INSIGHT

China's business regulatory approval reforms - further steps to market liberalisation

By Kate Axup
Banking Capital Markets China Energy Resources

In brief

The PRC Government is reforming its corporate regulatory approval processes at an unprecedented rate. The changes are aimed at facilitating private sector investment (including foreign direct investment) in order to move towards a more market-driven economy. Over the past four months, new regulations have reduced and, in certain cases, removed, corporate regulatory approval requirements for a range of business activities and investments. As part of these reforms, changes have also been made to the PRC Company Law and associated regulations. Partner Kate Axup, Senior Associate Wayne Wang and Lawyer Shona Shang look at the key changes.

How does it affect you?

  • Prospective foreign investors should note these changes, as approvals for certain businesses and investments have been simplified and, in some cases, are no longer required.
  • Foreign companies looking to establish a presence in China will have greater flexibility and autonomy in capitalising their domestic PRC companies.
  • The reforms, if implemented in full, will fundamentally change the regulatory approval process as China moves towards a more liberalised, market-based economy.

Background

Since the recent change of leadership, the State Council has continued to push for market economic reform. The establishment of the Shanghai free trade zone is one example of this.

Prime Minister Li Keqiang has emphasised that the PRC Government must further reduce its role in the administration and approval of private sector investment1, and the State Council (together with other legislative and administrative bodies) has reduced the level of administrative intervention associated with the establishment and operation of companies in China, through recent changes to the PRC Company Law and associated regulations.

These reforms are described in more detail below.

The State Council List

On 2 December 2013, the State Council issued the List of Investment Projects subject to Government Approvals (2013 Version) (the State Council List).

The State Council List applies to projects involving large fixed-asset investments, which are required to be approved by 'investment administration authorities', such as the National Development and Reform Commission (the NDRC), the State Council or local government. The State Council List replaces a previous list established in 2004.

The State Council List has removed the requirement for NDRC approval for many investments, or delegated the approval authority from the NDRC (ie from the national level) to local governments or the local development and reform commissions (DRCs). This is a positive development for foreign investors, as lower-level government entities, such as provincial or municipal authorities, are generally pro-foreign investment and keen to promote local growth by attracting investment projects. Accordingly, it is generally less complicated to obtain approvals from local government.

The State Council List applies to foreign direct investments and domestic investments by Chinese companies. It also includes a section specifically dealing with approvals required for Chinese outbound investment.

Some examples of the changes that apply in the energy and resources sectors are set out below.

Sector Investment project 2004 List State Council List
Energy Wind power Wind farm projects with a gross capacity of greater than or equal to 50,000 kW must be approved by the NDRC. Wind farm projects with a gross capacity of less than 50,000 kW must be approved by the relevant DRC. All wind farm projects are now subject to the approval of the relevant local government.
Hydropower Hydropower plants that are built on major rivers, or have a gross capacity greater than or equal to 250,000 KW, must be approved by the NDRC. Other projects shall be approved by DRCs. Hydropower plants built on major rivers must be approved by the NDRC. Other projects must be approved by the local government.
Resources Coal Coal development projects located in a State Programmed Mining Area2 must be approved by the NDRC. All other coal development projects are subject to the approval of the relevant DRC. Coal development projects that are located in a State Programmed Mining Area, and have a new annual production capacity of 1.2 million tonnes or more, must be approved by the relevant department of the State Council in charge of administering the coal industry.

All other coal development projects are subject to the approval of the relevant provincial government or local government below the provincial level.
Gold Gold projects with a daily extraction rate of 500 tonnes or more must be approved by the NDRC.

Other gold projects must be approved by the relevant provincial-level DRC.
All gold projects are to be approved by the relevant provincial government.

The approvals listed in the table above are sector-specific approvals, and are applicable to both domestic investment by Chinese companies and foreign direct investment in such sectors.

In relation to foreign direct investment, it is important to note that:

  • there are certain approval requirements included on the State Council List that apply specifically to foreign investment, without reference to sector or industry; and
  • the State Council List is not an exhaustive list of all approvals required for foreign direct investment. It does not change other existing ministerial approval requirements, such as the Ministry of Commerce (together with its local counterparts, the MOC) approval that is required for the incorporation of foreign invested companies. Further, it does not affect other approval requirements not included on the State Council List but required by the ministry that administers the specific industry (eg approval of the Ministry of Industry and Information Technology for foreign investment in the telecom industry). This type of approval is addressed in the Ministerial Lists (defined below).

