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Focus: China adjusts foreign investment policy

19 April 2011

In brief: The Ministry of Commerce of the People's Republic of China has recently issued changes to its policy on foreign investment. Partner David Wenger and Senior Associate Wayne Wang report on the changes that apply to foreign investment in China.

How does it affect you?

  • Foreign M&A projects with a transaction value less than US$300 million will now generally be reviewed by provincial branches of the Ministry of Commerce (the MOC).
  • Equity investments by foreign invested partnerships are subject to foreign investment review laws and regulations.
  • Certain industries have now been identified for more stringent review by the MOC.

Background

On 25 February this year, the MOC issued the Relevant Issues Concerning the Regulation of Foreign Investment (Shangzihan 2011 No.72) (the Circular) that is promulgated under the Opinions on Further Improving the Utilization of Foreign Investment (Guofa 2010 No.9) issued by the State Council on 6 April 2010 and the Decision on the Abolishment and Adjustment of the Fifth Batch of Administrative Approval Items (Guofa 2010 No.21) issued by the State Council on 4 July 2010. The Circular confirms certain important issues related to the MOC's approval and regulation of foreign investment.

Approval of foreign M&A projects

The Circular stipulates that foreign acquisition projects1 with a transaction value under US$300 million shall be approved by provincial level branches of the MOC rather than by the State MOC. The previous threshold was US$100 million. Notwithstanding the foregoing, certain projects continue to require approval by the State MOC regardless of the transaction value, in accordance with the Provisions on the Acquisition of Domestic Enterprises by Foreign Investors (the M&A Provisions) which was released on 8 August 2006 and amended on 22 June 2009. For example, under the M&A Provisions, approval from the State MOC is required (regardless of transaction value) for a 'round trip investment' where PRC investors set up a special purpose vehicle offshore to acquire PRC businesses or assets for the purpose of listing the shares of the special purpose vehicle on an overseas stock exchange.

Foreign investors using RMB to conduct investment

With the approval of the provincial level branch of the MOC, foreign investors who have earned RMB profits in cross-border trading or have otherwise legally obtained RMB funds offshore are now permitted to use their RMB funds to invest in the PRC, including (without limitation) for setting up new enterprises, increasing the capital of existing enterprises, acquiring domestic enterprises or providing shareholder loans. The provincial level branch of the MOC must report to, and obtain written approval from, the State MOC before providing its approval to the foreign investor.

Domestic investment by foreign invested partnerships

From 1 March 2010, the date that the State Council's Administrative Measures Governing the Establishment of Partnership Enterprises by Foreign Enterprises or Individuals came into effect, foreign investors have been permitted to set up foreign invested partnerships. From 24 January 2011, according to the Implementation Rules Related to the Conducting of a Pilot Programme of Foreign Invested Equity Investment Enterprises released by various departments of the Shanghai municipal government, foreign investors may, subject to regulatory review, set up limited partnerships in Shanghai to raise onshore RMB funds and conduct equity investments.

The Circular specifies that foreign invested partnerships whose main business is equity investment are considered as foreign investors and that their domestic investment must be in compliance with laws and regulations governing foreign investment in the PRC. For example, under the Foreign Investment Industrial Guiding Catalogue (2007), foreign investments are prohibited in certain industries.2 In addition, foreign investments in other industries must be in the forms of sino-foreign joint ventures, with or without caps on foreign investors' shareholdings.3 The Circular clarifies that these types of restrictions continue to apply, regardless of the structure of the investment.

Enhanced review of foreign investment in certain industries

The Circular also provides that local branches of the MOC are to become more involved in the review and administration of certain foreign investments. In particular, local branches of the MOC must now stringently review and cooperate with relevant authorities who are responsible for monitoring the relevant industries, and then report to the State MOC if there are any concerns with the proposed foreign investment. Industries that have been identified for this heightened scrutiny include:

  • lease finance, international express delivery, advertising, auctions and value-added telecommunication services conducted within the boundaries of a single province;
  • sensitive industries such as small-sum lending, market surveys, credit ratings and security services; and
  • industries with an inflow of large amounts of foreign currency, such as venture capital or equity investment.

Sale of foreign owned shares in listed companies

If a foreign-invested joint-stock company is listed in the PRC's 'A share' market, the approval certificate issued by the MOC for the establishment of such a company is required to set out the name of, and number of shares held by, any foreign investor. If a foreign investor sells (in a single transaction or in aggregate) more than 5 per cent of the company's total issued shares, then approval must be obtained from the relevant branch of the MOC and the approval certificate must be amended to reflect the new shareholding of the foreign investor.

Certain matters no longer subject to MOC review

The establishment of branch companies by foreign invested enterprises are no longer subject to MOC review, unless special regulations4 apply to the establishment of branch companies by those foreign invested enterprises. Similarly, where there are no special regulations, importation of equipment that is to be treated as contributed capital by foreign investors can now be directly registered with relevant authorities without the need to obtain approvals from the MOC.

If a foreign invested enterprise changes its name, or if an investor changes its name or its legal address (unless the new address is in the jurisdiction of another MOC branch), prior approval of the change from the MOC branch is no longer required. Instead, the foreign invested enterprise is required to file notification of the change with the MOC branch within 30 days after it has registered that change with the company registration authority.

Conclusion

The Circular encourages foreign investment by increasing the review threshold for certain foreign acquisition that previously required review by the State level MOC as well as simplifying certain approval and registration procedures for foreign investment. On the other hand, the Circular has also sought to strengthen regulatory review of foreign investment in certain industries which are considered to be more sensitive. Foreign investors should be aware of these new provisions and consider the Circular's impact on their proposed or existing investment in the PRC.

Footnotes
  1. Although the Circular does not make it clear, we assume this applies only to foreign investment projects in the large number of industries that are within the 'encouraged' or 'permitted' categories under the Foreign Investment Industrial Guiding Catalogue (2007). Those encouraged or permitted categories cover hundreds of industries, including the manufacturing of various products that utilise advanced or new technology.
  2. For example, foreign investment in the exploration and mining of rare earth, tungsten and radiative minerals is prohibited.
  3. Foreign investments in many industries are subject to such a requirement. For example, foreign investors must establish joint ventures with PRC companies in the manufacturing of natural food additives and food ingredients.
  4. The Circular did not clarify what is meant by 'special regulations' but we assume it refers to any other applicable regulations.

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