding development planning, industrial policies, market entry criteria and credit records. Any violation of the applicable laws and regulations may be entered into the information system and the violator "blacklisted" by all the relevant authorities.

Implications for foreign investors

The New Measures reflect the policy of the new central government to promote market-oriented reforms and relax the investment regulatory system. If the new rules are properly followed by the relevant authorities, the burdens and costs of most foreign direct investments in the PRC (such as forming joint ventures, setting up wholly owned subsidiaries or acquiring Chinese domestic enterprises) should be reduced. For foreign investors, this is certainly a step in the right direction, but the practical effect remains to be seen. Foreign investors are advised to watch for more detailed implementing rules and guidelines that may be issued under the New Measures. It is also increasingly important to note the practices of local governments, which now exercise authority over a greater number of projects, but whose enforcement of national rules may vary from place to place.

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.

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