Law and policy
Policies and practices
What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?
In 2016, the Ministry of Commerce of China (MOFCOM) announced its ‘13th Five-Year (2016-2020) Plan for Commercial Development’ (the Plan), in which MOFCOM placed the highest emphasis on the importance of foreign investment. The Plan specifically states that, during the 12th five-year plan, actual utilised foreign investment increased by 13.5 per cent in comparison with the 11th five-year plan, reflecting China’s steady growth and position in global economics. The government is also determined to increase foreign investment for the societal good. Despite the instability in world trade and global economy, Chinese government emphasised in many occasions that it still welcomes foreign investment and is firmly committed to protecting the lawful rights and interests of foreign businesses in China.
According to the Plan, MOFCOM aims to fully implement the management system of pre-establishment national treatment (PENT) with a negative list to create a more investment-friendly and convenient environment and legal framework. It is MOFCOM’s belief that such practice will mark the start of further reform and enable China to embrace the international rules and common practices more efficiently. In addition, reform of foreign investment regulation is also decreed. To enforce negative-list review and reduce the number of approvals to minimum extent ought to be MOFCOM’s priority, with one eye on promoting equal treatment and fair competition between foreign and domestic enterprises. Under this objective, the government intends to replace ‘approval-oriented regulation’ with ‘filing management’, which only requires the foreign investment in the fields of the negative list to go through the procedures of approval, making foreign investment simpler and faster. This revision is considered to be the core of China’s recent reform of foreign investment regulation, and it is the amendment of China’s foreign-investment laws (the Law on Wholly Foreign-owned Enterprises, the Law on Sino-foreign Equity Joint Ventures, the Law on Sino-foreign Co-operative Enterprises and the Law on the Protection of Investment by Taiwanese Compatriots) that herald the start of deregulation.
The negative list management system has been reformed with the goal of expanding marketing access to foreign investment. Pursuant to the Regulations on Foreign Investment Guidelines (State Council  No. 346), foreign investment in China is divided into four categories: encouraged; restricted; prohibited; and permitted (which refers to those that do not fall into the first three categories) and the former three categories are included in the Catalogue of Industries for Guiding Foreign Investment (the Catalogue) updated by the National Development and Reform Commission (NDRC) and MOFCOM periodically. The 2017 Catalogue (NDRC and MOFCOM’s Order  No. 4, effectuated on 28 July of the same year) superseded the 2015 Catalogue and amended the structure of the Catalogue to two main sections: Encouraged Catalogue and the Special Management Measures (Negative List) for the Access of Foreign Investment. In 2018, instead of updating the negative list in the 2017 Catalogue, NDRC and MOFCOM jointly released the Special Management Measures (Negative List) for the Access of Foreign Investment (NDRC and MOFCOM’s Order  No. 18, effectuated on 28 July of the same year (the 2018 Negative List)) for the first time that superseded the negative list in the 2017 Catalogue.
Comparing with the negative list in the 2017 Catalogue, the 2018 Negative List decreased the number of items that require special managing measures from 63 to 48 and further expanded market access of foreign investments in several fields, including finance, transportation, energy, resource and agriculture, etc. One major change is the 2018 Negative List cancelled the two categories of restrictive items and prohibited items and listed the special management measure for each item separately.
The scope of application of the negative list released by NDRC and MOFCOM is nationwide except the Pilot Free Trade Zone delimited by the State Council. The Pilot Free Trade Zone in China abides by the Special Management Measures (Negative List) for the Access of Foreign Investment in the Pilot Free Trade Zone (NDRC and MOFCOM’s Order  No. 19, effectuated on 30 July of the same year), which has three fewer items than the 2018 Negative List and adopts an approach of loosening restrictions to some specific items.
For specific implementing regulation, the new filing management is largely covered by the Provisional Measures on Administration of Filing for Establishment and Change of Foreign Investment Enterprises (amended on 30 July 2017 by MOFCOM Order  No. 2 and on 29 June 2018 by MOFCOM Order  No. 6, the Measure). A major change made by the MOFCOM amendment in 2018 as an effort to simplify the procedures is the filing for establishment could be conducted online simultaneously using the same documents while applying for the business licence. The filing for change should be conducted online within 30 days after the change. The materials and information required are scaled down significantly, and the authorities will not conduct a substantive review. The pre-establishing supervision is replaced with post-oversight to lessen the burden of foreign investors while maintaining the effectiveness of the laws. Furthermore, article 11 of the Measure states that the relevant authorities must complete the filing review in three days (reduced from between 45 and 90 days). Some believe that 95 per cent of investments in future will be eligible for the filing management.
