Revolutionary Change in Administration of Foreign Investment in China

China’s legal regime on foreign investment went through revolutionary changes recently. In September 2016, the Standing Committee of the National People’s Congress, China’s permanent legislature, promulgated amendments to four laws governing foreign investment, namely, the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People's Republic of China on Sino-foreign Co-operative Enterprises and the Law of the People's Republic of China on the Protection of Investment by Taiwanese Compatriots, changing examination and approval regime on foreign investment into administration by record-filing, except where special administration measures on market-access are stipulated by the State Council.
 
In order to implement these law amendments, the Ministry of Commerce (“MOC”) of China formally released the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises (the “Interim Measures”) on October 8, 2016, detailing the procedures of record-filing for establishment and change of foreign-invested enterprises (“FIEs”). Onthe same day, the National Development and Reform Commission (“NDRC”) and the MOC released a Joint Announcement, identifying areas where special administration measures on market-access are required. According to the Joint Announcement, approval will only be needed for foreign investors to acquire assets or equity of existing domestic companies or to invest in areas where foreign investment is restricted or prohibited according the Industrial Catalogue for Guiding Foreign Investment.
 
These recent development demonstrates a fundamental change in China’s administration of foreign investment. Foreign investors no longer need to apply for approval when setting up new companies, increasing or decreasing capital, selling equities or terminating operations in China. According to the new regulations, foreign investors will only need to file relevant documents for record before or after these activities. Government approval is no longer a pre-condition for the relevant documents to become effective and legal binding.
 
It should be noted that these changes have nothing to do with China’s foreign exchange control regime. Conversion of foreign currency under capital accounts is still closely monitored and controlled by the government. The recent changes are focused only on simplifying market access procedures for foreign investment. The new record-filing system is different from the old registration system of examination and approval in that the new record-filing administration for FIEs is more of a formality, which does not require the record-filing authority to review the substance of the documents filed. In other words, they will only conduct formal review of the documents to verify the completeness and accuracy of the formality of the filing, and will not examine and review business or legal aspects of the documents. Such changes on the registration system will greatly speed up the process of establishment and change of the FIEs, and save legal and administrative costs of foreign investors.
 
These changes are revolutionary as they represent a significant deviation from a legal regime characterized by examination and approval over the last three decades since China opened its doors to foreign investment in the early 1980s.  In addition, compared with past practice, the scope of industries that are restricted or closed to foreign investment has been substantially narrowed under the current Catalogue of Industries for Guiding Foreign Investment, signifing China’s determination to open the domestic market wider to foreign investors and facilitate foreign investment activities in China.
 
The new regulations are developed on the basis of experience accumulated at Shanghai Pilot Free Trade Area (“FTA”) and other pilot programs in other parts of China established after September 2013.   Those pilot programs have been successfully implemented in the FTAs around China for the last three years during which the number of foreign-invested enterprises established in the FTAs and the amount of foreign investment into the FTAs increased significantly.
 
According to the statistics from MOC, 26,575 FIEs were established in 2015 with actual foreign investment of RMB781.35 billion, representing an increase of 11.8% and 6.4% respectively over 2014 (excluding foreign investment in banking, securities and insurance sectors). The amount of foreign investment in Shanghai FTA accounted for half of the total foreign investment in the whole Shanghai. Hopefully the extension of record-filing administration from the pilot free trade areas to the whole China will help attract more foreign investment and booster continued economic growth in China at a time of global slow-down.
 
Jiang Jiang Esq.  is a partner of Hylands Law Firm. Mr. Jiang worked in the Ministry of Foreign Affairs from 1993 to 1996 and started legal practice in 1997. Mr. Jiang is specialized in international business and investment, with a focus on FDI, M&A, real estate development, anti-trust, anti-unfair competition, disposition of non-performing assets and international dispute resolution. Mr. Jiang has degrees from Chinese Academy of Social Sciences, Oxford University, China University of Law and Political Science and Beijing Foreign Studies University. Mr. Jiang is a member of All-China Lawyers Association and Inter-Pacific Bar Association, and Chairman of Real Estate Group of Terralex, an international network of leading law firms. He is a Chevening Schloar (Oxford 2001-2002) and an Aspen China Fellow (Class 3).

Jiang Jiang Esq can be contacted on +86 10 6502 8918/8888 or by email at jiangjiang@hylandslaw.com