China - Foreign Investment Bulletin April-May 2017.
Legal News & Analysis - Asia Pacific - China - International Trade - Regulatory & Compliance
3 July, 2017
The Ministry of Transport (“MOT”) and other two state ministries jointly promulgated the Sixth Supplementary Regulation on the Regulation of Foreign Investment in the Civil Aviation Industry, to further open up the civil aviation industry to Hong Kong and Macau service providers.
Five departments including the Ministry of Commerce (“MOC”) issued opinions to further promote the Comprehensive Pilot Program and the Trial of the New Open Economic System in 12 areas.
China Insurance Regulatory Commission (“CIRC”) solicits public comments regarding the amendment of Detailed Rules for Implementation of Regulations of the PRC on the Administration of Foreign-invested Insurance Companies and four other regulations. CIRC will cancel the notarization requirement for application materials.
The State Internet Information Office (“SIIO”) amended the Provisions for the Administration of Internet News Information Services. However, involvement in internet news information services by foreign enterprises is still restricted.
The People’s Bank of China (“PBOC”) formally announced that the opening of Bond Connect will initially be limited to “Northbound trading”. Both the Mainland and Hong Kong infrastructure institutions issued a joint announcement, specifying the custody and settlement requirements for the Bond Connect.
The Ministry of Commerce (“MOC”) solicits public comments regarding the Administrative Measures for the Record-filing of the Incorporation and Changes of Foreign-invested Enterprises. Foreign investors taking over domestic enterprises may be subject to record-filing system.
1. Further Opening Up of the Civil Aviation Industry to the Hong Kong and Macau Service Providers
On April 1, 2017, the MOT, the MOC and the National Development and Reform Commission (“NDRC”) jointly promulgated the Sixth Supplementary Regulation on the Regulation of Foreign Investment in the Civil Aviation Industry (the “Sixth Supplementary Regulation”). This regulation will further open up the civil aviation industry to Hong Kong and Macau service providers and will be effective from May 1, 2017.
On May 31, 2016, the State Council issued the Decision on the Temporary Adjustments Regarding Relevant Regulatory Approval and Special Permit Management Measures for Hong Kong and Macau Service Providers, further opening up the Mainland’s service industry to Hong Kong and Macau. This Decision temporarily adjusted the special management measures for permitting Hong Kong and Macau service providers, allowing them to participate in the air freight support services that were regulated under the Regulations on Foreign Investment in Civil Aviation Industry. In addition, this Decision required the Civil Aviation Administration of China (“CAAC”) to formulate concrete management plans and solutions.
On July 1, 2016, the State Council issued Decisions on Temporary Adjustments of Relevant Administrative Regulations, the State Council Documents and State Council Approved Regulatory Decisions in the Free Trade Zone, temporarily suspending the implementation of its content. This Decision exclusively allowed Foreign-invested Enterprises (“FIEs”) to invest and establish air transport sales corporations; allowed exclusively FIEs to invest and establish projects regarding air freight warehousing, ground services, inflight meals, and parking lots; relaxed the restriction that requires shares of foreign-invested general aircraft maintenance to be controlled by the Chinese party; canceled the requirement that foreign-invested aviation maintenance projects have to undertake business from the international maintenance market; and required the CAAC to draft the relevant management solutions.
1.2 Legal Review
The Sixth Supplementary Regulation made temporary adjustments in two respects, aiming to encourage Hong Kong and Macau service providers to develop the civil aviation industry in Mainland China.
This Sixth Supplementary Regulation allows Hong Kong and Macau service providers to invest in aircraft maintenance, inflight meals, air freight storage, parking lots and ground services projects through sole proprietorship (excluding projects relating to security); cancelled the Economic Needs Test that was required for corporations to obtain their charter under the joint venture Computer Reservation System (“CRS”) that was set up by Hong Kong and Macau service providers.
Within the pilot Free Trade Zones, the Sixth Supplementary Regulation exclusively allowed FIEs to invest and establish civil aviation sales agency; exclusively allowed FIEs to invest and establish air freight warehousing, ground services, inflight meals and parking lot projects; relaxed the restriction that requires shares of foreign-invested general aircraft maintenance to be controlled by the Chinese party; and canceled the requirement that foreign-invested airplane maintenance projects have to undertake business from the international maintenance market.
1.3 Next Steps
In January 2017, the State Council relaxed the restrictions on permitting foreign enterprises to invest in the service and manufacturing industries. We need to continue to monitor the issues of whether this Sixth Supplementary Regulation was applied only to Hong Kong and Macau service providers, and whether the implementation of such Regulation will also be opened up to other foreign investors.
