China further relaxes restrictions on foreign investment access

By Jeremy Dai, AnJie Law Firm
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Q: What changes have been made to the incorporation and registration procedures of foreign-funded enterprises under the current policy?

A: Pursuant to the Ministry of Commerce’s Decree No 2 of 2015, stipulations requiring registration of contributions to registered capital also apply to foreign-funded enterprises, removing restrictions on registered capital, capital contribution period, etc. The subsequent Interim Measures for the Administration of Incorporation and Alternation Filing of Foreign-Funded Enterprises (the Interim Measures) has significantly simplified the incorporation and alternation procedures of foreign-funded enterprises.

戴志文 Jeremy Dai 安杰律师事务所 合伙人 Partner AnJie Law Firm
Jeremy Dai
Partner
AnJie Law Firm

For a foreign-funded enterprise not subject to any special access controls of the government, the original mechanism requiring prior approval from the competent commerce authority will be replaced by the filing mechanism. This simply requires the enterprise to submit documents via the integrated administrative system. Under the new mechanism, the procedures will be completed within three working days of acceptance. Documents such as the credit report of foreign investors and the feasibility study report are no longer required. The Interim Measures, as amended on 29 June 2018 (the Revised Measures), bring about further simplification of the incorporation procedures, which enables filing and registration to be completed on a consolidated basis.

The Interim Measures state that the filing mechanism also applies to transactions where foreign-funded enterprises or foreign-funded listed companies resulting from acquisition or merger accept strategic investments from new foreign investors, provided that these entities are not subject to any special access controls of the government. But the Revised Measures exclude application to transactions where non-foreign-funded listed companies accept strategic investments from foreign investors.

There is a conflict between the stipulations of the Interim Measures, and Article 7 of the Measures for the Administration of Strategic Investments by Foreign Investors in Listed Companies (Measures for the Administration of Strategic Investments) which requires listed companies to obtain approval from the Ministry of Commerce before accepting strategic investments from foreign investors. But another document issued by the Ministry of Commerce, promulgated on 30 July 2018, proposed that strategic investments where the state-prescribed management measures of special market entry are not involved shall apply to the rules stipulated in the Interim Measures, thus reflecting the application of filing mechanism.

Q: What changes have been introduced by the Special Administrative Measures (Negative List) on Foreign Investment Access (2018 Version) issued on 28 June 2018?

A: The new negative list launches a series of new opening-up measures in 22 areas, further relaxing the restrictions on percentage of equity held by foreign shareholders, establishing an opening-up timetable for the automobile manufacturing and financial industries, and is predictable. Below is an overview of the opening-up measures for 20 areas:

(1) The previous stipulations that restrict controlling shareholders of new crop varieties (other than wheat and corn) selection, breeding and seed production businesses to Chinese entities are removed;

(2) Restrictions on foreign investment access to rice, wheat and corn purchase and wholesale sectors are removed;

(3) Stipulations that restrict controlling shareholders of special and scarce coal exploration and mining businesses to Chinese entities are removed;

(4) Restrictions on foreign investment access to graphite exploration and mining sectors are removed;

(5) Stipulations permitting foreign entities to be involved in rare earth smelting and separation businesses only in the capacity as shareholders of joint ventures and cooperative enterprises are removed, as are the restrictions on foreign investment access to the tungsten smelting sector;

(6) After the restriction on percentage of equity held by foreign investors is lifted for special-purpose motor vehicles and new energy vehicles OEMs in 2018, the same will be lifted for commercial vehicle manufacturers in 2020 and for passenger vehicle manufacturers in 2022, when stipulations restricting to two the number of shareholders of one passenger vehicle joint venture will also be abolished;

(7) Stipulations restricting controlling shareholders of vessel (including subsections) design, manufacturing and repair businesses to Chinese entities are removed;

(8) Stipulations restricting controlling shareholders of trunk and regional aircraft design, manufacturing and repair businesses, design and manufacturing businesses of helicopters of three tons and above, ground and surface effect aircraft manufacturing businesses, and drone and aerostat design and manufacturing businesses to Chinese entities are removed;

(9) Stipulations permitting foreign entities to be involved in general aircraft design, manufacturing and repair businesses only in the capacity as shareholders of joint ventures and cooperative enterprises are removed;

(10) Stipulations restricting controlling shareholders of power grid construction and operation projects to Chinese entities are removed;

(11) The stipulations that restrict controlling shareholders of trunk railway network construction and operation projects to Chinese entities are removed;

(12) Stipulations restricting controlling shareholders of passenger rail transport companies to Chinese entities are removed;

(13) Stipulations restricting the forms of foreign-funded international maritime transport companies to joint ventures and cooperative enterprises are removed;

(14) Stipulations restricting controlling shareholders of international shipping agencies to Chinese entities are removed;

(15) Stipulations restricting the controlling shareholder of a gas station chain construction and operation business meeting the following conditions to a Chinese entity are removed: (i) the business is established by a foreign investor; (ii) the chain consists of 30 or more stores; and (iii) it sells different types and brands of refined oil products from multiple suppliers;

(16) Stipulations restricting the percentage of equity held by a single foreign shareholder in a Chinese-funded bank to 20% and the combined percentage of equity held by all foreign shareholders to 25% are removed;

(17) In 2018, stipulations restricting controlling shareholders of securities companies and securities investment fund management companies to Chinese entities will be replaced with stipulations that restrict percentage of equity held by foreign investors to 51%. In 2021, the latter restriction will also be lifted;

(18) In 2018, stipulations restricting controlling shareholders of futures companies to Chinese entities will be replaced with stipulations that restrict percentage of equity held by foreign investors to 51%. In 2021, the latter restriction will also be lifted;

(19) In 2018, the percentage of equity that foreign investors are permitted to hold in life insurance companies will be raised from 50% to 51%. In 2021, this restriction will be lifted completely; and

(20) Stipulations prohibiting foreigners from investing in internet access service establishments are removed.

Jeremy Dai is a partner at AnJie Law Firm

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