Issues in Shanghai's Regional HQs Legislation

A welcome feature of the Tentative Provisions is the flexibility in terms of the form a Shanghai-based regional headquarter may take. Specifically, Article 2 allows regional headquarters to be set up in the form of a wholly foreign-owned investment company (commonly referred to as a holding company) or a management company. Such a choice grants multinationals an option as to the size of their investment under current regulations; a holding company must have a minimum registered capital of US$30 million whereas a management company requires a minimum of only US$2 million. Moreover, holding companies are subject to additional stringent establishment requirements. For companies that have not already set up a holding company in China but wish to establish a regional headquarter in Shanghai, a quick solution may be the management company option.

The approval procedure for setting up a management company appears to be easier than that for holding companies, with only local rather than central level approval being required.

The Same Business Scope?

Pursuant to Article 6 of the Tentative Provisions, regional headquarters established in Shanghai may provide the following management and support services: (i) investment and operation strategy; (ii) marketing and sales services; (iii) capital operations and financial management; (iv) technical support and research and development; (v) information services; (vi) staff training and management; and (vii) other services permitted by laws and regulations.

The Tentative Provisions and its implementing rules issued in March this year (which primarily deal with the application procedures and application material requirements) do not indicate that there will be any difference between the business scope of a regional headquarter set up in the form of a holding company or a management company. Thus, all the more reason for multinationals to choose a management company over a holding company. But the devil is in the details, and in this case the main issue is the finance-related services ((iii) above).

A Noticeable Difference in Practice

In practice, Shanghai COFTEC appears to be taking the view that a management company may not carry out capital operations and financial management services, only a regional headquarter established in the form of a holding company may do so. Indeed, such services were conspicuously absent from the business scope of a well-known multinational's regional headquarter that was recently approved by Shanghai COFTEC in the form of a management company.

One possible explanation for the exclusion may be that such services fall within the purview of China's banking regulator, traditionally the People's Bank of China (PBOC) and now the China Banking Regulatory Commission (CBRC). The Shanghai government promulgated the Tentative Provisions on its own, without any input from other government bodies such as the PBOC. As an example of the potential inconsistency in policy, Article 12 of the latest holding companies regulations promulgated by MOFCOM on June 10 2003, states that a holding company may only provide financial support to its invested companies with the PBOC's approval. On the other hand, no reference has been made to the PBOC in the Tentative Provisions with respect to the provision of capital operations and financial management services. The other possible explanation could lie in the different capital requirements of a holding company and a management company.

PBOC's Regulations on Finance Companies

Officials from the PBOC indicated that they did not participate in the drafting of the holding company regulations and therefore could not provide an interpretation as to the meaning of "financial support". It should also be noted that the PBOC published its own Administration of Finance Companies of Enterprise Groups Procedures in June 2000. These Procedures clearly set out the requirements for establishing such a finance company (which is quite different from those of a holding company) and the permitted business scope.

The above is a classic example of China's piecemeal legislative development, and the practical implications of the ongoing jostling between the central and local level authorities. Indeed, while China's WTO commitments call for greater transparency, the implementation of the Tentative Provisions illustrates the continuing gap between the letter of the law and the practical realties of doing business in China.