In June 2015, the Chinese authorities released two important publications, both impacting on how foreign investors can do business in the e-commerce sector in China.
Ministry of Industry and Information Technology Circular
First of all, the Ministry of Industry and Information Technology (MIIT) published the Circular of the Ministry of Industry and Information Technology on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors in Online Data Processing and Transaction Processing (Operating E-commerce) Business. This lifts with immediate effect the restrictions on foreign ownership in “online data processing and transaction processing services (operating e-commerce)”, allowing full foreign ownership of companies in this sector nationwide.
Almost all e-commerce ventures in China require a value-added telecommunications service (VATS) licence from the MIIT. Previous administrative measures restricted ownership in VATS companies to 50% foreign equity. The only exception to this was in the Shanghai Free Trade Zone, where the cap was increased to 55% foreign equity in January 2014 and then to 100% in January of this year. Now foreign investors will be permitted to own 100% of e-commerce companies across China.
While this is a significant liberalisation, the other regulatory requirements in the Administrative Measures on Foreign Invested Telecom Enterprises will still apply for foreign invested companies. In particular, there are minimum registered capital requirements and the major investor must have solid experience in operating VATS companies. Ultimately, the required VATS licences are granted at the discretion of the MIIT, who in the past have shown some reluctance to grant licences to Sino-foreign joint ventures, previously the only foreign ownership model permitted for e-commerce companies in China (apart from in the Shanghai Free Trade Zone). Given this point, it is not clear whether it will be even more difficult for wholly foreign-owned enterprises will to obtain these licences in practice. However, the below recent publications by the State Council appear to show that the tide is turning in terms of the Chinese authorities’ attitude towards foreign invested enterprises engaging in e-commerce in the Chinese market.
State Council Guidance and Opinions
One day after the MIIT circular was released, the State Council released its Guidance on Promoting the Healthy and Rapid Development of Cross-border E-commerce. This consisted of guidance on a range of policies to develop cross-border e-commerce, including making customs procedures more straightforward, introducing favourable import and export tax policies, the introduction of credit insurance services and advancing pilot projects to facilitate overseas payments.
These changes in the country’s policy on e-commerce are the result of the Opinions of the State Council on Striving to Develop E-commerce to Speed up the Cultivation of New Economic Driving Forcepublished by the State Council in May 2015, which asked China’s ministries and departments as well as provincial-level authorities to boost the development of the sector and set the goal of establishing an e-commerce market that is open, orderly and reliable by 2020. The Opinions set out various points to help achieve this target such as lowering requirements for market access (including through removing foreign ownership restrictions), regulating to ensure quality of products sold online, favourable tax policies, encouraging direct cross-border RMB investments, encouraging innovation and safeguarding cyber security and online transactions.
Given this context, the removal of the restriction on foreign ownership of e-commerce business appears to be just the start of a raft of measures aiming to boost the sector amid China’s slowing economic growth. While implementing measures still need to be published, the Chinese authorities are strongly indicating that liberalisation in the e-commerce sector is a priority, including legislative and regulatory reform. This is a positive sign, both for e-commerce companies doing business in China and potential foreign investors. However, it remains to be seen whether actual implementation keeps pace with regulatory efforts in these areas and wholly foreign-owned e-commerce companies will be able to operate unhindered in this newly opened up market.
Co-contributed by Ciara Simmons.