Year in Review – PRC Law in 2016
Antiterrorism: The PRC Anti-terrorism Law came into effect in January. It prescribes measures for identifying and dealing with terrorist organisations, activities and individuals. Telecom and internet service providers are required to take technical connection and decryption measures to co-operate with state antiterrorist activities, report and curtail the dissemination of terrorist and extremist information, and verify new and existing customers’ identities. Identification rules were issued in May.
CSRC renews restrictions on A share sale: January saw a renewal of the restrictions from the July 2015 equity market turbulence on sale of shares in A-share listed companies by their controlling shareholders, shareholders with 5 per cent stakes or greater, directors and management. Read more…
Property rights: In February, the Supreme People’s Court (SPC) published its first interpretation on the PRC Property Law, allowing registered title to property rights to be disputed by contrary evidence, providing guidance on how to rebut the bona fide purchaser presumption (including by way of constructive knowledge or voidability of contract) and clarifying the pre-emptive rights of co-owners of property.
Right over property seized during execution procedures: According to an April notice of the SPC, where a people’s court is asked to enforce a creditor’s preferential right over property which is already subject to a seizure or detention order or freezing measures imposed by an initial people’s court, the people’s court may request the transfer of such property for execution should the initial people’s court fail to initiate any auction or sale process within 60 days commencing from the date of seizure. Prior to the issue of this notice, creditors seeking to enforce their preferential rights would need to wait for the initial people’s court to finish all its procedures in relation to the seized property, which may take years.
Changes to PRC cross-border financing rules: In April a foreign debt quota for PRC companies and financial institutions, as well as a new filing procedure for foreign debt, was introduced. The foreign debt quota will be determined by reference to the outstanding amount of foreign debt and will be risk weighted based on the type of cross-border financing. Read more…
Shanghai Clearing House (SCH): SCH is the first and the only clearing house in the PRC that carries out central clearing of standardised over-the-counter derivatives and it has started clearing Renminbi interest rate swaps since 2014. SCH obtained a no-action letter from the U.S. Commodity Futures Trading Commission in May. Linklaters, working together with PRC counsel, issued a validity and enforceability opinion in respect of the central clearing documentation of SCH. Linklaters is also actively involved in advising Chinese domestic banks and foreign banks on central clearing business in the Chinese financial market.
Listed company share schemes: In May, the 2005 rules on employee share schemes of Shanghai and Shenzhen A-share listed companies were extensively revised. The new rules allow pre-allocation of up to 20 per cent of the rights under a scheme, give more flexibility to issuers to decide the vesting criteria, and clarify principles for pricing and lock-up of restricted stock units and share options. Participation in such plans by foreign nationals is now permitted.
Application of the NDRC registration / filing regime to “little red chip” debt issuers: In May/June, the National Development and Reform Commission (NDRC) informed the market that “little red chips” (loosely referring to offshore incorporated issuers controlled by PRC Mainland individuals) would be required to make registrations / filings with NDRC in connection with bond issuances. Since then, a number of little red chip issuers have completed the registration / filing process. While there are no official guidelines on the circumstances when the requirements will apply to an offshore incorporated issuer, certain factors (such as the location of the business/assets of the issuer and the extent of control by a PRC Mainland individual) will be highly relevant. Read more…
Fair competition review: In June, the State Council published Opinion on Establishing a Fair Competition Review System in Building a Market System, seeking to establish a fair competition review system in China with an aim to avoid rules and policies that would otherwise exclude or limit competition. Government bodies are required to conduct self review of existing rules and policies and any new rules and policies to ensure consistency with the fair competition requirements outlined in that opinion and amend/abolish those rules if inconsistent. The opinion also requires the stakeholders’ and the public opinions to be heard as appropriate when making policies or conducting a fair competition review.
State-owned asset transfers: In June, the regime requiring transfers of state-owned assets to be conducted by public solicitation on an exchange was significantly overhauled. Important changes include requiring public solicitation of investors to participate in most capital increases by state-controlled entities, and additional controls on the setting of bidders’ qualifications, pricing of transactions and payment terms.
RMB conversion of foreign debt borrowed offshore: Since June, all onshore enterprises (including both PRC-funded and foreign-invested enterprises) have been permitted to convert foreign debt borrowed offshore to RMB for their actual business needs in the PRC. This should encourage more onshore issuers/borrowers to contemplate a direct issuance/borrowing structure. However, transactions utilising a keepwell structure may still be appropriate in certain situations (e.g. from a withholding tax perspective). Read more…
Foreign investment managers: Since June, qualified wholly foreign-owned and Sino-foreign joint venture managers of private funds incorporated in the PRC may register with the Asset Management Association of China and conduct hedge fund business in the PRC, although restrictions on the scope of eligible entities and the permissible activities of such entities still apply. Read more…
Qualified Foreign Institutional Investor (QFII) quotas: In February and August, significant changes were made to the investment quota system under the QFII and Renminbi QFII schemes. In place of the need for quotas to be individually approved, a pre-set formula is applied to asset size upon the completion of a filing process. Approval is required for quotas exceeding the pre-set amount. Also, from October, restrictions on investors’ asset allocations under these schemes have ceased to apply.
