China has come to a new crossroads, where it needs to make important decisions on its future. It has chosen to go for a more efficient and open economy, writes Richard Li

This year marks the 40th anniversary of the decision of Deng Xiaoping, then leader of China, to enshrine “reform and opening up” as one of the country’s fundamental national policies in 1978. Four decades later, 2018 has witnessed another round of grand changes, which will see China open up further.

In March, China adopted a plan to reshape government organizations significantly. “The overhaul is the most comprehensive in recent years, with various ministries and agencies created, combined or dissolved,” says Greg Liu, a partner at Paul Weiss in Beijing.

Greg Liu believes that one important institutional change is the establishment of the State Administration for Market Regulation (SAMR) to replace three former agencies – the State Administration for Industry and Commerce (SAIC), the General Administration of Quality Supervision, Inspection and Quarantine, and the China Food and Drug Administration.

Judie Ng Shortell, another partner at Paul Weiss in Beijing, says the SAMR has also become China’s sole antitrust regulator, with the consolidation of the various antitrust functions that the SAIC, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) previously handled. “The consolidation is aimed at streamlining antitrust review and enforcement,” she says. “Whether SAMR will be more or less aggressive in enforcement of antitrust regulations remains to be seen.”

Another significant change is the merger in March of the China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC) into a new entity named the China Banking Insurance Regulatory Commission (CBIRC). “CBIRC is now China’s central regulator to supervise the banking and insurance industries, and this move is expected to reduce regulatory arbitrage and delineate the supervisory roles between the two sectors,” says Michael Chin, a partner at Simmons & Simmons in Hong Kong and Shanghai.


In addition to rejigging the regulatory bodies, China has also quickened its pace on further opening of its market. “Over the past 12 months, there have been quite a few official updates made in relation to the opening of sectors to foreign investments,” says Wang Yi, head of Norton Rose Fulbright’s Beijing office. “These updates have been positively received by international companies and financial institutions interested in investing in China. We have been instructed by various clients to restructure and expand their China businesses following the new opening. Granting more market access will, undoubtedly, continue to bring about great business opportunities for foreign companies that have kept their eye on the evolving Chinese economy.”

The Chinese government issued the 2018 versions of the Special Measures for the Administration of Access by Foreign Investors (Negative List) and the Special Measures for the Administration of Access by Foreign Investors in Pilot Free Trade Zones (Negative List) on 28 June and 30 June 2018, respectively. The former applies nationwide and the latter to FTZs.

“These two negative lists are important regulations that foreign investors must observe if they wish to grasp comprehensively China’s foreign investment policy direction and enter China to share in the dividends of reform and development,” says Lin Zhong, managing partner at EY Law Firm’s Shanghai office.


“Based on the timetable for relaxation in the automotive, financial and other industries set in the national negative list, the foreign parties of a significant number of equity joint ventures are seeking to renegotiate their contracts/agreements in order to increase their equity percentages. This will involve the determination of the consideration, the reapportionment of management authority and the revision of other commercial arrangements.”

Betty Yap, a partner at Paul Weiss in Hong Kong, says the revisions in both negative lists show China’s continuing efforts to open its economy to foreign investment. “They [both] feature a significantly shortened list of restrictive items, and broader openings for foreign participation in key sectors, such as finance, transportation, logistics, professional services, agriculture and manufacturing of automobiles, ships and aircraft,” she says.

Greg Liu, from Paul Weiss, says the treatment of value-added telecoms services will be extended from the Shanghai FTZ to all such areas in China, including 100% foreign ownership of app stores, storage and forwarding services, call centres, domestic multi-party communications and internet access services. “Such openings would provide more opportunities for existing and prospective foreign investors in those sectors,” he says.

In June, the State Council also issued the Notice on Several Measures to Use Actively and Effectively Foreign Investment to Promote High-quality Development of the Economy. Zheng Xiaodong, a senior partner at Jincheng Tongda & Neal in Beijing, says: “The Notice calls for a substantial lowering of the threshold for market entry, enhancement of the level of investment freedom and attraction of more foreign long-term investment of funds in domestic capital markets, all of which were parts of President Xi Jinping’s speech at the Bo’ao Forum.” He is confident that “through further opening (revision of relevant regulations included), the government intends to trigger a new rush of foreign investments in China”.

