The reform of Chinese foreign investment regulation ... · •History of Special Economic Zones in...

The reform of Chinese foreign investment

regulation

Opportunities for EU SMEs ?

Ronan Diot, Senior Associate

Norton Rose Fulbright LLP

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Speaker biography

Ronan Diot is a corporate lawyer based in Beijing. His practice focuses on assisting

foreign companies to do business in China and Chinese companies to do business

overseas, with emphasis on cross-border mergers & acquisitions and regulatory

aspects.

Ronan has extensive experience of contracts and negotiations with a China element

and has advised on a number of acquisitions and joint ventures projects within the

PRC or abroad.

Ronan’s practice also focuses on regulatory aspects of doing business in China,

including compliance with anti-bribery laws, PRC State and commercial secrets regime

and white-collar crime.

His experience includes the establishment of companies in highly regulated industries

such as the financial, telecommunications, aerospace, defence and security sectors

and the associated compliance, employment, and competition issues connected with

such matters.

Ronan is admitted to practice in France (Paris Bar) and Spain (Barcelona Bar).

Ronan Diot

Agenda

• Background of Chinese foreign investment regime

• History of Special Economic Zones in China

• Overview of SHFTZ

• New Free Trade Zones

• New Negative List and Foreign Investment Catalogue

• Draft Foreign Investment Law

• EU-China Investment Agreement

Background of Chinese

foreign investment regime

• The Foreign Investment Catalogue classifies industrial sectors by their

accessibility to foreign investment: (i) encouraged, (ii) restricted, (iii) prohibited.

• “encouraged” sectors used to be entitled to certain benefits (less so now)

• all other industrial sectors are (theoretically) permitted

• “restricted” sectors have restrictions on control (e.g. Chinese party must control

over the company), JV obligation

• certain technology transfer obligations in other regulations

• Foreign-invested enterprises need to complete a time-consuming “approval and

registration” process to get incorporated:

• local NDRC project approval

• local MOFCOM investment approval

• local AIC registration

• other ancillary authorities (tax, customs, SAFE, labor bureau, PBOC)

• China ranked 158 out of 189 countries in the “Start a Business” category of the

OECD’s “Doing Business” Study in 2013

History of Special Economic

Zones in China


Zones in China

1980: 4 Special Economic Zones


Zones in China


1984: 14 Open Costal Cities


Zones in China



1985: 3 Manufacturing Cluster Deltas


Zones in China




1988: Hainan SEZ


Zones in China




1988: Hainan SEZ

1992: 6 Yangtze River Ports


Zones in China




1988: Hainan SEZ


1992: 11 Border Cities


Zones in China




1988: Hainan SEZ



1990: 15 Free Trade Zones (保税区)


Zones in China




1988: Hainan SEZ



From 1980 to 1993: 53 Hi-Tech Zones

1990s: 15 Free Trade Zones (保税区)


Zones in China




1988: Hainan SEZ





2013: Shanghai Free Trade Zone 中国(上海)自由贸易试验区

上海

上海


Zones in China




1988: Hainan SEZ





2013: Shanghai Free Trade Zone 中国(上海)自由贸易试验区

上海

上海

2014: Zhuhai, Guangzhou and Shenzhen

Free Trade Zones 深圳

广州

珠海

深圳天

津 2014: Tianjin Free Trade Zone

天津

福建

福建

2014: Fujian Free Trade Zone

Overview of SHFTZ

(Initial opening)

• Integration of 4 areas:

• Waigaoqiao Free Trade Logistics

Park

• Waigaoqiao Free Trade Zone

• Pudong Airport Free Trade Zone

• Yangshan Free Trade Port Zone

• A total area of 29 km2

• Inaugurated in September 2013

• Extended to main business areas of

Pudong area in 2015:

• Lujiazui Financial and Trade Zone

(CBD)

• Jinqiao Export Processing Zone

(manufacturing cluster)

• Zhangjiang High Tech Park (high-

tech zone)

• A total area of 120.72 km2

Source: http://en.shftz.gov.cn/

What does the SHFTZ change ?

• All companies (regardless of nationality) are given National Treatment

• Negative List replaces Foreign Investment Catalogue:

• Investment in sectors not included in the list no longer subject to MOFCOM approval (only

registration)

• Certain sectors liberalised:

Sector Examples of liberalisation

Financial services Slightly easier to set up foreign-invested banks

Shipping services Reduction of domestic ownership requirements

Value-added telecoms

services

Progressive opening of the sector

Gaming consoles Sales of gaming consoles (retail and wholesale) allowed

Legal services Right to host PRC lawyers seconded from domestic firms

Travel agents Right to establish JVs for overseas tourism

Artists’ agents, Cultural

entertainment venues

Progressive lifting of restrictions

Continuing education JVs allowed

Medical institutions Wholly foreign-owned medical institutions are allowed

What does the SHFTZ change ?

• Foreign investment: Approval & Registration system replaced by “One-stop shop”:

• FTZ Management Committee, AIC, tax bureau and bureau of quality supervision joint service

• Application process reduced from 29 working days to 4 working days

• “annual inspections” replaced by record-filing

• Outbound investment:

• Simple “filing” procedure for outbound investment

• To be completed in 5 working days once filing application submitted

• Financial reforms:

• Interest rate liberalization;

• Cross-border RMB payment and foreign exchange management

• Development of international financial institutions

• Favorable tax policies:

• Payment of individual income tax by instalment for stcok-options (incentive for startups)

• Exemption of VAT for import of aircrafts

• Etc

New Free Trade Zones:

Do they matter ?