China is in the process of drafting the Foreign Investment Law of the People’s Republic of China, which is included in the State of Council Legislation Plan for 2018 (issued by the General Office of State Council  No. 15). The Foreign Investment Law, currently being drafted by MOFCOM and NDRC jointly, is believed to be a symbol of a new foreign investment era in China.
What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?
The fundamental legal framework regarding the control over foreign investment lies in the following codes: the Law on Sino-foreign Equity Joint Ventures (amended in 2016) and its implementing regulation; the Law on Sino-foreign Co-operative Enterprises (amended in 2017) and its implementing regulation; and the Law on Wholly Foreign-owned Enterprises (amended in 2016) and its implementing regulation. As mentioned in question 1, the Foreign Investment Law, which is drafted on the basis of the three laws, with revisions to reflect the reform of foreign investment management in China, will take the place of the three laws after formally taking effect in the future.
In addition, MOFCOM released orders or notices to provide specific provisions on foreign investment. The Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (MOFCOM’s Order  No. 6, effectuated on 22 June of the same year (the M&A Provision)) specified the requirements, basic structure, review procedure and materials needed for the merger and acquisition of a domestic enterprise by a foreign investor. Mergers and acquisitions by foreign investors are under relaxed review in the Measure, which has previously always been under strict control.
China’s primary regulation regarding the scope, content, procedure and timeline of the review on the basis of national security is the Notice of the General Office of State Council on Establishment of Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (issued by the General Office of State Council  No. 6 (the Security Review Notice)). For further information, see question 6. According to the legislature, the national security review, inter alia, will be included and further improved in the Foreign Investment Law.
Finally, foreign investment may trigger the scrutiny of the Anti-Monopoly Law (effectuated on 1 August 2008 (the AML)) and its regulations. According to the Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings (Decree of the State Council of the People’s Republic of China No. 529, effectuated on 3 August 2008), the thresholds are in the previous financial year, if:
- the total worldwide turnover of the undertakings to the concentration exceeded 10 billion yuan; and
- the total China-wide turnover of the undertakings to the concentration exceeded 2 billion yuan, and at least two of the undertakings to the concentration each had a China-wide turnover exceeding 0.4 billion yuan.
Reaching the thresholds means that the parties are obligated to notify the relevant authority and obtain its approval, and the transaction may not close before the parties secure clearance.
Scope of application
Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?
The supervision and the principal legal framework of foreign investment have been stated in questions 1 and 2. The three laws mentioned in question 2 have been amended and the scope of review differs according to the sectors, which are provided mainly in the negative list , and other details of the investment. Currently, all foreign investments are examined by the government. The amendment of the Measure also specifies that mergers and acquisitions resulting in conversion from non-foreign investment company into foreign investment company should also be covered by the Measure. Therefore, it is understood that, regardless of the form of investment (direct or indirect, joint venture, acquisition, incorporation or minority participation), the test of whether a transaction is caught by the Measure simply lies in whether it is a foreign investment in the sense of the aforesaid Chinese legal framework. The difference depends predominantly on the negative list, as mentioned above. Generally, the restricted items in the negative list attract greater attention from the authorities. As for sector-specific authorities, industrious monitoring or supervision by the government are not considered to be a part of the foreign investment review in China, and there is no difference between a Chinese and foreign company in this regard.
How is a foreign investor or foreign investment defined in the applicable law?
The exact definition of ‘foreign’ may differ, but if the nationality of the investor, natural person or legal person, is not Chinese, the person will be considered a foreign investor; and if the capital comes from countries or regions other than Mainland China then the investment will be treated as foreign investment. Hong Kong, Macau and Taiwan investors are also viewed as foreign by China’s foreign investment regulation.
Special rules for SOEs and SWFs
Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?
SOEs and SWFs are not specifically addressed in the relevant law, the review of their investment accords with the aforementioned laws.
Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?
The main regulations regarding the review on national interest grounds are the Security Review Notice and the M&A Provision. The competent authorities are MOFCOM and its local departments. Once MOFCOM confirms that the merger or acquisition falls within the scope of the national security review then the inter-ministerial joint committee (led by MOFCOM and NDRC) will oversee the review.
