On October 8, new legislative guidelines were approved during a State Council executive meeting and were followed by the issuance of the Temporal Method of the Establishment and Alteration Filing Management of Foreign-invested Enterprises by the Ministry of Commerce. These new guidelines are, according to the Chinese government, designed to improve the procedures regulating inbound investment into China. According to the Xinhua News Agency, “those willing to invest in China no longer have to go through approval procedures if they invest in non-restricted sectors outlined by the Catalog of Industries for Foreign Investment which was approved last year, and do not contradict with the special requirements regarding equity rights and level of management.”
These new rules are designed after the negative list approach used in China’s free trade zones (FTZs) in Shanghai, Guangdong, Tianjin and Fujian. The negative list process allows foreign investors to register their company, as long as that company’s industry is not on the negative list, rather than apply and wait for administrative licensing. To accomplish this, the new legislation creates a new filing management system that will allow for online processing – when previously firms had to apply for approval and wait for a license to be issued, allowing them to invest.
Registration wait times reduced
Under the new filing management system, for any industry that is not restricted or banned, companies will be able to complete an online registration, which will be processed and completed within three working days. This is a dramatic decrease from the more than 20 days it took under the previous application system. The Chinese government estimates this change will reduce administrative procedures by 95%, and some 500 enterprises submitted applications within the first week of the new legislation being in place.
High-tech industries and R&D encouraged
General manufacturing is now, reportedly, much more open for investment and investment in modern agriculture and services, high-tech industries, new energy and green business is being strongly encouraged by the Chinese government. In particular, China is hoping to attract more foreign investors that will invest in research and development in China and generate new technology within its borders. China also hopes that these types of reforms will signal that the market and industry are playing important roles in the development of China’s domestic economy, with the government releasing control and enhancing transparency.
Limited impact on mergers and acquisitions
For mergers and acquisitions, the new filing management program will apply when foreign investors purchase existing foreign-invested enterprises in China. However, if foreign investors purchase domestic, non foreign-invested enterprises, both equity mergers and asset mergers will continue to be regulated by the current administrative system and they will need to get approval according to the regulation of the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors. And, if the target company is listed on a domestic stock exchange, the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors will continue to apply.
Streamlined administrative approvals and increased local government powers
China’s State Council has also moved to streamline administrative approval and give more power to local governments to promote investment projects related to container terminals, vehicle engines, urban transit systems and inland water transportation. In addition, more private investment will be encouraged in various sectors, including healthcare, education, culture and sports. However, a number of these industries face significant regulatory challenges in market access, equity caps and pricing, among others that American companies struggle to navigate.
These new regulations and reforms come as China is trying to modernize its economy and move away from export-driven growth and into consumption and domestic-driven growth. These goals are hampered by the decrease in global foreign investment in China in the past year. According to the United Nations Conference on Trade and Development, global foreign investment flows this year will decrease by 10-15% compared to 2015.
To jumpstart investment, the Chinese government experimented with registration and administrative reforms in the China (Shanghai) Pilot Free Trade Zone (FTZ). It also introduced the concept of a negative list as a way to manage investment in the FTZ. In addition, it used the negative list mechanism in its negotiations with the United States on a Bilateral Investment Treaty (BIT). While the pace of reforms in the FTZ has been slow, with many noting the need for China to more aggressively reduce the negative list, the introduction of new national guidelines that will reduce filing and registration burdens for foreign-invested firms could be seen as an improvement and an example of the positive impact of the FTZ. However, many observers have noted that the guidelines have just come into effect and more time is needed to determine the actual impact of the reforms.
Pushing for further reforms of China’s investment regulations and for the finalization of a strong, effective BIT are two of AmCham Shanghai’s key advocacy priorities. Be on the lookout for future AmCham Shanghai Government Relations events on these and other topics in the months ahead.