• Three new Free Trade Zones have been announced:

• Guangdong Free Trade Zone, covering:

• Guangzhou Nansha New Area

• Shenzhen Qianhai Development Zone

• Zhuhai Hengqin New Area

→ special lifting of restrictions for HK/Macau investors (in shipping, travel agency services, healthcare

providers)

→ likely to be relevant for ordinary manufacturing and shipping

• Fujian Free Trade Zone, covering areas in:

• Xiamen

• Pingtan

• Fuzhou

→ likely to be used as a connection point for Taiwan and attract Taiwanese investment

• Tianjin Free Trade Zone, covering:

• Tianjin Port

• Tianjin Airport

• Binhai New Area

→ likely to be relevant for high-tech manufacturing and financial services, integrated in the

Beijing/Tianjin/Hebei

New Free Trade Zones:

Do they matter ?

• These new Free Trade Zones will follow the general approach of the

Shanghai Free Trade Zone:

• “Negative list”

• Simplified business registration process

• Simplified customs and tax formalities

• Better financial tools

• However, they various commercial / business specificities are already largely in

existence and their “general focus” is derived from reality

• i.e. if you know where you should have accessed the market from, the new Free

Trade Zones should not change your perception.

• For companies which have not yet entered the market, choosing one of the Free

Trade Zones provided that the location makes sense from a business perspective is

a sound option.

• But expect that the benefits available in Free Trade Zones will be rolled out to the

rest of the country fairly soon – partly as a result of investment agreements being

negotiated.

2014 New Negative List and

Foreign Investment Catalogue

• New Negative List 2014: from 190 to139 restricted sectors, with some (limited)

improvements in:

• Transportation (especially maritime transport)

• Healthcare (small-scale hospitals)

• Retail

• Financial services micro-credit, guarantee companies)

• Telecommunications services

• Real estate (secondary market services)

• New Foreign Investment Catalogue 2015: limited developments, mainly cosmetic

changes although liberalisation of:

• E-commerce

• Certain pharmaceutical and medical products (TCM products)

• Some agricultural sectors

• Overall, mainly a game of numbers, with few industries that really matter to foreign

investors being liberalised.

Current PRC Foreign

Investment Law Regime

• Three FIE Laws

• Sino-foreign Equity Joint Venture Enterprise Law

• Sino-foreign Cooperative Joint Venture Enterprise Law

• Wholly Foreign-invested Enterprise Law

• Other laws and regulations

• Implementing rules of the Three FIE Laws

• Foreign Investment Industrial Guidance Catalogue: Encouraged,

Restricted, Prohibited and Permitted

• Other regulations and rules: Circular No.10; Provisions regarding

the Transfer of the Equity Interests in Foreign-Invested

Enterprise etc.

New Foreign Investment Law:

good news or bad news ?

• Published by MOFCOM on January 19, 2015

• Public consultation ended on February 17, 2015

• Expected to be passed during this Congress (i.e. before

2018)

• Calendar strongly related to the negotiation of US and

EU investment agreements

The good

• Liberalize the system: Chinese governmental approval process no longer required

• Simplify the process for foreign investors in setting up their business presence in China

Liberalization of Market

Entry

• “Prohibited” category – Foreign investors are barred from investing

• “Restricted” category – Still subject to governmental approval

Negative List

• JVC and AOA will no longer need to seek governmental approvals

• Investments will be more commercial and flexible

Approval Process

The bad

• Much broader– including greenfield, M&As, shareholder loans, acquisitions of mining rights and concessions, and a variety of contractual arrangements

•Possibily of « conditional approval »

Scope of Foreign

Investment

• “Who is in control” vs “Who owns the entity”

• Considered to be investing into China if an offshore transaction results in the transfer of the actual control of a Chinese domestic entity to the foreign investor

Definition of Foreign

Investors

• All investment contracts entered into by foreign investors to be performed in the territory of China shall be governed by Chinese law.

Governing Law

The very bad

• Widely used in foreign investments into certain sensitive industry sectors

• existing VIEs to be reviewed on a case-by-case basis

VIE Structure

• Regular reporting to Chinese authorities in relation to their operations and financial performances

• Wider reporting obligations than annual inspection

Regular Reporting

• Very wide scope

• Little transparency

National Security Review

The future EU – China investment

agreement: What is in it for me ?

• Both the US and EU have been negotiating Investment Agreement with

China for several years and are now at the drafting stage.

• EU already had 26 BITs in place, mainly dealing with investment protection

• The new Comprehensive Investment Agreement will deal with much more

than investment protection:

• National Treatment

• Negative List and Market Access

• Indirect restrictions / discrimination prevention (licensing requirements, etc.)

• Investor/State dispute resolution

• If negotiations are successful, investors can expect:

• Better market access

• Better transparency

• Unified protection against expropriation

• Chinese side has long viewed these negotiations as prelude to a Free Trade

Agreement.

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