In terms of further opening up the capital markets, the State Administration of Foreign Exchange (SAFE) issued in June updated rules on the Qualified Foreign Institutional Investors (QFII) and Renminbi QFII (RQFII) schemes. “The main changes involved removing repatriation limits and principal lock-up periods, and allow foreign exchange hedging with onshore investments,” says Michael Chin, from Simmons & Simmons.

Also in June, the Asset Management Association of China (AMAC) released revised guidelines on setting up foreign-invested private fund managers in China. “The most pertinent change is that the AMAC will no longer penetrate the shareholding structure to determine if the ultimate foreign controller is a licensed financial institution in its country of domicile,” says Michael Chin. “It will now only consider the first level of foreign investor that is duly licensed.”


While pushing forward with reform, China is also facing a huge challenge: mitigating financial risk. The regulators have already taken countermeasures, e.g., the financial industry has been greatly impacted by the issuance of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (the New Asset Management Rules) issued in April 2018.

Zhang Yi, chairman of the China management committee of King & Wood Mallesons (KWM), says that in recent years the asset management industry has grown at a rapid clip, with banking, trust, securities, fund, futures, insurance and other such financial institutions engaging in various types of asset-management (AM) businesses. The AM products of the various financial sub-sectors have already reached RMB100 trillion. “It can be seen that the AM business is playing an active role in satisfying investment and financing demand and improving the financing structure and is effectively lending a helping hand in China’s economic development,” he says. “However, the existence of such issues as multi-level nesting, rigid payment, circumvention of oversight, etc., in certain AM products have triggered financial compliance risks, and AM disputes are also gradually coming to the fore.” Zhang Yi believes the official issuance of the New Asset Management Rules (NAMR) marks the entry of the AM industry into the “era of strict regulation”.


Zhang Ping, managing partner at JunHe’s Guangzhou office, says the NAMR are having a profound impact on the AM businesses of numerous sectors, including banking, trusts, funds, securities, insurance, etc., and “the adjustment of product structures and compliant operation under the NAMR have become the watch words in these sectors.”

Rao Yao, a partner at HHP Attorneys-at-Law in Shanghai, says the changes in the regulatory environment have brought with them a variety of problems for funds on the market. “Stringent fund oversight and the shattering of rigid payment have saddled liquidity with major problems, and non-performing assets have also followed hard on their heels,” he says. “On the one hand, tightening of liquidity by banks has led to greater risks arising at the funding level and, on the other, the weakness in the stock markets, exchange market and bond market has, likewise, led to a major increase in risks of default. The coming together of these risks has caused numerous defaults to arise simultaneously at this time.”

Rao Yao says there is a major difference between the financial default cases that have now erupted and past ordinary financial cases, presenting greater challenges to the legal and compliance departments of financial institutions. “It is said that the main work difficulties in the past were debt recovery and asset disposal. Today, in contrast, more risks are concentrated in various new unfamiliar types of cases that easily arise under complicated multi-nested transaction structures,” he says.

The NAMR also impact on acquisitions and restructurings. Wang Guan, a partner at Grandway Law Offices in Beijing, says the regulators’ oversight of funds has become stricter due to the implementation of the NAMR. “Accordingly, at the practice level in acquisitions and restructurings, special attention needs to be paid to the lawfulness of the source of the funds,” he says. “Where a layered leverage plan is involved, sufficient fact finding is a must and, in respect of nested financing designs for pledging the equity of the controlling shareholder, a clear and practical contingency plan to prevent a funding crash needs to be put in place.”

In the face of the trend towards increasing non-performing assets (NPAs) and debt defaults, the Supreme People’s Court has also proposed response measures. According to Wang Dan, the Beijing-based executive partner at Longan Law Firm, the Supreme Court has already issued several sets of judicial interpretations on “enforcement” that address the issue of the disposal of non-performing financial assets, and is currently drafting judicial interpretations that specifically address the issue. The Supreme Court has also repealed some regulations that were the subject of the industry’s criticism in the past. “These items of news and these moves should focus the attention of financial institutions, particularly institutions relating to the disposal of NPA,” he says.