P2P lending: August saw the first comprehensive legal framework for P2P lending activities in the PRC, imposing prohibitions and lending caps limiting these activities to small-sized loan transactions and requiring platforms to comply with licensing and data management obligations. Read more…
Listed company transactions: In September, the China Securities Regulatory Commission widened the definition of “material asset restructuring” transactions by listed companies requiring its approval. The lock-up period in connection with an acquisition of the companies’ shares in connection with such transactions was extended to a broader range of parties and more severe penalties for evasion were imposed.
Chinese credit default swap (CDS) re-vitalisation: In September, the Chinese National Association of Financial Market Institutional Investors published rules and product definition terms for credit derivatives products. The publication of these documents was intended to re-vitalise the credit derivatives market in China, which was initially launched nearly six years ago in 2010. At the end of October, 10 domestic banks entered into the first batch of 15 CDS transactions.
Foreign investment approval reform: In October, significant amendments were made to China’s wholly foreign-owned enterprise and sino-foreign joint venture (collectively, FIE) laws replacing, for all FIEs not subject to national restrictions on market access (contained in a negative list), the Ministry of Commerce approval requirements with a new post-transaction filing regime. Read more…
Tetra Pak fined for abuse of dominance: In November 2016, global aseptic carton packaging giant Tetra Pak was imposed with a fine of RMB 668 million in China for abuse of dominance under the Anti-Monopoly Law in relation to abusive practices including tying-in (between aseptic packaging equipment and packaging materials and between technical services and packaging materials), limiting trade counterparties (restricting raw materials suppliers from supplying Tetra Pak’s competitors), and loyalty rebate (inducing or locking in customers/foreclosing its competitors). In particular, the loyalty rebate finding by the competition authority is ground breaking, as loyalty rebate is not one of the expressly listed forms of abusive conduct in the Law and was found in this case as an infringement under the catch-all abusive conduct provision which has not been referred to in previous enforcement actions.
Independent guarantees: From December, an SPC judicial interpretation makes it clear that, irrespective of whether any foreign element is involved, independent guarantees will be treated as independent of the underlying transactions and will not be affected by any defects (except for fraud) in the underlying transactions, provided that the documentary requirements for enforcement, are prima facie, satisfied. The practice before this judicial interpretation was that only independent guarantees involving foreign elements would be treated as independent of the underlying transactions.
Year to come - PRC Law in 2017
Wealth management: In July, changes to the wealth management business rules were circulated to banks for comment. Key proposed changes include additional capital and track record requirements for products featuring equity or non-standard debt investments, disallowing differential returns to investors based on contractual ranking and new restrictions on multiple tiered investments. The market expects that the final rules, which may be released in 2017, will have significant impact on the wealth management business.
Drug registration: Consultation closed in August on proposed reforms to the 2007 new drug registration regime. If enacted, the two-stage post-clinical trial new drug registration will be replaced by a single application. The new process is more streamlined, but risks more wasted development costs if a drug's clinical value or effectiveness cannot be proven. Manufacturers may benefit from removal of the unique registration procedure for generics and the option for bioequivalent test results to be filed without approval. The draft proposals are expected to be revised or enacted in 2017.
New free trade zones: The Minister of Commerce stated in August that Chongqing city and Zhejiang, Hubei, Henan, Sichuan, Shanxi and Liaoning provinces had each been given approval to develop a free trade zone (FTZ). The new zones are expected to replicate many policies of the existing FTZs and develop a more geographically specific focus. No timeframe for the launch of the new FTZs was given, but launch in 2017 is a possibility as it is reported that their establishment plans are in the finalisation stage.
Principal protected investment funds: Consultation closed in August on proposed changes to the 2010 regime on principal protected investment funds. The proposals include additional track record requirements for managers, minimum duration and credit rating requirements on stable assets and enlarged capital buffers for risk assets invested by the funds, as well as limits on the size of principal protected funds as a proportion of the manager’s net assets or risk capital. The proposals may be finalised in 2017.
Off-balance sheet activities: In November, draft rules to further regulate banks’ off-balance sheet activities were published. It is proposed that banks make impairment provisions for risk-assuming off-balance sheet activities (widely defined) in accordance with the principle of “substance over form”, and as a general principle, the assumption of credit risk through agency and fee-based activities is to be prohibited. The consultation period ended in December and further revision or enactment in 2017 is a possibility.
Civil law principles to be restated: Three consultation drafts proposing to restate the 1986 General Principles of Civil Law were released in 2016, and enactment of the final version in 2017 is a possibility. Key changes proposed include extending the limitation period to three years, protecting rescuers in an emergency from civil liability to the rescued, clarifying the capacity and status of partnerships and protecting personal information against illegal collection, use, processing, transmission, provision, publication and sale. Under the proposals, an act which exceeds an entity’s registered business scope will remain valid if no rule restricting or prohibiting or requiring a special licence for the relevant act is breached.
