28 September 2016

New era for International Funds to invest in China

This article was written by Jingjing Jiang and Miao Wang.

On September 3, 2016, the Standing Committee of the National People’s Congress of the PRC promulgated the “Decision regarding the Amendment of the Four Statutes Including the ‘Law of the People's Republic of China on Wholly Foreign-Owned Enterprises’” (“Decision”). The highlight of the Decision is that for matters that do not involve special administrative measures on foreign investment access (“negative list”), a filing mechanism will apply. The negative list will be published or approved by the State Council of the PRC.

On the same day, the Ministry of Commerce of the PRC promulgated the “Provisional Measures on Filing Administration for the Establishment and Change of Foreign-Owned Enterprises (draft for public consultation)” (“Provisional Measures”, together with the Decision, the “New Rules”), which provides further details regarding the filing system in relation to foreign investments. The New Rules will take effect on October 1, 2016.

The implementation of the New Rules will to a large extent facilitate international funds’ investments in China. It will have an impact in the following three areas:

  • direct investments by international funds in China,
  • investments by foreign-owned equity investment enterprises in China, and
  • parallel investments by international funds and onshore RMB funds.

1. Key contents of the New Rules

a) Scope of application

The New Rules apply to all kinds of foreign-owned enterprises which may be established by international funds in China, as well as investments made by foreign-invested investment companies, foreign-invested venture capital investment enterprises and foreign-invested equity investment enterprises (all of which are deemed as foreign investors) in China.

Pursuant to the New Rules, matters such as establishment of a foreign-owned enterprise, change in shareholding, share charge, etc., will no longer be subject to prior approval from the Ministry of Commerce of the PRC or its local counterparts (“MOFCOM”) so long as the enterprises involved do not fall within the scope of the negative list (see chart below for details).

Scope of application

b) The filing mechanism and the negative list

Prior to the promulgation of the New Rules, save for foreign-owned enterprises established in free trade zones in Shanghai, Guangdong, Tianjin and Fujian, prior approvals from MOFCOM is required for all inbound investments by foreign investors (including international funds).

The New Rules created different policy for foreign investments depending on whether they are in or outside the negative list. The filing mechanism will apply to foreign investments that fall outside the negative list. The diagram below shows the filing and approval mechanisms under the New Rules:

The filing mechanism

2. Impact on international funds’ direct investments in China

After the New Rules take effect, the procedures through which international funds make investments in China will be simplified.

a) It will enhance the efficiency of international funds when investing in China: the filing procedures under the New Rules will only take 3 business days to complete, and such procedures can be completed after establishment and changes. Compared with the 45 to 90-day prior approval by MOFCOM previously, it will be much more efficient for international funds to make investments in China.

b) It will reduce the administrative burden for international funds when investing in China: under the filing system, enterprises only need to do the filing online. In addition, materials which are required for filing (mainly being incorporation documents and letter of authorization of the investor and the enterprise, etc.) are much less than what was required under the existing system. Under the old system, local MOFCOM took different views on documents that they require international investors to submit. Some local authorities even require international investors to provide documents which are non-existent in their home jurisdictions. Such inconsistent practices pose varying degrees of obstacles for international investors when they make investments in China. After the New Rules take effect, so long as the investments do not fall inside the negative list, the chance of having difficulty in preparing and submitting supporting materials should be greatly reduced.

For investments to be made by international funds falling within the negative list, however, the existing prior approval procedure will continue to apply. Separately, where antitrust review and/or national security review is required, such review shall be complied with as well.

3. Impact on investments by foreign-owned equity investment enterprises in China

Pursuant to the existing foreign investment administrative regime, foreign-owned equity investment enterprises are deemed as foreign investors, and the investments that they make in China are deemed as foreign-invested enterprises, which require prior approvals from MOFCOM.

After the New Rules take effect, foreign-invested equity investment enterprises will no longer need to apply for prior approvals from MOFCOM when they make investments in sectors outside the negative list. It is expected that the investment structure for foreign-invested equity investment enterprises will be further simplified and streamlined.

4. Impact on investments by USD and RMB parallel funds in China

Under the existing foreign investment regime, it usually takes a long time for MOFCOM to approve foreign investments, and there is also a certain degree of uncertainty. Due to this reason, international funds and onshore RMB funds often find it hard to make and exit an investment at the same time. Moreover, investee enterprises are also required to assist in submitting various supporting documents to MOFCOM, and ongoing approvals will be required for future changes after investee companies become foreign-invested enterprises. Therefore, in practice, many domestic enterprises are unwilling to accept investments from international funds. After the New Rules take effect, fund managers managing both international funds and onshore RMB funds may find it easier to structure and make parallel investments which will make such parallel arrangement more acceptable by onshore and offshore investors.

5. Uncertainty and prospects for the New Rules

Despite the fact that the New Rules will greatly simplify the administrative procedure for international funds in their investments in China, it is still uncertain how it will be implemented in practice. The existing foreign investment legal regime is fairly complicated which involves a number of authorities (such as the State Administration of Foreign Exchange, Industry and Commerce Bureau, etc.) to collaborate with each other. To be consistent with the changes brought about by the New Rules, the existing foreign investment regulations and rules will be subject to amendments. Apart from amending regulations and rules, what is more important is how the various local authorities in China will interpret the New Rules in practice. Nevertheless, taken as a whole, we believe the New Rules certainly is a ground-breaking reform since the implementation of the foreign investment laws in the PRC decades ago. The New Rules will usher in a new era for international investors (including international funds) for their investments in China.

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