China’s foreign investment regulatory landscape is undergoing another wave of major revamping since China amended its Company Law and the implementation guidelines regarding the registered capital of foreign-invested enterprises (FIEs) two years ago. The long-standing approval-based market entry system for foreign investors in China is expected to migrate toward a recordation-based system, which would greatly shorten the market-entry review period that a foreign investor needs to factor in when setting up an FIE.

Traditionally, FIE projects were subject to a substantial review process that was the focus of the approval-based system. This substantial review process is being phased out and replaced with a post-market-entry inspection, reporting and policing system. These changes were announced on Sept. 3, 2016 when a general guideline enacted by the Standing Committee of the People’s Congress (“FIE Law Amendments”) was included in amendments to the main body of FIE laws, including the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law, and the Wholly Foreign Owned Enterprise Law. Also on Sept. 3, in tandem with the FIE Law Amendments, China’s primary foreign investment agency, the Ministry of Commerce (known as “MOFCOM”), issued a draft regulation – the Interim Measures on Administration of Recordation in Incorporation and Alteration Matters Concerning Foreign-Invested Enterprises (“Tentative Measures”). Both the FIE Law Amendments and the Tentative Measure will take effect on Oct. 1, 2016.

The FIE Law Amendments add a new guideline about incorporation, dissolution, or extension of the corporate term of an FIE which, in the past, were deemed to be material “corporate changes.” Under the FIE Law Amendments, such corporate changes may be effected through recordation with, rather than approval by, a MOFCOM office, provided that such FIE’s business scope does not fall into categories listed in the “negative list” (“National Negative List”). The National Negative List is intended to be a catalogue of industries or sectors, yet to be developed and issued by the national-level authorities, where foreign investment is either prohibited or restricted and national treatment is not required. On a pilot basis, a negative list was first introduced by the Shanghai free trade zone in 2013. The new recordation system is off limits in such industries or sectors. Below, we highlight a few aspects of the Tentative Measures which set forth more detailed guidelines about the recordation system and post-registration regulation.

  • Simplified Market Entry. An FIE whose business is not listed in the National Negative List may complete the business registration process through the recordation system within three working days from submission day. The recordation is not a pre-condition for issuance of a business license by the Administration of Industry and Commerce (equivalent of corporate registrar in China) and may occur before or after issuance of the business license of the FIE.
  • Post-Market-Entry Regulation. FIEs that are established using the recordation system but whose businesses are on the National Negative List will be subject to penalties.
  • Heightened Background Review on Beneficial Owner. The recordation registration form attached to the Tentative Measures calls specifically for information about the ultimate beneficial owners, in addition to the direct investors, of the FIE. This may be a precursor to certain major changes in the regulatory guidelines that shift the review focus from the merits of a FIE project to the sponsors or controlling investors of the FIE.

Lastly, there are currently no guidelines to lend more visibility on how this reform may impact other market entry regulatory regimes. We do not anticipate that the recordation system ushered in by the FIE Laws Amendments or the Tentative Measures will currently be adopted for use in business acquisitions. For example, a foreign company looking to acquire a Chinese domestic enterprise will still likely be subject to the relevant M&A code (known as the “MOFCOM M&A Regulation”), which in the past had a widespread impact not only on “green field” acquisitions but, also, internal restructuring of Chinese enterprises as the “red chip” companies – a structure adopted by numerous Chinese companies to build an offshore holding company structure to facilitate raising international venture capital or seeking exit opportunities outside China. Likewise, anti-trust review will remain on its current course.