In the field of bankruptcy restructuring, after the issuance of the Minutes of the National Court Bankruptcy Adjudication Working Meeting in March this year, it is clear that the Supreme Court intends to improve the bankruptcy administrator system and guide the establishment of an administrator association. Wang Dan states that this will have a major beneficial impact on the legal industry’s provision of bankruptcy and liquidation services. “Furthermore, corporate management needs to give the restructuring field the weight it deserves, as it is not just enterprises facing bankruptcy that need to give consideration thereto,” he says. “Many investment enterprises, or group companies, or financing platforms, etc, have a large number of enterprises facing cases that involve bankruptcy restructuring.”

At the end of June, the CBIRC issued the Administrative Measures for Financial Asset Investment Companies (for Trial Implementation). This document defines AM companies (AMC) as “non-bank financial institutions that mainly engage in bank debt-for-equity swap and complementary support business”. The targeted easing of 0.5 percentage points by the central bank on 5 July freed up RMB500 billion in liquidity to support the conversion of debt into licences equity.


“Each of the five big state-owned banks has obtained a licence for their subsidiary AMC, signifying that they can convert the large volume of enterprise debt that they hold into equity through their AMC, further reducing gearing and lightening the debt burden the enterprises had to bear,” says Dorothy Xing, a partner at East & Concord Partners in Beijing. “In addition to being able to carry out ‘debt-for-equity’ swaps with the claims it takes off the hands of the bank, an AMC can create equity by first injecting capital into an enterprise and then using the same to repay the debt to the bank, thereby achieving the transformation of debt into equity.”

Dorothy Xing says the AMC that commercial banks establish will also attract private capital to serve as shareholders, and the relevant effect will radiate out to wider economic sectors and produce a positive effect.


Peter Corne, head of Dorsey & Whitney’s Shanghai office, has focused on clean technology, advanced manufacturing, biotechnology and healthcare. “Increased standards from the government for environmental sustainability practices have led to growth in the market, creating opportunities for foreign investments to satisfy growing demand,” he says. “More local companies are looking to partner with foreign investors in JVs to combine local manpower and connections with foreign expertise.”


Fan Jiannian, a partner at Gide Loyrette Nouel in Shanghai, has noticed that the pharmaceutical industry is still booming. “There are still lots of opportunities for the international player due to China’s increasingly old population, higher demand of the Chinese middle class for better healthcare, and relative low confidence of mainland people on Chinese enterprises in such industries,” he says, adding that compliance will become a key element for further development in such industry.

In the renewable energy industry, numerous photovoltaic enterprises are currently facing funding difficulties. Xie Yu, a partner at Grandall Law Firm in Beijing, says the pressure of the sliding economy between January and June this year, as well as the resulting string of measures in response (e.g., Notice on Matters Relevant to Solar Power Generation in 2018), signify that the state is beginning to apply the brakes to the subsidization of renewable energy and that the alternate energy sector needs to find new financing channels.

“Reducing costs and increasing product mark-ups have become the primary solutions of the industry in these difficult times,” says Xie Yu. “Accordingly, financing type legal services and Hong Kong listings have become the current demand for legal services in the energy and natural resource sectors. Additionally, the freezing of capital has also had a profound impact on debt repayments and production of enterprises in the alternate energy sector, giving rise to a series of defaults, making it imperative for players to pay close attention to guarding against such disputes and seek solutions.”


Kevin Shao, a senior partner at City Development Law Firm in Shanghai, keeps an eye on investment and acquisitions in the real-estate sector. He has seen that, since the beginning of 2018, there has been comprehensive tightening in the financing channels of real estate enterprises and, additionally, due to the high funding threshold “more existing developers are opting for projects in cooperation with third parties as opposed to independently developing them as in the past”. “In addition, the large developers have also responded to state policies, focusing on ‘leasing and sale in parallel’ and ‘leasing and sale co-equal’ projects, which have become the focus and development trend in the sector.”

