On May 20, 2014, the National Development and Reform Commission, China’s economic planning agency, released the Administrative Measures for the Approval and Record-filing of Foreign Investment Projects (the “Administrative Measures”). Concurrent with the release of the Administrative Measures, the previously effective law, the Interim Administrative Measures for the Examination and Approval of Foreign Investment Projects (the “Interim Measures”) promulgated on October 9th, 2004 was repealed. The Administrative Measures will become effective on June 17, 2014.

The Administrative Measures implement the requirements of Decision to Reform the Investment System and the Investment Project Catalogue Approved by the Government (2013 Version) released by the State Council (the “Approved Catalogue”). Compared with the Interim Measures they contain significant revisions and adjustments with respect to regulatory oversight, administration and legal liabilities in order to further reform the regulatory structure for foreign investment. The main content in the Administrative Measures is as follows:

Which Foreign Investment Projects are subject to the Administrative Measures

The Administrative Measures apply to Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures, wholly foreign-owned enterprises, foreign-invested partnerships, mergers and acquisitions of domestic enterprises by foreigners, capital increases and reinvestments in foreign-invested enterprises and domestic investment projects made in Renminbi by foreign investors(each a “Foreign Investment Project” and collectively “Foreign Investment Projects”). Foreign Investment Projects are regulated by the Catalogue for the Guidance of Foreign Investment Industries (the “Foreign Investment Catalogue”) and other sector specific laws and regulations. Under the Foreign Investment Catalogue, Foreign Investment Projects are categorized as either “encouraged,” “restricted,” “prohibited” or they are not categorized at all, in which case they are “permitted.” Foreign investors cannot invest in “prohibited” sectors while they are allowed to invest in the sectors specified in the other categories. In the case of “restricted” or “permitted” sectors certain restrictions such as shareholding limitations apply.

Approval or Record-Filing of Foreign Investment Projects

Under the Administrative Measures, foreign investment projects are either subject to an approval requirement or merely a record filing. Whether or not a foreign investment project is subject to an advance approval depends on investment thresholds and requirements that have been updated by the Administrative Measures, as follows:

Regulation of Foreign Investment Projects Under the Administrative Measures

Click here to view the table.

[Note: When a foreign-invested enterprise applies to increase its capital, the total investment amount for the purposes of determining whether there is an approval requirement or a record-filing is the increased capital amount. For merger and acquisitions of domestic enterprises by foreigners, the total investment amount is the total transaction amount.]

For Foreign Investment Projects requiring advance approval from the NDRC, the Administrative Measures increased the investment threshold from USD 100 million to USD 300 million, with the additional condition that the Foreign Investment Project has a controlling shareholder who is or is effective Chinese.  With respect to “restricted” real estate Foreign Investment Projects, the Administrative Measures delegate approval authority from the NDRC to the provincial governments.  With respect to items 1-11 in the Approved Catalogue, approvals or record-filings are now handled by the competent governmental departments based on the conditions and requirements specified in the Approved Catalogue. Other than these specific requirements, other Foreign Investment Projects require only a record-filing with the local government.

Revisions to Project Approval Application Materials

Compared to the Interim Measures, the Administrative Measures simplify the content and documents required in a Foreign Investment Project’s application report. For example, the following documents that previously had to be submitted as part of the application are no longer required: i) explanation about the primary technology, workmanship, the number of employees and the consumption of main raw materials in a Foreign Investment Project; ii) letter of intent issued by a bank for a financing of a Foreign Investment Project; iii) environmental impact assessment stipulation and the approval document issued by the provincial or state administrative department of environmental protection; and iv) land prequalification for reconstruction projects within an area pre-approved for construction.

While simplifying the application materials for the approval of Foreign Investment Projects, the Administrative Measures strengthen the approval authority’s investigation of a Foreign Investment Project’s resource utilization, energy conservation, environmental protection, ecological safety and effect on the public interest. Foreign Investment Projects that may materially affect the public interest, the approval authorities are required to take appropriate measures to solicit for public comments during their evaluation, and for particularly significant projects, an expert review system may be adopted. The application for a Foreign Investment Project requiring prior requires the following: i) basic information about the Foreign Investment Project and its investor(s); other attached relevant materials such as evidence of an enterprise’s registration, letter of intent for the investment and board resolutions on the capital increase and/or M&A projects of domestic and foreign investors. The competent investment department of the local authorities shall issue written comments and state the reasons within seven (7) working days for Foreign Investment Projects not to be filed.

Requirements for All Foreign Investment Projects

The Administrative Measures state that Foreign Investment Projects, whether they require advance approval or merely a record-filing, are required to comply with i)  the relevant laws and regulations of the state; ii) national or regional development planning; iii) industrial policy and access criteria; iv) the Foreign Investment Catalogue and the Catalogues for Foreign-invested Leading Industries in Central and Western China. For Foreign Investment Projects subject to advance approval, the Administrative Measures further require the following during the construction process for a Foreign Investment Project: i) resources shall be developed reasonably and utilized efficiently; ii) there shall be no effect on national or ecological security and iii) the public interests shall not be materially affected.

Changes to a Foreign Investment Project

Where the Foreign Investment Project’s location, investor, stock rights, or main construction content changes, the applicant is required to apply for the change with the original approval authority that approved the project or accepted a record-filing. If the projects approved fall into the scope of filing management after change, they shall be handled in accordance with the filing procedure; otherwise they shall be handled in accordance with the approval procedure.

New Chapters on Supervision and Legal Liability

The Administrative Measures add two new chapters, “Supervision” and “Legal Liability” in order to provide further specifics relating to the approval, record-filing, post approval/record-filing regulation and legal liabilities of Foreign Investment Projects. Compared to the Interim Measures, the Administrative Measures further emphasize perfecting the information sharing system amongst governmental agencies, and summarizing and reporting local information in order to synchronize the regulation of Foreign Investment Projects.

According to the Administrative Measures, related authorities such as the administrative authority for industry and commerce, tax department, customs department and so on, shall not handle the relevant procedures and financial institutions shall not provide loan support for Foreign Investment Projects that have not been approved or filed within the jurisdictional limits and procedures of approval authorities. When Foreign Investment Projects are approved or filed, the approval or filing documents shall have a stipulated validity period.  Project applicants can apply for an extension of such validity period within thirty (30) working days following its expiration if the Foreign Investment Project has not commenced yet. The failure to do so will result in the approval or filing becoming null and void. If an applicant uses improper means, such as dividing the Foreign Investment Project or providing false materials, when applying for an approval or record-filing, the approval or record-filing authorities shall not accept the application or deny the application. Where the approval or record-filing authorities have already provided documentation allowing the Foreign Investment Project to proceed, and these circumstances are found to exist, such authorities shall revoke the approval or record-filing pursuant to law. Where construction has already started and these circumstances are found to exist, the authority shall order the construction to stop pursuant to the law. In these instances, the relevant approval or record-filing authorities and related departments shall cause the violators to have a poor credit record, and shall prosecute the legal liability of related persons who are liable pursuant to the law.

One interpretation of the Administrative Measures is that they will strengthen the independence of enterprises when it comes to making their investment decisions and impact in a positive way the transformation of government functions