Foreign Investment Bulletin.

Legal News & Analysis – Asia Pacific - China – International Trade

6 May, 2015

 

This bulletin covers the following important developments. The State Council further liberalized the services industry for service providers of the Hong Kong Special Administrative Region (“Hong Kong”) and Macao Special Administrative Region (“Macao”). The China Banking Regulatory Commission (“CBRC”) revised the Implementing Rules of the Administrative Regulations of the People’s Republic of China on Foreign-invested Banks (“Implementing Rules”). To further promote the foreign-invested lease industry, the Ministry of Commerce (“MOFCOM”) supplemented the Measures on the Administration of the Foreign-invested Lease Industry.
 
The State Council Further Liberalized The Service Industry For Hong Kong And Macao Service Providers In Guangdong Province
 
In order to adopt more preferential policies for Hong Kong and Macao service providers in Guangdong province and implement two agreements1 , on March 3, 2015, the State Council promulgated the Decision of the State Council on Temporarily Adjusting Relevant Administrative Examination and Approval Measures and Special Market Entry Management Measures Applicable to Hong Kong and Macao Service Providers in Guangdong Province (“Decision”).
 
Background
 
In 2003, Mainland China entered into the Closer Economic Partnership Arrangement (“CEPA”) with Hong Kong and Macao respectively. By August 2013, to further strengthen the cooperation between Mainland China and, respectively, Hong Kong and Macao, Mainland China had entered into ten supplementary agreements to CEPA with each jurisdiction.
 
On December 18, 2014, in order to realize the liberalization of trade in services, Mainland China, Hong Kong and Macao resolved to enter into the Agreements. To implement such Agreements, the State Council promulgated the Decision and temporarily adjusted the administrative approval and the market entry measures for Hong Kong and Macao service providers in Guangdong Province.
 
Legal Review
 
According to the Agreements, the approval authority will approve encouraged projects and restricted projects where the majority of shares (including controlling interests) must be held by Mainland Chinese investors under the Catalogue for the Guidance of Foreign Investment Industries. The remaining investment projects will be handled by the same authority and follow the same procedures as projects invested by Mainland Chinese investors. Further, the agreements and Articles of Association related to the establishment and alteration of the companies set up by Hong Kong and Macao service providers do not need to be approved. These agreements and Articles of Association only need to be filed with the approval authority, with the following two exceptions:
 
(1) reserved restrictive measures under Article 8 of Chapter IV and the establishment and alteration of a company or a financial institution in the telecommunications and cultural services sectors shall be handled in accordance with the existing foreign investment laws and regulations and other relevant provisions; and
 
(2) the establishment and alteration of commercial presence in forms other than companies shall be handled in accordance with the relevant existing provisions.
 
To implement the Agreements, the State Council promulgated the Decision and temporarily adjusted the administrative approval and the market entry measures in Guangdong Province. The Decision temporarily adjusts the relevant administrative approval and market entry measures (e.g., relating to qualification, restrictions on shareholding percentages and business scope), which are stipulated under a number of administrative regulations and documents2 . The relevant competent department of the State Council and the People’s Government of Guangdong Province will formulate the regulations with respect to the services provided by Hong Kong and Macao service providers in Guangdong province.
 
It is notable that, for education services, Hong Kong and Macao service providers are allowed to establish wholly foreign-owned non-academic vocational training institutions in Qianhai, Nansha, Hengqin of Guangdong province, and enroll students as the local vocational training institutions.
 
Next Step
 
The realization of the Agreements depends on whether the relevant departments of the State Council and government departments in Guangdong province will timely formulate the corresponding regulations to implement the Decision. It is also important to pay attention to when the liberalization of trade in services in Guangdong will be spread nationwide.
 
CBRC Revised The Implementing Rules
 
To comply with the Administrative Regulations of the People’s Republic of China on Foreign-invested Banks (2014 Revision) (“Foreign-invested Banks Regulations”), CBRC revised the Implementing Rules and solicited public comments on March 12, 2015.3
 
Background
 
In 2014, the State Council revised the Foreign-invested Banks Regulations, the amendments included: (1) removal of the requirement to establish a domestic representative office prior to establishing a business institution; (2) easing of the restriction on conducting Renminbi business by business institutions: (i) shortening of the business operation term from more than 3 years to more than 1 year; (ii) removal of the requirement to realize profit for two consecutive years before filing an application; and (3) removal of the limitation on the minimum working capital that the head office should grant to domestic branches. In the same year, CBRC formulated the Implementing Measures on the Administrative Licensing of Foreign-invested Banks accordingly.
 
 
Aiming to comply with the Foreign-invested Banks Regulations and the Implementing Measures on the Administrative Licensing of Foreign-invested Banks, and to perfect the text of certain provisions, CBRC revised theImplementing Rules.4
 
Legal Review
 
CBRC revised 58 provisions of the Implementing Rules, among which, 3 provisions were revised in accordance with the Foreign-invested Banks Regulations; 42 provisions were revised in accordance with the Implementing Measures on the Administrative Licensing of Foreign-invested Banks; the text of 13 provisions was perfected. The number of the provisions of Implementing Rules was reduced from 134 to 100. CBRC deleted the provisions that were duplicated in the Implementing Measures on the Administrative Licensing of Foreign-invested Banks. The notable amendments include the following:
 
In terms of market entry, CBRC inserted into the Implementing Rules, three circumstances under which companies cannot be shareholders of wholly foreign-invested banks or Sino-foreign joint venture banks: (1) cash flow volatility is significantly influenced by the economic environment; (2) the debt-to-asset ratio and the financial leverage ratio are higher than industry averages; and (3) the company holds for other parties any shares of wholly foreign-invested banks or Sino-foreign joint venture banks.
 