With respect to domestic investments by mainland enterprises, Kevin Shao states that the major challenges currently existing at the legal level are the continuing trend towards greater stringency and uncertainty in the financing environment, the control measures in the real-estate market, and the variation in administrative control from place to place. “Certain developers may commit non-compliant acts as a result of a lack of familiarity with the policies in the place where their project is located,” he says. “In such circumstances, in addition to the possible penalties by the administrative authority, the developer may also face a series of civil risks and liabilities.”

JunHe’s Zhang Ping keeps an eye on the development of the education industry. He says that, following on from the official implementation of the Law on Promoting Private Education on 1 September 2017, most provinces have issued implementing opinions. “With the further issuance of the Implementing Regulations for the Law on Promoting Private Education (Draft for Comment) in April this year, numerous clearer requirements are being made in respect of the administration of private educational institutions by type and their compliant operation, having a profound impact on the private education industry,” he says. “Listing in Hong Kong, acquisition and integration, category selection and compliant operation have become the focus of attention of management and the legal departments of educational enterprises.”

Karen Zhong, a partner at Merits & Tree Law Offices in Beijing, says the blockchain industry has entered a new era of rapid growth, and the “fusion of blockchain with such new technologies as artificial intelligence has resulted in a broader application of blockchain”. In terms of investment, many financial institutions, such as banks, are beginning to participate therein. Also, in terms of application, blockchain technology is being applied in such sectors as the financial sector, the real economy, e-government, etc. “However, where laws and regulations are not yet completely clear, numerous risk factors are also lurking,” she says. The global nature of the blockchain industry makes it imperative to consider regulation and compliance issues in various jurisdictions.


With the continuous updating of laws and regulations, compliance has become increasingly important to enterprises. Zhang Yi, chairman of KWM, says that, from the perspective of compliance, there have been new revisions of regulations in fields that are intimately connected with enterprises’ operations, such as online data, environmental protection, taxation and labour law. “On the one hand, the state is intensifying its efforts to protect the environment, while, on the other, it has further strengthened the oversight and regulation of enterprise taxation and labour employment,” he says. “The importance attached to online data security and the establishment of compliance systems are also showing a clear growing trend. Corporate compliance has risen to a new height, requiring a comprehensive evaluation of existing compliance systems, and the timely updating and revision to avoid risks to the greatest extent possible.”


Environmental protection (EP) has become a compliance issue enterprises need to face today. “Since the Chinese government has raised the status of the environment to one of the three major tasks, the law enforcement efforts of the EP law enforcement authorities have been greatly strengthened,” says Wang Jihong, a partner at Zhong Lun Law Firm in Beijing. “In recent years, emphasis has been placed on investigating and handling environmental law violations in Jiangsu and Zhejiang, with a large number of enterprises, which illegally discharged waste water or illegally buried waste, receiving administrative penalties.” She says there is strong demand from relevant enterprises for legal services for guarding against EP compliance risks, offering new opportunities for lawyers.


Feng Jianjian, a partner at Jingtian & Gongcheng in Shanghai, says in explanation that he expects the Chinese government to issue officially the Cybersecurity Level Protection Regulations before the end of the year. This is something that has drawn the attention of enterprises, particularly foreign ones. “Different security levels will require the performances of different grades of compliance obligations, followed by the carrying out of the corresponding testing, assessment and recordal, thereby increasing enterprises’ compliance costs,” he says.

Feng Jianjian warns that, for enterprises that are proposing to list, so long as they have data related business, they must take into consideration data compliance, otherwise their future listing and financing could be affected. “Because they have a large volume of personal information stored, large internet enterprises will pay particular attention to the issue of personal information security compliance,” he says. “Because the nature of their data is quite sensitive, enterprises in the financial and medical industries will also attach greater weight to personal information compliance. Furthermore, data and information in the credit industry involve the credit information of enterprises and individuals, also making it a key industry for data-related legal services.”