The Abrogation List and Ministerial List

On 28 January 2014, the State Council issued the Decisions on Abrogating or Delegating (to lower authorities) Certain Regulatory Approvals (the Abrogation List).

The effect of the Abrogation List is to remove certain approval requirements or delegate such requirements to lower-level authorities (ie from the State Council to the relevant ministries or local governments). In some cases, the approval requirement thresholds have been changed.

For example, previously sino-foreign cooperative mineral resources exploration or production joint ventures required special pre-approval from the Ministry of Land and Resources (MOLAR) (or its local branches). This was in addition to general approval requirements, such as obtaining an exploration/mining licence from MOLAR and the MOC approval in connection with the establishment of the joint venture. In practice, this meant that the Chinese party had to apply for MOLAR pre-approval before the joint exploration/production contract was signed with the foreign party. The MOLAR pre-approval requirement has now been removed.

Further, in February 2014, a number of PRC ministries and government departments, including the NDRC, the MOC and MOLAR, released their respective lists of regulatory approvals (each of these, a Ministerial List). The Ministerial Lists set out and summarise all of the regulatory approval requirements that are required from each of the relevant PRC ministries.3 The Ministerial Lists have also confirmed the abrogation of certain previous approval requirements. For example, previously, MOC approval was required before a production sharing contract between a Chinese oil company and a foreign oil company could become effective. Approval is now no longer required, with a filing obligation applicable instead.

In theory, any business activity that is not included on a Ministerial List will not require regulatory approval. However, it remains to be tested whether this will be fully implemented in practice at all levels of the PRC Government.

PRC Company Law Reform

Changes to the PRC Company Law came into effect on 1 March 2014. Accordingly, the State Council and the State Administration of Industry and Commerce (together with its local counterparts, the SAIC) have recently issued or amended relevant regulations / measures in relation to the incorporation / registration of companies (the Amended Company Regulations). The changes are aimed at facilitating private investment in China, with a view to reducing the supervisory role of PRC regulators. They apply equally to purely domestic companies and to foreign invested companies.

Some of the key amendments that apply to any PRC company are summarised below.4

Requirement Previous provisions Amended provisions
Minimum registered capital Not less than RMB 30,000 (or not less than RMB 100,000 if there is only one shareholder) for a limited liability company and RMB 5,000,000 for a joint stock company. Requirement removed (except for certain companies in specified industries such as banking, insurance, other finance industries and direct sales; the same exception applies to the following lines of this table)
Initial registered capital contributions Initial registered capital contribution of not less than 20 per cent of the subscribed registered capital required. Requirement removed
Timeline for making full capital contribution Capital contribution must generally be fully paid within two years following the company's incorporation. Requirement removed
Proportion of cash contribution At least 30 per cent of the registered capital must be in cash. Requirement removed
Registration of paid-up capital Registration of paid-up capital after each contribution is made. Requirement removed
Capital verification Verification of capital contribution to be conducted after each contribution is made. Requirement removed

In addition, every PRC company (including any foreign invested company) was previously required to pass an annual inspection conducted by the SAIC and various other authorities. Under the Amended Company Regulations, this requirement has now been removed and companies are only required to lodge annual filings with the SAIC.

The way forward

Historically, the Chinese economy was largely State driven and highly regulated, with most aspects of business activity requiring the approval of the relevant PRC authorities. Although the remaining approval requirements are still comprehensive and highly prescriptive, the recent reforms to China's regulatory approval processes represent a departure from the previous policy of pre-approvals and rigid investment control, and are aimed at facilitating business in the PRC.

The reform process is continuing and the full extent of it remains to be seen. Market participants, both local and foreign, will be curious to see whether the changes will be fully implemented in practice, and what will come next. We will continue to monitor this important reform process.

 

Footnotes

  1. Speech of Li Keqiang at the Second Anti-Corruption Work Meeting on 11 February 2014. Full Chinese text available at: http://news.china.com.cn/politics/2014-02/24/content_31570728.htm
  2. The State Programmed Mining Areas are areas zoned by the State for the construction of large or medium-sized mines according to the state's construction plan and the mineral resources plan.
  3. Most of these approvals have already been prescribed by various PRC laws and regulations, but stipulated in various regulations, rather than on one consolidated list.
  4. Some of the previous requirements applying to foreign invested companies were slightly different from the general requirements applying to purely domestic companies. However, the Amended Company Law and the Amended Company Regulations apply both to foreign invested companies and purely domestic companies.