2. Five departments including the Ministry of Commerce issued a joint announcement on promoting the comprehensive pilot programs for a new system of open-economy.
On April 7, 2017, the MOC, the NDRC, the PBOC, the General Customs Administration of China (“GACC”), and the General Administration of Quality Supervision (“AQSIQ”) jointly issued Several Opinions on Further Promoting the Comprehensive Pilot Program and Trial of the New Open Economic System (“Opinions”), requiring relevant departments to support this pilot program in building a new system of open-economy in 12 areas.
In May 2015, the Central Committee of the Communist Party of China, and the State Council jointly issued Several Opinions on Building a New Open-Economy System, promoting a new phase of high standards for opening-up reforms. To implement the essence of this document fully, the MOC and the NDRC established 12 pilot areas, including Jinan City, Nanchang City, Tangshan City, Zhangzhou City, Dongguan City, Fangcheng Port City, and Pudong New District, Liangjiang New Area, Xixian New District, Dalian Jinpu New District, Wuhan Metropolitan Area and Suzhou Industrial Park, for a two-year pilot program for constructing a new system of open-economy in these areas from May 2016 (“Pilot Program”).
2.2 Legal Review
The Opinions set forth 13 requirements, aimed at strengthening the overall plans for the top-level design and ground-level implementation, thereby promoting the effectiveness of the Pilot Programs.
The Opinions support these pilot areas to further explore and expand the convenience of trading and investment, promoting “pipe service” reforms, laying a strong foundation and accumulating experiences for the construction of a new system of open economy. The main measures that have been taken include: innovating the management model of verification in processing trade; creating the rapid custom clearance channel for ports and custom special supervision areas; building the experimental reform zone for inspection and quarantine (national inspection zone); accelerating the building and sharing of information system in the pilot zones; perfecting the investment record-filing method for Hong Kong and Macau providers; supporting foreign invested banks in establishing domestic branches; supporting private enterprises and foreign-invested financial institutions in jointly establishing Sino-foreign joint venture banks; allowing qualified foreign enterprises to issue RMB denominated bonds domestically and to initiate cross-border RMB two-way cash pool businesses with multinational corporations; supporting the border tourism experimental zones and cross-border tourism cooperation zones; and cultivating new spots for border tourisms.
2.3 Next Steps
Compared to the Pilot Free Trade Zone which was ratified by the State Council and implemented by the provincial governments, several regulatory approvals might involve temporary adjustments of the law and regulations. The pilot areas are set by the MOC, the NDRC and other state departments, and executed by the municipal and district-level governments. Any innovative measure that renders assistance shall be subject to the existing legal framework. Working in conjunction with each other, these two intend to provide replicable experiences in building a new system of open economy.
3. CIRC solicits public comments regarding Rules on the Administration of Foreign-invested Insurance Companies. CIRC may cancel the notarization requirement for application materials.
On April 24, 2017, CIRC solicits comments from the public regarding the Amendment of Detailed Rules for Implementation of Regulations of the PRC on the Administration of Foreign-invested Insurance Companies and other four regulations (“Draft for Comment”). This comment solicitation ends on June 1, 2017.
On April 27, 2015, the General Office of the State Council issued the Notice on Clearing and Regulating the State Council’s Relevant Administrative Approval’s Agency, which plainly states that the approval authority cannot require applicants to entrust agencies to provide any service or require applicants to provide any document from the relevant agency, except those clearly stipulated in law, administrative regulations, decisions by the State Council and relevant regulations in accordance to the Administrative License Law.
To implement the State Council mandates concerning the clearing and regulating agency services approved by the administrative agencies, the CIRC decided to amend provisions in four regulations including Detailed Rules for the Implementation of the Regulations of the PRC on the Administration of Foreign-invested Insurance Companies.
3.2 Legal Review
The Draft for Comment involves four regulations, which are (1) the Detailed Rules for the Implementation of the Regulations of the PRC, (2) Rules on Administration of Representative Offices of Foreign Insurance Institutions, (3) Administrative Measures for Subordinates Term Debts of Insurance Companies and (4) the Administration of the Office Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies. There are four main aspects to these amendments:
First, it has lifted the requirement that foreign-invested insurance companies’ application materials have to be notarized in the legally established notarization office in its resident country or region.
Second, it has lifted the requirement that foreign insurance institutions’ domestic branches’ Business Permit Certificates, Certificate of Incorporation and Registration Certificates’ photocopies have to be notarized in the legally established notarization offices in its resident country or region.