Shanghai FTZ cross-border finance: Following a Shanghai initiative from the central bank in November, the Shanghai FTZ is expected to offer enhanced financial services in 2017. The notice contemplates its multinationals establishing cash pooling arrangements allowing selection between RMB and other currencies, private equity fundraising in the Shanghai FTZ for certain encouraged cross-border projects, and a range of cross-border financial products targeted at qualified expatriates, international employees and returnees.
Financial sector liberalisation: The government pledged to allow all overseas investors to own bigger stakes in their PRC securities and fund management joint ventures from the current 49 per cent at the respective economic dialogues with the U.S. and UK governments in June and November. Separately, the Shanghai authorities have announced that Shanghai FTZ is seeking central government support to pilot the reform. When and how the pledge will be implemented in 2017 remains to be seen.
Overseas direct investment (ODI) by Chinese companies: The government is reported to have tightened scrutiny of banks’ foreign exchange conversion and cross-border payment transactions in November in an effort to slow ODI fund outflows and prevent further RMB depreciation. It therefore remains to be seen if the draft amendments to simplify the ODI regime published in April will be released in their present form in 2017, or whether new controls over ODI will instead be proposed.
Contaminated land: In line with the State Council’s goal of a sound framework for land contamination prevention and treatment by 2020, consultation draft rules were issued in November requiring those who cause contamination to carry out surveys, risk evaluations, pollution abatement and land restoration in accordance with the “polluter pays” principle. If the polluter cannot be identified, the land use rights holder (including their successors in title) will bear the liability. 2017 may see this rule enacted.
Overhaul of financial regulators: As foreshadowed in the 13th Five-Year Plan, the authorities in charge of restructuring government bodies are expected to consider financial supervisory reform proposals in 2017. Possibilities include creation of a financial stability commission, merger of the banking, securities and insurance regulators and the consolidation of these regulatory functions within the central bank.
Reform of FDI and corporate laws: Following the October reforms, a priority of the authorities will be to submit the Draft Foreign Investment Law (DFIL) for review by the National People’s Congress (NPC) in 2017. Harmonisation of governance, corporate form, registration and bankruptcy procedures of foreign invested enterprises with the regime under the PRC Company Law is one of the DFIL’s key aspects, and April’s draft reforms to the PRC Company Law may aid the DFIL’s progress to becoming law. Read more…
Further rules on foreign investment: 2017 is expected to see other key rules relating to PRC M&A and inbound investment regulatory approvals, such as those on acquisitions of domestic enterprises by foreign investors and establishing investment holding companies, being repealed or revised in light of the October reforms to the approval system. These may include the new Foreign Investment Catalogue and negative list, a draft of which has been circulated for public comment by January 2017. Read more…
NGOs: China’s first law regulating the activities of foreign NGOs will come into effect in January 2017. The law requires foreign NGOs to register a presence or complete a filing in order to conduct any activities in the PRC and imposes other funding restrictions and reporting obligations on their activities.
Online financial services: More rules are expected to protect lenders, customers and investors after the authorities complete a crackdown in March 2017 on internet P2P lending, equity crowdfunding, insurance, payment clearing and asset management activities which will target the evasion of financial business and licensing restrictions, lending platforms used as cash pools or guarantors, and false advertising.
E-commerce: Released for public consultation in December, the draft E-Commerce Law was hotly debated at the NPC Standing Committee and is likely to become law in 2017 or 2018. The law will introduce new principles of how an e-commerce contract is formed and provide safeguards against IP infringements and the use and sharing of personal data in e-commerce transactions. It also aims to protect e-business operators and users against various forms of network abuse.
Cybersecurity: The Cyber Security Law will come into effect in June 2017. It imposes significant duties on network operators to notify data breaches, protect personal information and comply with equipment procurement and security maintenance requirements. Additional requirements including data onshoring and national security review apply to critical information infrastructure. Read more…
Extension of reporting system concerning foreign-related and foreign arbitration to domestic arbitration: The current practice of reporting any non-enforcement of foreign-related or foreign arbitral awards to the PRC Supreme People’s Court (SPC) for prior approval may be extended to domestic arbitral awards. The SPC is considering this move to ensure consistent application of relevant standards and requirements to enforcement of domestic awards by the lower courts in different parts of the PRC.
Anti-monopoly enforcement further guidance: In the course of 2016, the Chinese regulators published consultation drafts of six antitrust guidelines covering leniency applications, exemptions, commitments, calculation of fines and illegal gains, as well as antitrust issues in the automotive and intellectual property sectors. At least some are expected to be finalised in 2017.
Revisions to Anti-Unfair Competition Law: The government is seeking to revise the current Anti-Unfair Competition Law which has been in place since 1993. The key changes contained in the consultation draft published in February 2016 include clarifying relationships/removing the overlaps with the Anti-Monopoly Law, inserting new types of infringement and definitions of commercial bribery and proposing a potentially more severe base for fine calculations (change from “illegal gain” to “illegal turnover”). These changes are likely to be adopted during 2017.