Enterprises also need to pay attention to foreign regulations on the protection of personal data. Merits & Tree’s Karen Zhong says one recent legal issue her clients easily overlook is the EU’s General Data Protection Regulation (GDPR), which came into effect on 25 May. “This not only regulates enterprises in the EU jurisdiction, but also brings any company or organization that processes or controls personal data of EU residents within its jurisdiction,” she says. “Clients must place importance on GDPR compliance and respond actively to avoid the occurrence of compliance incidents.” An enterprise that violates the regulation could face an administrative fine of up to €20 million or 4 per cent of the its global turnover (whichever is greater) and bear the attendant civil liability.


Wu Hua, a partner at Guantao Law Firm in Beijing, has noted that, since the entry into effect of the 2014 amended version of the Administrative Procedure Law, the law enforcement personnel of administrative authorities have been vigorous in performing their duties, while the level of administrative law enforcement has been continuously improving. “The administrative authorities have strengthened their training, and personnel with a law background have been put into the front lines of law enforcement,” she says. “Pursuant to the current Administrative Procedure Law, if an administrative reconsideration decision upholds the original administrative act, the administrative authority and the reconsideration authority will be co-defendants and could face the prospect of jointly losing a case. Accordingly, an administrative reconsideration authority will render its administrative reconsideration decision in strict accordance with the law.”

Accordingly, Wu Hua warns enterprises they need to place greater emphasis on administrative law and enhance their awareness of compliance with such law. “For example, in the past, no one considered an enterprise operating outside its home area to be a problem, but, in fact, this is a violation of the law,” she says. If an enterprise is penalized as a result, its qualifications to participate in future tendering for government procurement could be affected. In serious circumstances, its very existence could be jeopardized.


Protection of intellectual property is one area of reform on which China is placing particular emphasis. Looking at the situation in the first half of 2018, “the number of cases in the field of confirmation of intellectual property rights (IPR) has shown a substantial (upward) trend”, says Spring Chang, the Beijing-based founding partner of Chang Tsi & Partners. “In the area of protection of IPR, standard patent lawsuits are, in addition to traditional lawsuit types, a point of focus, as China has progressively become the main battlefield in the global struggle for standard patents.”

He Jing, a senior consultant at AnJie Law Firm in Beijing, says that, against the background of the China-US trade war, the topic of IP protection appears particularly prominent. From the perspective of macro policy, this year’s report on the 19th National Congress of the Communist Party of China expressly points out that a culture of innovation is to be vigorously advocated, and the creation, protection and application of IP are to be strengthened.

“Generally speaking, the trend in IP protection in China is to ever greater strictness, which is good for the protection of enterprises’ IP and also provides a good IP legal environment for investment and development in China by foreign enterprises,” says He Jing. “However, enterprises also need to pay attention before launching any business, analysing in advance and taking precautions against IP risks so as to avoid unnecessary losses arising due to infringement.”

David Tian, the Beijing-based managing partner at An Tian Zhang & Partners, says that, “since the increase in the rate of damages for the infringement of IP, the willingness of enterprises to file claims has increased. The successful examples of large claims occurring recently also puts real pressure on infringing enterprises, which may serve as a litigation strategy, causing defendants to favour settlement.” Still, while many foreign enterprises are still focused on halting infringement, with few demanding large damages, their overall approach remains relatively conservative. “However, as the actions in which large damages have been awarded that have been reported recently mainly involve domestic enterprises, whether it is feasible for foreign enterprises to seek heavy damages in China is a question that remains to be answered,” he says.

David Tian also notes that, with the progress of Chinese enterprises in the high-tech sector, the scope of patent litigation has expanded. In the past, patent litigation mainly involved design, daily use, mechanical and other such simple patents, but today, this has expanded to such industries as chips, integrated circuits, etc. However, he also notes that there has recently been trend towards stronger local protection in certain regions. “This type of protection is still not marked in Beijing and Shanghai. So, at the moment, we advise our clients to go to Shanghai or Beijing to institute high-tech-related legal actions,” he says.

