China's regulatory regime on inbound foreign investment entered a new era on 1 October 2016. According to a decision issued by the National People's Congress of China in September 2016, the foreign investment approval requirement has to a large extent been replaced by a filing system across the nation (please refer to our earlier Legal Update for details). To implement this decision, a number of regulations have been released recently, including:

  • NDRC & MOFCOM Circular 2016 No.22 (中华人民共和国国家发展和改革委员会中华人民共和国商务部公告2016年第22号) ("Circular 22")
  • Interim Administrative Measures on Record-filing of Establishment and Change of Foreign Invested Enterprises (外商投资企业设立及变更备案管理暂行办法) ("MOFCOM Measures")
  • SAIC Notice on Registration of Foreign Invested Enterprises under the Filing System (工商总局关于做好外商投资企业实行备案管理后有关登记注册工作的通知) ("SAIC Notice")

Under the new system, foreign investment no longer requires the approval from the Ministry of Commerce (MOFCOM) or its local branches, as long as the business undertaken is not on a "negative list".

"Negative List"

Contrary to expectations, the Chinese regulators did not issue a nation-wide "negative list" in the form similar to that of the free trade zones (FTZs). Instead, the "negative list" is made by reference to the current Foreign Investment Industrial Catalogue (Catalogue) - the new record-filing regime does not apply to the following types of foreign investment (which will continue to be subject to MOFCOM approval):

  • Any investment in the restricted category or prohibited category under the Catalogue;
  • Any investment in the encouraged category under the Catalogue where there are restrictive requirements on foreign equity ratio or foreign nationals being senior management; and
  • Any acquisition of non-foreign-invested companies in China by foreign investors (regardless of industrial sectors).

Foreign investment other than the above will only need to go through an online record-filing procedure with local MOFCOM (Filing Procedure).

MOFCOM Filing Procedure

Compared with the draft issued in September, the finalised MOFCOM Measures (together with an official interpretation) made additional clarification on a number of issues relating to the Filing Procedure:

  • When reviewing the filing, local MOFCOM will determine whether the subject matter falls outside the "negative list". If so, local MOFCOM will confirm this in the filing receipt.
  • Unless otherwise stated in laws and regulations, for change of matters of foreign invested enterprises (FIEs), if such change requires the approval by the FIE's highest authority (e.g., board of directors of a Sino-foreign joint venture or shareholder(s) of a wholly foreign owned enterprise), the change will enter into effect on the date of such approval.
  • For FIEs making re-investment in China, the existing regime will continue to apply, i.e., (i) for re-investment in a restricted category under the Catalogue, local MOFCOM's approval is required, and (ii) for re-investment in an encouraged or permitted category, record-filing with local MOFCOM is needed after the relevant AIC registration is completed.
  • For foreign-invested listed companies and foreign-invested companies listed on the National Equities Exchange and Quotations (the so called "New Third Board"), record-filing with local MOFCOM is only required when the cumulative foreign equity change reaches 5 percent or if there is a change to the majority shareholder.
  • The Filing Procedure applies across the country and has replaced the filing procedures previously applied in FTZs.
  • For any inconsistency between the MOFCOM Measures and other regulations issued by MOFCOM, the MOFCOM Measures shall prevail. Rules such as those regulating FIEs' equity transfer and FIEs' merger and division are expected to be amended.

AIC Registration

As most foreign investment projects no longer require MOFCOM approval, the Administration for Industry and Commerce (AIC) becomes the main governmental authority responsible for reviewing foreign investment applications. This includes the review of FIEs' constitutional documents.

While it remains to be seen whether and to what extent AIC may conduct substantial review on the applications, the SAIC Notice provides some high-level guidance in this respect:

  • AIC should apply the same standard on FIEs as on domestic Chinese companies when reviewing registration applications. However, it is not entirely clear how this will be implemented in practice.
  • AIC should consult with National Development and Reform Commission (NDRC) and MOFCOM (or their local branches) for complicated issues encountered in reviewing the application, including whether a matter falls within the "negative list". However, the SAIC Notice fails to clarify whether and how such process may affect the timing of AIC's reviewing procedure.

Observations

  • While the reform is no doubt a welcome move by Chinese regulators, applying the existing restrictions under the Catalogue as the "negative list" reflects a cautious approach taken by the government. It is expected that this will be a transitional approach and the regulators will likely work out a more detailed and hopefully shortened list.
  • Although MOFCOM record-filing is not a pre-requisite to AIC registration, it is advisable to check the local practice. In some cases, it may be preferable to complete MOFCOM filing first because the filing receipt serves as a confirmation from MOFCOM that the subject matter does not fall within the "negative list", which may facilitate subsequent AIC registration.
  • It is worth noting that a great number of regulations issued by the State Council, MOFCOM, AIC and various industrial regulators are yet to be amended to conform with the new regime. The legislation process may take a considerable amount of time. Local practice of various government authorities may also vary during the initial phase of implementation of the new system. Foreign investors should closely monitor developments in this regard.

Originally published 11 October 2016

Visit us at www.mayerbrown.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2016. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.