Third, it has lifted the requirement that when raising subordinate debt, insurance companies have to submit a legal opinion; its last three years of financial statements and solvency reports; and most recent quarterly-end financial statements and solvency reports.
Fourth, it has lifted the requirement that the insurance companies’ reports regarding its directors, supervisors and executive managers’ qualifications submitted in Chinese (originally written in foreign language) have to be notarized by a Chinese notarization office.
3.3 Next Steps
In recent years, administratively approved agency services have played an important role in promoting governmental compliance with the law and providing technical support for corporations and the public. However, there are also several problems related to abundant and time-consuming procedures, arbitrary charges and a strong tendency to monopolize the market, reducing the effectiveness of the administrative approval system’s reforms to a certain extent. Therefore, these problems have increased the burdens on corporations and the public, and disrupted the market order. The amendments that CIRC made with regards to four regulations such as the Detailed Rules for Implementation of Regulations of the PRC on Administration of Foreign-invested Insurance Companies are the concrete actions taken to implement the State Council’s mandate regarding clearing and regulating administrative approval for agency services. These amendments will facilitate the simplification of administrative approval procedures in the insurance industries, improving the efficiency of the administrative approval process, reducing the burden on corporations and further promoting the healthy development of the insurance industry.
4. The State Internet Information Office (“SIIO”) amended the Regulations for the Administration of Internet News Information Services. Foreign enterprises are still restricted from involvement in internet news information services.
To implement Cybersecurity Law of the PRC, on May 2, 2017, the State Internet Information Office amended the Regulations for the Administration of Internet News Information Services (“New Regulation”) and on May 22, 2017, announced the new Detailed Rules for the Implementation of Internet News Information Services. However, foreign enterprises are still restricted from involvement in internet news information services. This New Regulation and its Detailed Rules for Implementation will be in effect from June 1, 2017.
To regulate internet information services, the State Council issued the Regulation on Internet Information Services of the PRC on September 25, 2000. This Regulation requires those service providers in the business of news internet information to obtain approval from the relevant regulatory authorities prior to obtaining its Business Permit or complying the Record-filing Procedures.
To regulate domestic internet news information services, the Ministry of Information announced the Regulation on Internet Information Service of the PRC (“Original Regulation”) on September 25, 2005. According to the Original Regulation, “no organization is allowed to establish Sino-foreign joint ventures, Sino-foreign joint ventures and foreign operators of Internet news information services unit. Internet news information service providers and foreign joint ventures, Sino-foreign joint ventures and foreign-owned businesses involved in Internet news information services cooperation, should be reported to the Office of National Internet Information Security Assessments”.
To ensure cybersecurity and other interests, the Standing Committee of the National People’s Congress promulgated the first comprehensive statute, the Cybersecurity Law of the PRC, on November 7, 2016. This Cybersecurity Law will be in effect from June 1, 2017.
In addition, for the implementation of Cybersecurity Law and other relevant regulations, the National Internet Information Office amended primarily on licensing for internet news information services, management systems, the duties of internet news information service providers. The New Regulation mainly amended the following:
First, it has expanded the definition of “news information”. This new regulation removed the restriction under the original Regulation that limits the content of “news information” to “political types of news information”. In accordance to this regulation, “news information” includes reports and comments related to political, economic, military, diplomatic and other social public affairs, and also includes reports and comments regarding social emergencies.
Second, it has expanded the regulatory scope. The service provision requires that internet news information services licenses to be obtained by any entity providing internet news information to the public which includes (but not limited to) websites, Apps, forums, Blogs, Microblogs (twitters), and Wechat Official Accounts, instant message, and live video streaming.
Third, it classified different licenses for various internet news information services. This New Regulation divides internet news information services into different categories, namely editorial publishing services, reprinting services, and communication platform services. Editorial publishing services refer to the collecting, editing, producing and publishing process for news information. Reprinting services refer to selecting, editing and publishing news information services that have already been published by other news providers; communication platform services refer to the services that provide a platform for users to transmit news information.
This New Regulation on Internet Information Service of the PRC and its Detailed Rules and Cybersecurity Law will go into effect on the same day.
4.2 Legal Review
This New Regulation and its Detailed Rules on Implementation adopted provisions in the Original Regulation regarding foreign enterprises’ involvement in internet news services and affect those foreign enterprises in the internet news information service in the following ways:
Firstly, no organization can establish a Sino-foreign joint venture, Sino-foreign contractual joint venture, or foreign-invested internet news information service company. When the business entity applies for a license to provide internet news information services, it should disclose whether its share structure includes any foreign-invested components. In addition to the share structure diagram that traces back to the natural person, institutional organization and wholly state-owned company, the applicant also has to submit explanations regarding the actual controlling person and letter of commitment affirming no foreign enterprise involvement.