In the patent field, He Jing is of the opinion that enterprises should pay attention to the Work Guidelines for the Trial of Standard Essential Patent Disputes (for Trial Implementation), which the Guangdong Provincial Higher People’s Court issued in April this year and the Provisions on Several Issues Concerning the Trial of Patent Right Grant and Confirmation Cases (1) (Draft for Comment) the Supreme People’s Court issued in June.

“The Work Guidelines not only have a strong guiding nature for judges in the adjudication of cases, but also have very high reference value for standard essential patent (SEP) holders and parties that work such patents,” he says. For an enterprise that works a SEP, it needs, in order to minimize disputes with the rights holder, to pay attention to the following: (1) fully demonstrating “good faith” or “sincerity” in the course of the SEP licensing negotiations; (2) the comparative methods for determining the FRAND royalties; and (3) FRAND undertakings have a restrictive effect on injunctive relief, but they do not signify that a SEP rights holder cannot obtain injunctive relief.

With respect to the Supreme People’s Court’s Draft for Comment, He Jing states that, “the provisions therein on the submission of additional experimental data and the patent linkage system the implementation in China of which has been promoted in recent years have major significance for protection of the patents of pharmaceutical enterprises”.



An acquisition/restructuring may, in fact, be a project that involves a system of intersecting regulation by multiple authorities. Many acquirers only focus on the progress of the review by the securities regulator, while giving relatively little weight to the requirements and progress of the review by other competent authorities that may be involved, often resulting in drawing out the time required for the acquisition/restructuring.

Partner, Grandway Law Offices


With the free flow of information and the rapid development of cross-border transmission, the global network environment has witnessed an earth-shaking change, and the legislation of different countries and regions on the protection of information has become a hot topic of discussion. The implementation of the EU’s closely watched GDPR has been the most important development in the information protection field in the past half year. The GDPR’s extraterritorial reach has greatly broadened its scope of application, something to which the management and the legal and compliance departments of enterprises need to
attach importance.

HHP Attorneys-at-Law

As the Stock Exchange of Hong Kong made substantial revision to the listing rules to accommodate TMT and biotech companies for listings in Hong Kong, we have seen a surge in listing applicants in these sectors to consider Hong Kong over other jurisdictions for a public offering.

Wilson Sonsini Goodrich & Rosati

China has recently established two international commercial courts in Shenzhen and Xi’an in June of this year. The courts, which aim to resolve any Belt and Road and Greater Bay initiative disputes, increase the options available to international investors and should be well received.

Holman Fenwick Willan
Hong Kong


Environmental issues have been a huge focus of the Chinese government. [For the consumer goods sector], it has increased enforcement action, which has proved disruptive to supply chains, causing increased costs and delays.

Consumer sector clients should also be aware of the tightening regulations on the compliance front, particularly in relation to consumer protection, personal data protection, unfair competition and regulation of e-commerce activities, etc.

Herbert Smith Freehills


We have seen a clear trend of the combination between the traditional production and service sector and the internet sector. Many of our clients have developed or are in the process of developing web-based platforms to deliver better their products/services to consumers …

In these projects, we assist clients in analysing the various legal and regulatory requirements … including e-commerce law, telecommunication law, banking and insurance law, data privacy protection law, etc.

Beijing and Shanghai


In the banking and finance sectors, the things that require close attention are the risk of bad debts in the large volume of loans extended abroad by China and the relatively serious outflow of domestic funds. Between January and June this year, the loans extended abroad by certain large domestic banks have become unrecoverable. The recovery of foreign-related loans involves the issues of judicial assistance between countries and governing law. Accordingly, the review and management of loans extended to foreign parties should be strengthened.

Senior Partner
Kangda Law Firm

After more than three years of rapid growth, China has become the country with the greatest volume of PPPs in the world, but, at the same time, this has given rise to numerous fraudulent PPP projects, saddling local governments with additional debts. During rectification, numerous PPPs face the prospect of being swept away or being required to undergo rectification. This has produced a large volume of legal matters that has become a new feature of the PPP sector this year.

Zhong Lun Law Firm