On November 24, 2014, the PRC Ministry of Commerce and the PRC Ministry of Civil Affairs jointly issued the Announcement on Matters Relating to Foreign Investors' Establishment of For-profit Elderly Care Institutions (the “Announcement”). The Announcement is another important measure for the further opening of China’s elderly care services market.

I. Background of the Announcement

The opening of China’s elderly care services market has been an evolving process:

    1. The Interim Measures for the Management of Social Welfare Institutions, issued by thePRC Ministry of Civil Affairs on December 30, 1999, stipulated that foreign investors may set up social welfare institutions including elderly care institutions only in the forms of equity or cooperative joint ventures with Chinese parties;

    2. The elderly services institutions were listed as one of the “encouraged industries” under the Foreign Investment Guiding Catalogue (the “Catalogue”) effective as of January 30, 2012. However, the specific form of such institutions was not specified in the Catalogue. Therefore, it was uncertain whether foreign investors would be able to establish a wholly-owned elderly care institution under such Catalogue;

    3. On February 17, 2013, the PRC Ministry of Commerce and the PRC Ministry of Civil Affairs jointly issued the Circular on the Establishment of For-Profit Elderly Care Institutions and Service Institutions for the Disabled by Hong Kong and Macau Service Providers, in which service providers from Hong Kong and Macau were allowed to set up for-profit elderly care institutions in the forms of Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures, or wholly foreign-owned enterprises;

    4. The Permitting Measures of the Establishment of Elderly Service Institutions (the “Permitting Measures”), issued by the PRC Ministry of Civil Affairs on June 28, 2013, stipulated that foreign investors were allowed to establish both wholly owned elderly care institutions and joint venture institutions, which was a progress towards a fully opened elderly care services market to the foreign investors;

    5. In the Several Opinions of the State Council on Expediting the Development of the Elderly Service Industry (the “Opinions”) promulgated on September 6, 2013, foreign investors were explicitly encouraged to invest in the elderly care services industry;

    6. On November 4, 2014, the National Development and Reform Commission issued the Announcement on Soliciting Public Comments on the Draft Revisions to the Foreign Investment Guiding Catalogue, in which, in addition to the existing “elderly services institutions”, the “elderly care institutions” were newly added into the “encouraged industries”;

    7. On November 24, 2014, the Announcement was jointly issued by the Ministry of Commerce and the Ministry of Civil Affairs (became effective on the same day), in which foreign investment in for-profit elderly care institutions was further confirmed. Furthermore, the Announcement stipulated the establishment conditions and procedures as well as the rights and limitations of the foreign-invested for-profit elderly care institutions (the “FIE Institutions”), and provided practical guidelines for foreign investment in the for-profit elderly care institutions.

II. Primary Provisions of the Announcement

    1. Principles. Foreign investors are encouraged to establish the FIE Institutions in China independently or         jointly with Chinese companies, enterprises and other economic organizations.

    2. Primary Rights. The FIE Institutions can engage in domestic investments relating to the elderly care services; they shall also enjoy the same preferential tax policies and other policies on reduction and exemption of administrative and institutional fees as those available to the domestic-invested for-profit elderly care institutions.

    3. Establishment Procedure. Application materials for establishing a foreign invested enterprise (the “FIE”) shall be submitted to the provincial-level commerce authorities; after being approved by the commerce authorities, the foreign investors shall, within one month upon receipt of the approval certificate of the FIE1, handle the formalities for the registration of foreign-invested enterprises with the competent administration for industry and commerce. The FIE shall then apply to the competent civil affairs authorities for a permitfor the operation of the elderly care institutions in accordance with the PermittingMeasures and other related regulations

    .4. Limitations. The application for establishing foreign-invested real estate enterprises through changing the usage of the construction land for the elderly care facilities or the plot ratio shall not be approved; the FIE Institutions shall not engage in businesses such as the “pension by housing” business that allows seniors to convert home ownership into cash; and the FIE Institutions shall apply for an approval if medical and health care services are included in their business scope.

III. Comments on the Announcement

1. May Further Encourage the Foreign Investment in the For-profit Elderly Care Institutions

    (1) The Announcement not only provides more detailed provisions concerning the FIEInstitutions, but also confirms the official view that the elderly care institutions shall be fully opened to the foreign investors. Given that China has a large aging population and there is a supply and demand gap in the elderly care services industry, the Announcement will offer fresh incentives to foreign investment in this industry.

    (2) The Announcement confirmed a series of rights enjoyed by the FIE Institutions: the right to participate in the reform of the government-funded elderly care institutions; the right to engage in the investment in the elderly care services-related businesses; the right to the same preferential policies as those owned by domestic investors.

2. No Policy Change to the Restrictions on Foreign Investment in the Real Estate Industry

    The real estate industry was listed as one of the “restricted industries” under the Catalogue effective as of January 30, 2012. Given the high barriers to the real estate industry for the foreign investors, the Chinese authorities think that the foreign investors, with a land for the  construction of the elderly care facilities in hand, may change the usage of such land or the plot ratio, to conduct investment in the real estate industry in the name of the FIE Institutions. In view of this possibility, the Announcement explicitly prohibits the application for the establishment of the foreign-invested real estate enterprises through changing the land use or the plot ratio of the land which is supposed to be used for the construction of the elderly care facilities. Therefore, the Announcement does not give a green light for those foreign investors who want to enter China’s real estate industry in the name of operating the FIE Institutions.

IV. Issues and Further Clarifications Needed

    (1) The source of land for the FIE Institutions has not been specified. The operations of the FIE Institutions depend on certain infrastructures, in which the land is essential. However, neither the source nor the acquisition process of such land has been explicitly stipulated in the Announcement or other relevant regulations. The Opinions issued in 2013 proposed that: (i) the land for the construction of the elderly care facilities should be treated as business land, which should be given priority to supply; and (ii) relevant land policies should be formulated to promote the development of the elderly care industry. However, in Beijing, for example, there were a total amount of 5,150 hectares state-owned construction land supplied in 2014, only 100 hectares of which were for the construction of the elderly care facilities according to the Beijing 2014 state-owned construction land supply plan. In addition, according to the Guiding Opinions on Land Used for Care Services and Facilities for the Elderly issued by the General Office of the Ministry of Land and Resources on April 17, 2014, the land for the construction of for-profit elderly care facilities should be acquired by the user by means of leasing and granting for a fee. Given that the cash-rich companies such as large real estate enterprises and insurance companies have stepped into the senior housing industry, the FIE Institutions might be at a disadvantage in terms of capital, which would be a barrier for the FIE Institutions to access the construction land for the elderly care facilities. As a result, the priority of the land supply to the FIE Institutions proposed by the Opinions may not be effectively implemented.

    (2) There could be conflicts in the approval process between the commerce administrative authorities and civil affairs authorities. Under the Announcement, only with the receipt of the approval certificate of the FIE from the relevant commerce administrative authorities and the completion of the company registration, can the foreign investors apply to the competent civil affairs authorities for the establishment license for the elderly care institutions in accordance with the Permitting Measures. Under such a procedure, an FIE Institution holding an approval certificate issued by the relevant commerce authorities may not operate its business if it cannot subsequently obtain an operating license from the competent civil affairs authorities . Therefore, the establishment procedure under the Announcement may result in a conflict between the two approving authorities. In view of this situation, full coordination is required between the two authorities in practice.

    The Announcement provides more detailed guidance and more convenience for the foreign investors to invest in the for-profit elderly care institutions. As there are still some uncertainties with respect to how the Announcement may be implemented, we will keep you posted with respect to any new development of this Announcement.