Secondly, since the New Regulation has expanded the definition of “news information” and expanded the regulatory scope of internet news information services, this has led to Sino-foreign joint ventures, or Sino-foreign contractual joint ventures and wholly foreign invested enterprises to be more cautious when dealing with internet news information service companies involving internet news information services.
Finally, when Sino-foreign joint ventures, contractual joint ventures or wholly foreign invested enterprises cooperate with internet news information service providers involves news information service businesses, they should report it to State Internet Information Office to have a safety assessment and submit all materials related to the joint venture enterprises or cooperative businesses. If such cooperation might cause internet news information service providers to no longer satisfy the licensing requirements, then it shall fail the safety assessment.
4.3 Next Steps
The Detailed Rules for the Implementation of Internet News Information Services has not specified how to assess whether the cooperation of Sino-foreign joint ventures, contractual joint ventures or wholly foreign invested enterprises with internet news information service providers is related to internet news information service business and cause the internet news information service providers to no longer satisfy the requisite requirements. This provides State Internet Information Office substantial discretion in making safety assessments. Thus, we need to monitor further announcements and information about the implementation of Detailed Rules on the safety assessments.
5. The POBC and Hong Kong Monetary Authority officially announced the opening of “Bond Connect”, which will be initially limited to Northbound trading only.
On May 16, 2017, PBOC and Hong Kong Monetary Authority jointly issued an Announcement on the Collaboration in Establishing Mutual Bond Market Access between Hong Kong and Mainland China, agreed to open this mutual connection and cooperation between the Mainland and Hong Kong bond markets (“Bond Connect”). On May 19, the Shanghai Clearinghouse and the Hong Kong Central Moneymarkets Unit (“CMU”) issued a joint announcement regarding the custody and settlement services for the Bond Connect. On May 31, the Central Bank announced the Interim Measures on Mainland and Hong Kong Bond Market Mutual Connect and Collaboration (“Draft for Comment”), soliciting public comments regarding the requirements for foreign investors to participate in the Bond Connect’s custody and settlement services.1
To prepare and facilitate the implementation of the “Bond Connect” in both Hong Kong and Mainland is one of the policy objectives that was specified in the two sessions (NPC & CPPCC) and the State Council’s Advice regarding “Works on the Implementation of the Government’s Work’s Report on the Prioritized Divisions”. This Joint Announcement is the first document on how the relevant authority should promote and implement this policy objective.
The Mainland China’s bond market is divided into the Inter-bank Bond Market and Market-in-the-Field Bond Market. The former market is an over-the-counter (“OTC”) market, which encompasses more than 80% of the bond trading volume. The latter market is mainly for retail and has a relatively small trading volume, constituting less than 10% of the overall trading volume.
The opening-up policy in the Mainland China’s Inter-bank Bond Market has been in place since 2015. The PBOC’S No. 3 Announcement  (“No.3 Bulletin”) that was issued and implemented in 2016, expands the scope of foreign institutional investors that satisfied the relevant requirements to include: 1) financial institutions that were registered and established overseas such as commercial companies, insurance companies, securities companies and fund management companies and other asset management institutions; 2) the investment products that were issued by the above-mentioned financial institutions (in full compliance with law and regulations) to its clients; 3) pension funds, charity funds, and donation funds that other long-term institutional investors were approved by the PBOC. Until now, those foreign investors who could invest in the Mainland China’s Inter-bank Bond Market were limited to those medium- to long-term institutional investors or central-bank like institutions for asset-management purposes specified by the No.3 Bulletin.
5.2 Legal Review
First, the Joint Announcement specified that the Bond Connect will initially be limited to “northbound trading” only. This means that foreign investors will invest in the Mainland China’s Inter-bank Bond Market via the infrastructure institutional arrangements for mutual access between Hong Kong and Mainland China regarding trading, custody and settlement. As for “Southbound trading”, which refers to domestic investors seeking to invest in Hong Kong’s bond market via the infrastructure arrangement between the two places, it will be implemented later on.
Second, the Joint Announcement specified, that “Northbound trading” will comply with the current Mainland Inter-bank Bond Market opening-up policy framework, hence investors and trading tools will be in compliance with those specified by the PBOC. In addition, the “Northbound trading” has no limit as to the investment quota. This implies that, those foreign investors who could invest directly in the Mainland China’s Inter-bank Bond Market will still be those specified by the No.3 Bulletin such as central-bank like institutions for asset-management purposes or medium- to long- term institutional investors. “Northbound trading” will facilitate the existing framework that allows foreign investors to invest in the domestic Inter-bank Bond Market. In addition to setting up a domestic bank account to trade, it also provides foreign investors channels via infrastructure building institutions, multiple custody methods, and added more channels for the investments in the domestic Inter-bank Bond Market.
