A new era for China’s foreign investment regime: the official launch of the filing regime

On October 8, 2016, the first working day following China’s “Golden Week” holiday, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) issued a joint announcement (Joint Announcement) clarifying the scope of foreign investments which are eligible to apply the new filing regime (Filing Regime).

On the same date, MOFCOM also formally issued the Interim Measures on Administration of Filings in respect of Establishment and Change of Registration of Foreign-invested Enterprises (MOFCOM Filing Measures).

Further details on the “Filing Regime” and the related regulatory changes can be accessed here.

The MOFCOM Filing Measures and the Joint Announcement, together with a recent notice from the State Administration for Industry and Commerce (SAIC), clarify a number of issues that were not previously addressed in the draft of the MOFCOM Filing Measures published in September 2016 for public consultation.

We summarise the major Filing Regime updates below following the Joint Announcement and MOFCOM Filing Measures.

There is no national negative list

As mentioned in our previous update, it was expected by the market that NDRC and MOFCOM would publish a national negative list setting out those industries that would be subject to special administrative measures (including regulatory approvals). NDRC and MOFCOM have now clarified in the Joint Announcement that any foreign investment made:

1. in restricted and prohibited industries, and
2. in encouraged industries subject to shareholding restrictions or senior management personnel requirements,
   
   as outlined in the Catalogue of Industries for Guiding Foreign Investment (2015 Revision) (Foreign Investment Catalogue) will be subject to special administrative measures.  

In other words, at this time, the government has decided to keep the current Foreign Investment Catalogue rather than publishing a national negative list. Any foreign investment made in industries that fall outside of the scope described above is now subject to the Filing Regime.

The Filing Regime is not applicable in certain circumstances

The Joint Announcement clarified that, the new Filing Regime will not apply to

1. foreign investors’ acquisitions of domestic companies which are then converted into foreign-invested enterprises (FIEs), and
2. foreign investors’ strategic investments in Chinese listed companies.

In these circumstances, the current approval regime will remain unchanged. However, those FIEs which result from such foreign acquisitions and/or investments may apply the Filing Regime if there are any subsequent changes, provided these changes are not subject to special administrative measures under applicable laws and regulations.

The Filing Regime also does not apply to further investments made by existing FIEs. Instead, these will continue to be subject to the current legal regime where MOFCOM approval is required if an FIE makes a further investment into a restricted industry, or an encouraged industry which is subject to regulatory restrictions, as set out in the Foreign Investment Catalogue.

FIEs and foreign investors that fall within the Filing Regime

The MOFCOM Filing Measures are clear that FIEs will include Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures, wholly foreign-owned enterprises, and FIEs limited by shares.

However, equity investment enterprises that have been set up by foreign investors, which were previously recognised as foreign investors in the September 2016 draft MOFCOM Filing Measures have been removed. In other words, investments made in equity investment enterprises set up by foreign investors remain subject to the existing regime, including the regulations applicable to FIEs’ further investments and relevant local (for example in Shanghai and Shenzhen) regulations which govern FIE equity investment enterprises.

The Filing Regime may work in conjunction with China’s national security review regime

Transactions involving FIEs that fall within the Filing Regime may also be subject to China’s national security review regime. If foreign investors intend to invest in a sensitive industry (examples may include important agriculture, energy and resources and infrastructure industries), they are strongly recommended to seek proper legal advice prior to undertaking the transaction even if the transaction applies the simple Filing Regime. This will help foreign investors to avoid circumstances where they are asked to unwind a deal even after the shareholder changes have been registered with the competent AIC because the transaction has not received national security review clearance.

The Filing Regime still requires further clarification

The Joint Announcement and the MOFCOM Filing Measures are still unclear as to whether, under the Filing Regime, the approval by a competent NDRC local counterpart is still needed.

Whilst the MOFCOM Filing Measures will replace the filing procedures that were implemented in the four pilot free trade zones in China (FTZs), it is unclear whether the negative list currently in place in the FTZs will remain effective. We believe at this time the government does not intend to remove the preferential treatment available in the FTZs (particularly as the FTZ negative list is shorter and more flexible than the Foreign Investment Catalogue). Instead, it is possible that the government may extend these preferential treatments to the whole of the country in the future.

SAIC issued regulations to implement the Filing Regime

On September 30, 2016, SAIC issued the Circular concerning the Registration Work post the Implementation of the Filing Regime for Foreign-invested Enterprises which took effect from October 1, 2016. This circular outlines procedures that AIC will adopt in order to be compatible with the Filing Regime.

The Filing Regime has taken effect from October 8, 2016. Any MOFCOM applications that had been submitted but yet to be approved before this date will be replaced by the filings provided that they fall within the scope of the Filing Regime.