Reforming China’s Legal Administration of Foreign Direct Investments

On September 3, 2016, the Standing Committee of the National People’s Congress of the People’s Republic of China (the PRC) adopted the Decision on Changing the Wholly Foreign-Owned Enterprise Law of the People’s Republic of China and three other laws on foreign investment (the Decision).¹ This article outlines the current legal regime on the administration of foreign direct investment (FDI) in China, explains the shift from the substantial review and approval system to the record-filing system, details how the record-filing system will be implemented in China and offers our thoughts on the major issues to be further addressed for the implementation of the amendments to the four relevant laws as specified in the Decision and the final version of the Record-filing Measures.

I. CURRENT LEGAL REGIME ON THE ADMINISTRATION OF FDI IN CHINA

In the decades since the beginning of the opening-up policy in 1979, China has developed a comprehensive set of laws and regulations to regulate foreign investments, among which, the WFOE Law, the EJV Law, the CJV Law and their respective implementing rules are the key legislation, together with the PRC Company Law. In addition, there are separate rules governing various aspects of foreign investment related issues, such as acquisitions by foreign investors of PRC domestic companies, equity changes in FIEs, mergers and splits of FIEs, and re-investment in mainland China by FIEs.

By publishing the Foreign Investment Industrial Guidance Catalogue (Guidance Catalogue) since 1995,² China classifies foreign investment activities into four categories: (i) Encouraged, (ii) Permitted, (iii) Restricted, and (iv) Prohibited.³ Foreign investment in the first three categories is subject to substantial review and approval of the constitutional documents of the FIEs (such as joint venture contracts and articles of association) by the Approval Authorities before any foreign investor can register with the competent Administration for Industry and Commerce (AIC, i.e., the company registry in China) for the establishment of an FIE. Approval Authorities must approve the incorporation of FIEs and any subsequent changes to the FIEs.⁴ Certain changes to any FIE (such as amendments to the constitutional documents, equity changes and transfer and increase or decrease of total investment and registered capital) are also subject to the review and approval by the Approval Authorities.

II. A SHIFT FROM APPROVAL SYSTEM TO RECORD-FILING SYSTEM

Over the years, the approval system has faced criticisms mainly in the following aspects:

• The lengthy statutory timelines for the Approval Authorities to issue approvals, which vary from thirty to ninety business days, depending on the matters to be approved—even though, as a matter of fact, many Approval Authorities have improved their efficiency and may grant approvals within ten business days.
• The substantial review of FIEs’ constitutional documents has raised concerns by FIEs and foreign investors that the Approval Authorities can interfere with their flexibility in doing business.

The Approval Authorities have been aware of the fast-changing environment for foreign investment in China and the demands of foreign investors and FIEs for more openness, transparency and efficiency. Thus they started trials to improve the current administrative regime for FDI. From October 2013, China started certain trial pilot programs in the Shanghai Free Trade Zone, Guangdong Free Trade Zone, Fujian Free Trade Zone and Tianjin Free Trade Zone (collectively, the FTZs). Under the trial pilot programs, foreign investment in the FTZs in areas which are not on the Negative List is no longer subject to the Approval Authorities’ approval. Instead, a simple record-filing system was established.⁵ MOFCOM now believes that the trial record-filing system, which has been successfully tested in those FTZs, is ready to be applied nationwide.

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1. In addition to the PRC Wholly Foreign-Owned Enterprise Law (WFOE Law) adopted by the NPC on April 12, 1986 and amended October 31, 2000, the other three laws amended by the Decision are: the PRC Sino-Foreign Equity Joint Venture Law (EJV Law) adopted by the NPC on July 1, 1979 and amended April 4, 1990 and March 15, 2001, the PRC Sino-Foreign Cooperative Joint Venture Law (CJV Law) adopted by the NPC on April 13, 1988 and amended October 31, 2000, and the PRC Law on the Protection of Investment by Taiwan Compatriots adopted by NPC Standing Committee on March 5, 1994.
2. Amended in 1997, 2002, 2004, 2007, 2011 and 2015.
3. As a matter of fact, the Guidance Catalogue only included three categories, i.e., (i) Encouraged, (ii) Restricted, and (iii) Prohibited. Any activities not included in the Guidance Catalog are deemed to be permitted.
4. Such as changes of the registered capital and total investment amounts, registered address, business scope, director(s), supervisor(s), legal representative, equity transfer, amendment to the articles of association and joint venture contracts (for EJV and CJV), termination of FIEs, etc.
5. Based on the trial experience of the FTZs, on April 8, 2015, MOFCOM published the Administrative Measures regarding Record-filings for Foreign Investment in FTZs (Trial) (Record-filing Measures for FTZs) and the General Office of the State Council published the Special Administrative Measures (Negative List) on Foreign Investment Access to FTZs (Negative List for FTZs), both of which took effect thirty days after being published.