The triggering of the review, which is crucial to the issue at hand, can be seen in article 1(1) of the above-mentioned Notice, which focuses on the domestic and supporting enterprises:
- involved in the military industry and its supporting companies;
- located near key and sensitive military facilities;
- other units related to national defence and security; and
- involved in key agricultural products, key energy and resources, vital infrastructure, important transportation services, core technologies and significant equipment manufacturing with actual control gained by foreign investors.
The definitions of merger and acquisition, and the gaining of actual control, are provided in article 1(2-3).
As mentioned in question 2, if reaching the threshold, the parties of the foreign transactions are obligated to notify the relevant authority under the AML. After the institutional reform of state institutions in March 2018, the competent authority was adjusted to newly established State Administration for Market Regulation (SAMR) from MOFCOM.
Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?
The relevant laws and regulations of foreign investment are becoming clearer. Therefore, the investor should have some indication beforehand of how likely it is that it will get approval. However, if the investment involves a national security review, then it is more challenging for the investor to predict the result owing to the lack of transparency of the review. As mentioned in question 6, the scope, procedures, factors and other elements of the national security review are quite clear, but the results can be unpredictable because the discretion of the authorities still carries great importance.
What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?
There is no special threshold for foreign investment review in China. As previously provided, MOFCOM aims to fully implement the management system of PENT with a negative list, which means the foreign investment that falls within the negative list but is not prohibited will go through the approval procedure, while the foreign investment outside of the negative list only need to go through the filing procedures, which significantly reduces the burden of the investor. The filing for establishment to MOFCOM could be conducted online simultaneously with the same documents while applying for the business licence, the filing for change to MOFCOM should be conducted online within 30 days of the change. The filing is compulsory. As for national security and antitrust reviews, the thresholds are provided respectively in questions 6 and 2.
National interest clearance
What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees?
In general, the authorities will consider if the transaction or investment conforms to foreign investment access and industry policies, and the impact on national security will be evaluated if it meets the threshold of the national security review. The investor can submit application documents to the local bureau of commerce, and the internal foreign investment division will be responsible. If the application is in line with the foreign investment policies, the division will draft the approval letter and submit it to the head of the bureau of commerce for his or her final review, which will ultimately decide whether to issue the official approval letter and certificate of approval.
As stated above, the fundamental legal framework of the national security review is set out in the Security Review Notice and its following regulation: the Provisions of the Ministry of Commerce on Implementation of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (MOFCOM’s Order  No. 53, effectuated on 1 September of the same year).
The scope of the national security review is provided in question 6. Should the transaction need to be scrutinised, the investor shall apply for approval. In such circumstances, MOFCOM should inform the investor within 15 days, and subsequently submit to the inter-ministerial joint committee within five days. Other authorities, national industry associations, competitors and the undertakings upstream or downstream all have the standing to advise MOFCOM to initiate the review. Once informed, MOFCOM should confirm and submit the transaction to the inter-ministerial joint committee within five days. The reviewing date officially starts when the filing materials are deemed to be complete. From this time, the investors are forbidden from closing the deal for another 15 days. Application is free, although it does require certain materials, which can be found in article 5 of the provision in the above paragraph.
Notwithstanding the national security review, MOFCOM’s merger and acquisition review is fairly comprehensive. For example, article 1 of the M&A Provision, which is also mentioned in question 2, candidly includes national and economic security as the factors of the review. NDRC’s Project Approval also takes national security into account, pursuant to article 16(4) of the Administrative Measures on Approval and Filing for Foreign Investment Projects (2014).
The reviewing process is mandatory, though free of charge. There is a standard filing form for investment that doesn’t fall into the negative list. The investor can visit MOFCOM’s official website and enter the filing system, which, with the required information, can be submitted online to the local bureau of commerce. That information includes the foreign investor, the amount of foreign investment, business scope, ultimate controller of foreign investment company if applied, future investment plan and number of employees of the company. Reviewing the information should provide a clear picture of the application.
Which party is responsible for securing approval?
The notifying party is usually the foreign or Chinese investor establishing a foreign-invested enterprise; for other applications it would be the foreign invested enterprise, but details may differ according to the industry and its respective regulation.
How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?
For foreign investment qualified for filing management, the review process takes three days. For other investments still needing approval, the period changes according to the type of the investment, pursuant to the respective regulations: Sino-foreign equity joint ventures, up to 90 days; Sino-foreign cooperative enterprises, up to 45 days; and wholly foreign-owned enterprises, up to 90 days.
