Effective as of November 6, 2015, the Ministry of Commerce (“MOFCOM”) and the State Administration of Foreign Exchange (“SAFE”) jointly promulgated the Circular Concerning Further Improvement of Filing Process for Foreign Investment in Real Estate (“Circular 895”). Circular 895 lifts the requirement for foreign invested real estate enterprises (“Real Estate FIEs”) to complete or, more accurately, to wait for the completion of, a national-level MOFCOM filing after receiving “COFTEC” approval (approval at the provincial or local MOFCOM level). The national-level MOFCOM filing requirement has been in place since 2007 as a part of the Chinese central government’s previous effort to exercise more scrutiny and control of foreign investment in Chinese real estate. Circular 895 evidences another step in the continued relaxation of the rules governing such scrutiny and control.
- 2006 – 2007: Strengthening Control
On July 24, 2006, six ministries of the People’s Republic of China (including MOFCOM and SAFE) jointly issued theOpinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market (“Circular 171”). Circular 171 required, among other things, that foreign investors form Real Estate FIEs to acquire real estate in China, and that the registered capital of any Real Estate FIE be no less than 50% of its total investment amount. Circular 171 is notable as the circular that began the Chinese central government’s increasing scrutiny and control of foreign investment in real estate and the government’s treatment of such investment as different from foreign investment in other industries.
On May 23, 2007, MOFCOM and SAFE jointly issued the Circular on Further Strengthening and Regulating the Examination, Approval and Supervision of Foreign Direct Investment in the Real Estate Industry (“Circular 50”). Circular 50 required the relevant COFTEC that approves a Real Estate FIE to transmit a copy of such approval to MOFCOM for filing, and stated that MOFCOM was empowered to take corrective measures with respect to improper local approvals. This filing requirement effectively imparted to MOFCOM the power to substantively review and control all COFTEC Real Estate FIE approvals.
On July 11, 2007, SAFE issued the Circular on the Issuance of the List of the First Group of Foreign-funded Real Estate Projects Approved by MOFCOM for Record by the General Affairs Department of SAFE (“Circular 130”). Under Circular 130, Real Estate FIEs were not permitted to convert foreign currency into RMB (or vice versa) without completing the MOFCOM filing requirements. In addition, this circular provided that Real Estate FIEs were no longer permitted to incur “foreign debts”, including loans extended by their offshore shareholders and offshore banks.
- 2014 – 2015: Loosening of Control
Since 2014, the Chinese central government has been gradually loosening various restrictions on foreign investments in the China real estate market.
On June 24, 2014, MOFCOM and SAFE jointly issued the Circular Concerning Improvement of Filing Process for Foreign Invested Real Estate Enterprises (“Circular 340”). Pursuant to Circular 340, MOFCOM delegated to COFTEC the authority to review filing applications for Real Estate FIEs, and simplified the national-level filing process, making such filing merely an administrative matter, instead of the substantive approval process that such filing was prior to the issuance of this circular. Real Estate FIEs which were filed by COFTEC, except those that failed MOFCOM’s random filing checks, were to be published on the official website of MOFCOM and, after such publication, were permitted to convert foreign currency into RMB.
On August 19, 2015, six ministries of the People’s Republic of China (including MOFCOM and SAFE) jointly issued theCircular Concerning Adjustment to Relevant Policies on Market Entry and Administration of Foreign Investment in the Real Estate Market (“Circular 122”). Circular 122 expressly requested various governmental authorities to further simply the approval process with respect to Real Estate FIEs and also abolished the previous Circular 171 requirement that the registered capital of any Real Estate FIE be no less than 50% of its total investment amount (so that, in respect of a Real Estate FIE with a total investment of US$30 million or more, the minimum registered capital requirement was changed from 50% of its total investment to 30% of such amount). This change made the registered capital requirements applicable to Real Estate FIEs the same as those applicable to other foreign invested enterprises and represented a paradigm shift from the process started with Circular 171, evidencing the Chinese central government’s continued move toward increasingly treating real estate investment as similar to foreign investment in other industries.
Summary of Circular 895
Under Circular 895:
- after COFTEC approves the establishment (or the amendment of the constitutional documents) of a Real Estate FIE, it is required to internally report the relevant information relating to the underlying real estate project via MOFCOM’s internal system;
- MOFCOM’s website will no longer publish Real Estate FIEs which have completed MOFCOM filing. Instead, after obtaining the applicable COFTEC approval, a Real Estate FIE may directly liaise with their relevant local bank to arrange for foreign exchange conversion of its registered capital; and
- MOFCOM will, on a quarterly basis, perform a random check of Real Estate FIEs which have been approved by the relevant COFTECs.
Conclusion and Outlook
Circular 895 seems to be a clear response by MOFCOM and SAFE to further simplify the approval process with respect to Real Estate FIEs in a manner consistent with Circular 122. Notably, despite it being titled the Circular Concerning “Further Improvement of Filing Process” for Foreign Investment in Real Estate, Circular 895 effectively lifts the MOFCOM filing requirement, which has been in place since 2007. This is sending a very strong signal that the Chinese central government is taking significant steps to loosen the long-held restrictions on foreign investment in China real estate and that the government is moving to a regulatory environment where foreign investment in real estate is increasingly treated like other foreign investments.
There are, however, still questions yet to be answered. For instance, while Circular 122 lifts the requirement that the shareholder of a Real Estate FIE has fully funded such Real Estate FIE’s registered capital before it can obtain offshore loans and convert foreign exchange loans into RMB, it does not expressly abolish the Circular 130 prohibition that Real Estate FIEs are not allowed to incur “foreign debt”. Given the signal sent by Circular 895, we expect that it is only a matter of time before the Chinese central government (in particular SAFE) issues additional rules expressly allowing Real Estate FIEs to incur such foreign debt as the regulation of foreign investment in real estate is treated more like foreign investment in other industries.