The Joint Announcement issued by the Shanghai Clearing House and CMU, specified that “the multiple-layered custody method employed by the Northbound trading will be regarded as the primary registered custody institution by the Shanghai Clearing House. CMU will be the secondary custody institution;
All products registered under the Shanghai Clearing House’s custody are investment subject matters under Bond Connect. Shanghai Clearing House, CMU and foreign investors via the Bond Connect seeking to invest in Mainland Inter-bank Bond Market will perform the information reporting obligations required by the relevant regulatory authorities.
5.3 Next Steps
The Bond Connect will be limited to “Northbound trading” and operates within the established opening-up framework of the Mainland Inter-bank Bond Market. We need to continue to monitor the issue of when “Southbound trading” will be implemented and be used as a channel that enables domestic institutions to invest in overseas bond markets. Additionally, we need to monitor the expansion of the scope of investors that allows more diversified portfolio investors to trade bonds in the over-the-market market, via establishing a special trading account in appointed banks in the Mainland and/or Hong Kong.
6. The MOC solicits public comments regarding the Administrative Measures for the Record-filing of the Incorporation and Changes of FIEs. Foreign investors taking over domestic enterprises may subject to Record-filing administration.
The MOC drafted Administrative Measures for the Record-filing of the Incorporation and Changes of FIEs (Draft for Comment) (“Record-filing Draft”), and has started the public comment solicitation process from May 27 2017.2 This Record-filing Draft will include foreign investors taking over domestic enterprises within the scope of the record-filing administration.
According to the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors, foreign investors taking over domestic enterprises will obtain permissions from the approval authorities. Domestic companies, corporations and natural persons that use a legally established or controlled companies’ name overseas to take over its related domestic companies (“acquisition of an affiliate”), should apply for approval from the Ministry of Commerce. If foreign investors employ a sizable medium- to long-term strategic takeover investment to listed companies (“strategic investment”), they shall comply with the procedural requirements issued by the Securities Regulatory Institutions of the State Council, in accordance with the Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies.
Since October 1, 2016, the establishment and amendment of foreign-invested corporations will be governed by the record-filing management system instead of the prior approval system, except for those special management measures for state-regulated implementation. But for foreign enterprises’ M&A establishing and amending corporations, they will not employ this Record-filing Administration, and will still have to obtain approval from relevant institutions in accordance with the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investor, and Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies. The Record-filing Draft will include the foreign investors taking over domestic enterprises within the scope of record-filing administration.
6.2 Legal Review
The Record-filing Draft made several amendments to the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors. One of the key amendments is to expand the scope of record-filing administration to include non-FIEs transforming to FIEs, such as by means of M&A or strategic investments. These enterprises should comply with the record-filing procedures. For those foreign investors investing in non-foreign invested listed companies, or those foreign-invested listed companies introducing new foreign investors as shareholders, they should comply with the record-filing procedures 30 days before or after the registration at the securities registration institution.
Basic information changes of FIEs established by M&A as well as foreign investors strategically investing in listed companies have to undertake the record-filing procedure.
When complying with the record-filing procedures for the establishment and amendment of FIEs, the Record-filing Draft added another provision requiring the submission of the FIEs and its foreign investors’ shareholder structure diagram illustrating the actual controlling person. For those involving foreign investors or using shares in overseas companies as a payment method, the Record-filing Measure also requires domestic corporations to submit the Overseas Investment Corporation’s Certificate.
6.3 Next Steps
The Record-filing Draft has not specified whether acquisition of an affiliate will be included within the scope of acceptable record-filing administration. Acquisition of an affiliate is another special form of foreign investors taking over domestic enterprises, which needs approval from the MOC. In practice, this approval has proven difficult to obtain. We need to continue to monitor this issue of whether the acquisition of an affiliate will be included in the scope of record-filing administration after the formal issuance and implementation of the Record-filing Measure.
1. For more details regarding the Draft for Comment, please see Client Briefing – PBOC Solicits Comments for Interim Measures for Administration of Bond Connect, by XIE Qing (Natasha), Wang Hui, LU Bing, JUNHE LAW REVIEW (http://www.junhe.com/law-reviews/644) June 14, 2017. The Interim Measures for Administration of Bond Connect was formally released by PBOC on June 21, 2017.
Natasha (Qing) Xie, Partner, Jun He