In practice, local reviewing authorities have generally shortened their review time to one week. Mergers and acquisitions by foreign investors usually take longer to review than other foreign investments. Factors affecting the timeline include the number of approvals involved, the sector and type (greenfield or M&A) of the investment, and the profile of the transaction. Although there is no exemption, the government usually respects the investor’s request to hasten the review if there is any special circumstance, such as the pressure to close on time.
Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?
Previously, MOFCOM’s foreign investment approval was a prerequisite for other registrations such as industry and commerce registration and foreign exchange registration, therefore, investors could not close the deal before the review was completed. This remains the case; however, the filing-management application process is now quite different. For instance, article 1(3) of the Notice of the State Administration for Industry and Commerce on Registration Work Following Filing Administration for Foreign Investment Enterprises (State Administration for Industry and Commerce Order  No. 189, released on 30 September of the same year) states that ‘the filing certificate issued by the Commerce authorities is not a prerequisite for industry and commerce registration.’
Therefore, MOFCOM has stressed the importance of interim and ex-post supervision on different occasions, for example, the Notice of MOFCOM on the Work of Supervision and Inspection of the Filing of the Establishment and Change of Foreign Invested Enterprises (MOFCOM  No. 954, released on 13 December of the same year). The legal consequence of violating the Measure is that the foreign investment company or its investor will be fined up to 30,000 yuan and possibly have other relevant legal liabilities if it breaks other laws and regulations.
There is no doubt that, when the investment ought to be under national security review, merger and acquisition review, or antitrust review, the legal ramifications are the same as ever: the parties cannot close the transaction. The consequences of doing otherwise include a fine, compulsory termination of the transaction, transferring of assets or equities, and other necessary measures.
Involvement of authorities
Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?
Most authorities provide guidelines or illustrations of the process as reference points for investors, who are recommended to study them carefully. Even though the relevant regulations remain unspecific, the authorities normally accept a request for pre-filing meeting. Still, there are provisions in this regard, including article 4 of the Provisions of the Ministry of Commerce regarding the national security review provided in question 9. Nevertheless, though in most instances it does assist the parties with a clearer picture of the review and the prevailing opinion of the authority, such meeting or consultation does not have a legal or de facto binding effect on the agency and should be treated with great care.
When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?
There is no unified standard or regulation in this regard. Meetings or communications are mostly welcomed and potentially helpful for the review, but the results differ. Nor are the authorities always willing to meet the representatives from the parties. Such practice is not yet common in China.
What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?
There is no specific provision in this regard under the foreign investment review regime in China. For filing management, the Measure imposes a fine on non-compliance such as refusing to file, providing misleading or false information, investment against the Catalogue, and refusing the inspection of the government. For approval-required foreign investment, similar regulations and legal liabilities (fines, forfeiture of illegal income, and revocation of a business licence) are also provided, such as article 60 of the Implementation Regulations for the Administrative Regulations of the People’s Republic of China on Registration of Enterprise Legal Persons (State Administration for Industry and Commerce Order  No. 92) and other regulations for the specific approvals involved. Under the AML, SAMR may impose certain penalties and even unwind a notifiable transaction that failed to comply with the notification obligation, according to article 48 of the AML, although there has not been any precedent thus far.
What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?
The first substantive test for foreign investment lies in the negative list, where the government’s view is clear. Needless to say, the prohibited items in the negative list therein mean no form of investment is allowed. Any attempt to invest in the non-prohibited items in the negative list would certainly invite close scrutiny and pose challenges.
Factors to be considered in merger and acquisition security reviews, national security reviews and antitrust reviews are provided in the respective regulation and are briefly summarised as the following:
- merger and acquisition security review:
- compliance with the laws, administrative regulations and rules of China;
- abiding by the principles of fairness, reasonableness, consideration of value, honesty and trust;
- to avoid excessive market concentration or competitive practices that are exclusionary or restrictive;
- to not disrupt social economic order, damage public interest or cause loss to state-owned assets;
- national security review:
- the impact of merger and acquisition transactions on national defence and security, including the production capacity of domestic products, capacity for provision of domestic services and the relevant equipment and facilities required for national defence;
- the impact of merger and acquisition transactions on the stable operation of the national economy;
- the impact of merger and acquisition transactions on the basic order of society;
- the impact of merger and acquisition transactions on research and development abilities of core technologies involving national security; and
- antitrust review:
- the market shares of the business operators involved in the concentration and their control over the market;
- the degree of market concentration of the relevant market;
- the impact of the concentration of business operators on market entry and technological advancement;
- the impact of the concentration of business operators on consumers and other relevant business operators;
- the impact of the concentration of business operators on the development of national economy; and
- any other factors deemed relevant for consideration by the anti-monopoly enforcement agency of the state council.
