In March 2009, the Ministry of Commerce of the PRC (MOFCOM) issued a series of three circulars to delegate its approval authority over certain foreign investment matters to its local counterparts in provinces, autonomous regions, municipalities, various cities and national economic and technological development zones (ETDZs) (together, the Local Commerce Authorities). These circulars are entitled, respectively, the Circular on Further Improving the Work on the Examination and Approval of Foreign Investment Projects, the Circular on Delegating the Authority to Examine and Approve the Establishment of Investment Companies by Foreign Investors, Circular  No. 8, Circular 8), and the Circular on Approval Matters Relating to Foreign-Invested Venture Investment Enterprises and Venture Investment Management Enterprises, Circular  No. 9, Circular 9). By delegating its approval authority in certain areas of foreign investment, including encouraged industries, holding companies and venture investment enterprises, MOFCOM has considerably simplified examination and approval procedures for foreign investment in these areas. Circulars 7, 8 and 9 are expected to have a stimulating effect on foreign direct investment in China.
As disclosed in MOFCOM’s recent press conference on April 15, 2009, China’s foreign investment statistics have been steadily declining for the past six months. In an effort to boost foreign direct investment amidst the international economic meltdown, MOFCOM has taken a series of steps to coax wary foreign investors back to China. One such step is MOFCOM’s delegation of its approval authority over certain foreign investment projects as specified in Circular 7. According to this circular, foreign investment projects in encouraged industries that previously fell within MOFCOM’s purview (e.g., projects with a total investment over US$100 million) and do not affect the overall national equilibrium will now be examined and approved by Local Commerce Authorities. The scope of the authority that MOFCOM granted to Local Commerce Authorities includes approving the establishment of new foreign-invested enterprises (FIEs), as well as changes to existing FIEs previously approved by MOFCOM.
Circular 7 also authorizes Local Commerce Authorities to approve mergers with, and acquisitions of, domestic enterprises in encouraged or permitted industries where the deal value is not more than US$100 million, and those in restricted industries where the deal value is not more than US$50 million. In addition, Circular 7 grants Local Commerce Authorities in various cities and ETDZs the same authority in approving foreign investments as was previously enjoyed by Local Commerce Authorities at the provincial level.
The scope of authority granted to Local Commerce Authorities in Circular 7 does not extend, however, to approving capital increases beyond the threshold stipulated by the State Development and Reform Commission or equity transfers that would result in a shift of control from Chinese investors to foreign investors. Moreover, Circular 7 does not provide Local Commerce Authorities with approval authority in areas and industries where special policies or regulations call for central MOFCOM approval, unless MOFCOM specifically grants authorization.
Circulars 8 and 9 are the first two pieces of legislation following Circular 7 to empower Local Commerce Authorities in specially-regulated foreign investment areas. Before the issuance of these circulars, for example, central MOFCOM’s approval was required to establish or change foreign-funded holding companies (Holding Companies) and venture investment enterprises (VIEs). Circulars 8 and 9 lift this requirement, and delegate approval authority to Local Commerce Authorities in these two areas. Specifically, Local Commerce Authorities now have the authority to examine and approve the establishment of or change to any Holding Company or VIE with a registered capital of not more than US$100 million. Changes to Holding Companies or VIEs previously approved by MOFCOM, except for single capital increases of over US$100 million or changes in the major investors, will also come under the purview of Local Commerce Authorities. The ETDZs are granted the same authority as other Local Commerce Authorities with respect to VIEs, but not Holding Companies. No further delegation of approval authority by Local Commerce Authorities or ETDZs is permitted.
The delegation of authority provided under Circulars 7, 8 and 9 allows foreign investors and FIEs to avoid the costs and inconvenience associated with applying for approval at the central government level, and obtain the necessary administrative authorization at the local level as long as they meet certain criteria set forth in the Circulars. Nonetheless, foreign investors and FIEs should understand that the Circulars do not make any changes to the substantive rules or criteria relating to the approval and administration of foreign investment activities in China. Local Commerce Authorities and ETDZs do not have broad discretion to approve foreign investment activities as they see fit; rather, they must strictly adhere to the general laws and other administrative rules and regulations governing foreign investment activities (e.g., the well-known M&A Rules revised in 2006) when exercising their newfound authority.