In 2015, reforms to Chinese legislation focused on liberating foreign investment, and facilitating company registration and other formalities relating to foreign investment, as well as strengthening administration in key areas. This update covers the most noteworthy of these. Please see our monthly legal flash for more comprehensive information.
The year started with the Ministry of Commerce issuing a draft Foreign Investment Law for public comments, in an attempt to unify China’s current legal framework on foreign investment.
The draft has not been approved, and in April, the 2015 Foreign Investment Industrial Guidance Catalogue came into effect, regulating (i) access to Chinese industries, (ii) maximum shareholding ratios allowed, and (iii) how investment can be implemented. The 2015 Catalogue incorporates many reforms first implemented on a trial basis in China’s Free Trade Zones (as of December 28, 2014, Fujian, Guangzhou, Shanghai and Tianjin, referred to as “FTZs”). However, instead of adopting the anticipated “negative list” system, it keeps the traditional three categories of industries: encouraged sectors, restricted sectors and prohibited sectors.
The “negative list” enumerates the sectors —industries, fields and businesses— in which investment is restricted or prohibited, giving all market players equal access to the sectors not specified on the list.
The State Council has now announced China’s intention to introduce this approach gradually, in selected areas and on a trial basis, from December 1, 2015, and to implement a unified national negative list system by 2018. This is expected to provide a higher degree of predictability and simplified approval procedures for foreign investors that establish in China.
Reforms aimed at relaxing company registration and other issues that have long been considered overregulated have been introduced nationwide successfully after being tested in China’s FTZs:
- The company registration reform “three-certificates-in-one, one-license- one-code” was introduced nationwide on October 1, 2015. Newly established enterprises and existing enterprises applying to change their registration no longer need to obtain a separate business license (issued by the Administration for Industry and Commerce, “AIC”), an organizational code certificate (issued by the quality and technology supervision authority) and a tax registration certificate (issued by the tax authorities). Instead, they can apply for a new business license with a unified social credit code by completing one application form and submitting one comprehensive set of application documents to the AIC.
- The State Administration of Foreign Exchange (“SAFE”) substantially changed the way of settling foreign exchange capital of foreign-invested enterprises (“FIEs”), from June 1, 2015. A FIE can now convert the foreign currency in its capital account into RMB at any time, without presenting documentation to justify its business needs. The converted RMB funds will still be centrally managed in a separate and specific account, and FIEs will still need to present supporting documents and go through the bank’s review process for each withdrawal (certifying the valid use of the funds on an as- needed basis, except for cumulative monthly imprest cash payments of up to RMB 100,000). However, FIEs will be able to hedge their exchange risks by converting foreign currency in their capital account when the exchange rate is favorable.
- Regarding enterprises’ business scope registration, enterprises are obliged to publish any newly added or modified business activities that are subject to government approval through the online Enterprise Credit Information Disclosure System. They can now apply for business scope registration at their discretion, and registration of the business activity term is no longer subject to prior administrative approval. For corporate changes such as split and merger, change of form and change of shareholders, enterprises do not have to complete the approval formalities again for business activities that were already approved by the relevant authority.
In addition to the simpler procedures for foreign investors that set up new businesses in China, there have also been changes to visa and work permit applications in Shanghai to attract talent and reinforce its reputation as a hub for science and innovation. Main changes include simplified visa application procedures for highly skilled foreigners and foreigners living overseas that have secured an employment license issued by the Chinese labor authority; long-term work-related residence permits for foreigners on their third application; permanent residence permits for highly skilled foreigners under certain conditions; and special residence permits for foreign students to start-up business after graduating from a Chinese university.
In another significant milestone, in mid-2015 China’s Supreme People’s Court first acknowledged the validity of loan agreements directly between non- financial enterprises to cover production or operational business needs. It is no longer necessary to resort to entrusted loans, and certain limits have been established regarding the circumstances under which such private lending will be considered illicit (for example, relending the funds to make a profit), and the reasonableness and effectiveness of interest claims.
Also, to facilitate offshore financing for Chinese-invested enterprises, the National Development and Reform Commission (“NDRC”) enacted a circular to shift foreign debt management to record filing and registration. Debt instruments that Chinese-invested domestic enterprises borrow from overseas lenders in RMB or foreign currencies for terms exceeding one year are no longer under the quota- based pre-approval regime, and the NDRC determines the overall maximum annual foreign debt at a macroeconomic level. Although the scope of this circular excludes FIEs, since early 2016, they have benefitted from similar policies in the FTZs.
On June 19, 2015, the Ministry of Industry and Information Technology revoked restrictions on foreign shareholding ratios in e-commerce businesses nationwide (previously, the maximum foreign shareholding ratio was 50%). It remains to be seen how this liberalization will interact with the new Anti-Terrorism Law (effective January 1, 2016, causing network security concerns for international technology enterprises and posing serious threats to data protection) and the draft Cyber Security Law (establishing local certifications and security reviews and controls).
Other significant changes introduced in 2015 relate to the food, drugs and advertising industries.
Under the revised Food Safety Law effective October 1, 2015, the State Food and Drug Administration is in charge of supervising and administrating food production and operation. The law establishes measures to guarantee food safety and new comprehensive licenses for food production and operation (including food production, food distribution and catering services).
The NDRC and six other government departments announced the government’s aim to lift current controls and establish a market-oriented drug pricing system, gradually shifting its focus from guiding to monitoring drug prices. The State Council also launched a new system for reviewing, examining and approving drugs and medical devices in China.
The aim of the revised Advertising Law, which came into effect on September 1, 2015, is to (i) enhance consumer protection; (ii) further regulate advertising, especially relating to drugs, healthcare foods, medical devices and education; and (iii) adapt the framework to the special requirements of the internet. At the same time, the AIC abolished the requirement to seek special approval to establish foreign-invested advertising enterprises.
Following the path set by the Anti-Monopoly Law, and to promote competition and innovation, in April 2015 the AIC issued the first regulations banning the abuse of intellectual property rights to exclude and restrict competition, and on December 31, 2015, the NDRC issued guidelines for public comments to prevent the abuse of intellectual property rights.
Regarding procedure, on July 15, 2015, the Supreme People’s Court officially recognized that the Shanghai International Arbitration Center and the Shenzhen Court of International Arbitration have jurisdiction over disputes on arbitration clauses that respectively designate the former Shanghai Sub- Commission and South Sub-Commission of China’s International Economic and Trade Arbitration Commission if entered into before the split and official name change to SHAIC on April 8, 2013. Otherwise, China’s International Economic and Trade Arbitration Commission has jurisdiction. Finally, relating to the continued actions to restrain corruption and bribery, the Criminal Law was amended, toughening criminal and monetary penalties for bribery and for taking advantage of professional status.