To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?
Foreign investment review authorities will not consult or cooperate with officials in other countries. In practice, it is also rarely seen in other relevant reviews. However, the antitrust authority in China has had communication and cooperation with other jurisdictions such as the European Union, the United States, Canada and several other countries in recent years and such cooperation are becoming deeper and more frequent. It is anticipated that such relations will become closer in future.
Other relevant parties
What other parties may become involved in the review process? What rights and standing do complainants have?
For a greenfield investment, competitors, customers or other government agencies are not usually involved in the review process. If it is a merger or acquisition, the foreign investment review authority will encourage or request opinions from other competent government agencies, industrial associations and possibly competitors. In national security and antitrust reviews, all third parties’ opinions are valued, and formal channels are provided, such as those mentioned in questions 9 and 19. The details differ according to the applicable regulations.
Prohibition and objections to transaction
What powers do the authorities have to prohibit or otherwise interfere with a transaction?
In a national security review, according to the regulation, the inter-ministerial joint committee can ask MOFCOM to terminate the transaction, to force the transferring of the shares or assets involving in the transaction, or to take any other necessary measure in order to eliminate the negative effect brought by the investment. Similar powers are available when relevant government authorities conduct merger and acquisition reviews or antitrust reviews. It is the duty of the authorities to examine whether the terms of a transaction are fair, just and comply with regulations. Nevertheless, according to current practice, the reviewing agencies minimise their presence and involvement in transactions between enterprises. Even if investors do consult with the agencies to clarify the relevant regulations, the scope of the response will be limited in order not to interfere with or obstruct the deal.
Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?
Foreign investment review regulations (either approval or filing management) do not have specific provisions for such practice. However, the investor may know the reason for the rejection and can apply again after adjusting the transaction and revising the filing documents. In a merger and acquisition review, such a scenario rarely occurs because the main concerns of the government centre around industry policies and entrant requirements, so responding to such concerns is relatively straightforward. In national security, and antitrust reviews, investors are usually allowed to meet with the authorities and to rectify the transaction to an acceptable extent. For example, in a national security review notice, it clearly states that the investor may alter the arrangement during the review to reduce the competent authority’s concern and obtain the desired approval. The substantive tests provided in question 16 are a good starting point from which to access the likely concerns of the authorities.
Challenge and appeal
Can a negative decision be challenged or appealed?
According to China’s administration law and its jurisprudence, and given the fact that a negative decision from a government prevents foreign investor activity, it should be challengeable. However, it is not usual for Chinese law to explicitly state the legal recourse available (such practice is called the instruction of remedy). For example, there is no such provision in the relevant foreign investment regulations. As stated above, before reaching a final decision, the authorities sometimes give the investor an opportunity to discuss altering their transaction to eliminate their concerns, especially in national security, and antitrust reviews. After a decision is reached, investors are, in theory, given the right to appeal the decision through either filing an administrative review or by bringing a lawsuit. The details may vary according to the actual circumstances.
What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?
In mergers and acquisitions reviews, national security reviews and antitrust reviews, the respective regulations, which are all mentioned above, contain provisions requiring the agencies to honour their confidential nature. For instance, article 41 of the AML explicitly states that the agency and its personnel must maintain the confidentiality of the review process. However, the legal recourse of any violation by the authorities may not be as direct as we all hope, and, as for the foreign investment review, neither filing nor approval regulation provide similar guarantees of confidentiality.
Relevant recent case law
Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.
Updates & Trends
Updates & Trends
Updates and trends
In the stage of finalising and transitioning to the Foreign Investment Law, which is believed to the biggest reform to foreign investment laws and regulations in China for decades, the Chinese government carried out several important policies and measures on foreign investment in recent years. The State Council released two notices regarding further opening up and promoting of foreign investment in 2017, including over 40 specific measures. The negative list, which was released independently for the first time in 2018, decreased the number of items that require special managing measures from 63 to 48 and further expanded market access of foreign investments in several fields, including finance, transportation, energy, resource and agriculture, etc. Another major measure to simplify foreign investment formalities is that filing for establishment could be conducted online simultaneously using the same documents while applying for the business licence. Meanwhile, the Chinese government has emphasised on many occasions that it still welcomes foreign investment and is firmly committed to protecting the lawful rights and interests of foreign businesses in China.