In terms of business, among other amendments, CBRC revised the provisions relating to the temporary business cessation of business institutions and inserted a list of application documents for business institutions to apply to provide Renminbi services or expand thecustomer scope of Renminbi services.
 
Next Step
 
CBRC needs to further interpret how to identify situations where “cash flow volatility is significantly influenced by the economic environment” and “the debt-to-asset ratio and the financial leverage ratio are higher than industry averages”. Otherwise, such criteria will probably hinder foreign investment.
 
MOFCOM Further Promotes The Foreign-invested Lease Industry
 
To further promote the foreign-invested lease industry, MOFCOM supplemented the Measures on the Administration of the Foreign-invested Lease Industry, and solicited public comments on the draft Supplementary Rules on March 24, 2015.5
 
Background
 
In 2013, the State Council decided to liberalize the financial services sector in the Shanghai Free Trade Zone. After almost two years of pilot reforms, the Shanghai Free Trade Zone has accumulated certain replicable experiences in the financial services sector and other sectors. The State Council decided to promote nationwide these replicable experiences. For example, the State Council asked MOFCOM to implement the following changes before June 30, 2015: (1) to allow financing lease companies to engage in the commercial factoring business that related to the companies’ primary business and (2) to removethe restrictions on the minimum registered capital of subsidiaries established by financing lease companies. In these circumstances, and taking the Agreements into consideration, MOFCOM drafted the Supplementary Rules to supplement the Measures on the Administration of the Foreign-invested Lease Industry.
 
Legal Review
 
The Supplementary Rules amend the Measures on the Administration of the Foreign-invested Lease Industry. The notable amendments include the following.
 
In terms of market entry, MOFCOM removed the requirement that the registered capital of a foreign-invested financing lease company be not less than USD 10m. MOFCOM also removed the restrictions on the minimum registered capital of the subsidiaries established by financing lease companies. In addition, MOFCOM inserted new requirements for the primary investor (the largest shareholder or the actual controller), including: (1) the background of the primary investor must be related to finance, manufacturing, investment banks, private equity and other institutions or the primary investor must have experience in financial leasing, (2) the primary investor must be credible, and (3) the primary investor must engaged in actual operations.
 
In terms of approval, the approval and management authority for the foreign-invested lease industry has been decentralized from the MOFCOM to the provincial level and the period for approving a foreign-invested lease companyand a foreign-invested financing lease company has been shortened from 45 working days to 20 working days. For lease companies set up by Hong Kong and Macao service providers, the agreements and Articles of Association related to the establishment and alteration of these companies do not need to be approved. These agreements and Articles of Association only need to be filed with the approval authority.
 
In terms of investment and business scope, MOFCOM raised the threshold of intangible assets (e.g., software and technology attached to the leased properties) from no more than one half to two-thirds of all leased assets. Also, MOFCOM allowed the financing lease companies to engage in the commercial factoring business that related to the primary business of the companies.
 
End Notes:
 
1 The agreements refer to the Agreement between Mainland China and Hong Kong on Achieving the Basic Liberalization of Trade in Services in Guangdong Province under the Framework of Mainland China and Hong Kong Closer Economic Partnership Arrangement and the Agreement between Mainland China and Macao on Achieving the Basic Liberalization of Trade in Services in Guangdong Province under the Framework of the Mainland China and Macao Closer Economic Partnership Arrangement (“Agreements”).
 
2 Such administrative regulations and documents consist of the Administrative Provisions on Foreign-invested Telecommunications Enterprises, the Regulations of the People's Republic of China on Sino-foreign Cooperation in Running Schools, the International Maritime Regulations of the People's Republic of China, the Regulations on the Administration of Entertainment Venues, the Regulations on the Administration of the Credit Investigation Industry, the Notice of the General Office of the State Council on Forwarding the Opinions of the Ministry of Culture and Other Relevant Departments on Launching Special Campaigns against Electronic Games Business Venues (Guo Ban Fa [2000] No. 44) and the Provisions on Foreign Investment in the Civil Aviation Industry
 
3 http://www.cbrc.gov.cn/chinese/home/docView/56731B78C84D438C 99F59ABB1E96297F.html
 
4 http://www.cbrc.gov.cn/chinese/home/docView/81C4CFCBC0924A43 97331ECAE1361125.html
 
5 http://www.chinalaw.gov.cn/article/xwzx/tpxw/201503/201503003987 68.shtml
 
Jun He 4 
For further information, please contact:
 

Catherine Miao, Partner, Jun He 

miaoqh@junhe.com

 

Vivian Pan, Jun He 

panym@junhe.com

 

Yuming Li, Jun He 

liyuming@junhe.com