Foreign investment welcome in China's new advertising landscape

Several key provisions regulating the advertising industry have been promulgated since the 1990s, which is also the period when Chinese legal reform began to accelerate. There have been three key regulations issued by the Chinese government over this time period, namely the Several Rules on the Establishment of Foreign Invested Advertising Enterprise issued in 1995, the Regulation of Administration of Foreign Invested Advertising Entities issued in 2004 (which replaced the 1994 rules), and the recently issued Provisions (which replaced the 2004 regulations).

The Provisions are an attempt to not only update the 2004 regulations but also to streamline the process of establishing advertising entities.

Article 2 of the Provisions defines a foreign invested advertising enterprise (FIAE) as a Sino-foreign joint venture enterprises and Sino-foreign cooperative venture enterprises (hereinafter referred to collectively as Jointly-Operated Advertising Entities) and wholly foreign-owned advertising enterprises (the WFOAE) that conduct advertising activities in compliance with relevant laws and regulations.

The Provisions segments the approval process and oversight administration for FIAEs between the Ministry of Commerce (MOC) and the State Administration of Industry and Commerce (SAIC). SAIC or its authorised counterparts at the provincial level have been mandated as the governing oversight authorities over the advertising industry and it is also responsible for the examination and approval of any project proposal and feasibility study report submitted by a foreign company that wants to establish a FIAE in China. The MOC or its authorised counterparts at the provincial level are responsible for the examination and approval of the proposed FIAE's articles of association and, in the case of joint ventures, the joint venture contract.

Although establishment procedures vary by type of FIAE entity the foreign investor wants to establish, the following rules apply to all FIAEs:

• The investor must submit the required documents to the SAIC or the authorised local counterparts at the provincial level (the Approval AIC). As for Jointly-Operated Advertising Entities, the foreign investor must obtain pre-approval from the AIC office at the location where the FIAE will be established. The Approval AIC is required to issue the Position Paper concerning the proposed FIAE establishment within the statutory period noted in the Provision.

• The investor must then submit the Position Paper together with other required documents to the provincial level Ministry of Commerce. Subject to all application documentation being in order, the MOC will issue an Approval Certificate of the Foreign Invested Enterprise to the foreign investor.

• Subsequent to MOC approval as noted above, the foreign investor must then submit an application to the Approval AIC that includes the Position Paper, Approval Certificate of the Foreign Invested Enterprise and other documents as requested by the Approval AIC.

If the FIAE to be established is a Jointly-Operated Advertising Entity, the Chinese investor is responsible for handling the application process.

FIAEs can also establish branch offices subsequent to finalising all registration procedures to establish the FIAE, provided that all registered capital has been paid in and the annual advertising income of the FIAE for the previous year exceeds RMB20 million. Branch office establishment is accomplished by the FIAE filing a concurrent application with AIC and with the provincial level MOC. The AIC may approve or disapprove such establishment application after discussion with the provincial level MOC.

The Provisions contain specifics applicable to various types of FIAEs, such as: the investors of a jointly-operated advertising entity shall be enterprises that are engaged in the advertising business; the investor shall have been incorporated and in operation for a period of more than two years prior to the FIAE application date; and outstanding achievements have been reached (a general reputation requirement). In the case of a WFOE FIAE application, the investors shall be enterprises that primarily engage in the advertising business and have been incorporated and in operation for a period of more than three years.

The Provisions also provide that FIAE's must obtain special government approval when the investors want to transfer shares of an investor, add a new shareholder, change the business scope of the FIAE or increase/decrease the registered capital of the FIAE.

The Provisions are applicable to Hong Kong, Macau and Taiwan investors who intend to establish an advertising entity in the PRC. However, according to the Mainland and Hong Kong/Macau Closer Economic Partnership Arrangement (CEPA), Hong Kong and Macau service providers (as defined in CEPA) were permitted to establish a WFOAE in the PRC as of January 1 2004.

Comparison of the Regulation and the Previous Regime

The Provisions did make some significant changes to the 2004 regulations, particulars of which are as follows:

Approval power has been transferred to lower level authority

Local AICs at the provincial level are now authorised to approve FIAEs, whereas previously this authority was held mostly by the SAIC. Now, authorised local AICs at the provincial level are entitled to examine and approve the Project Proposal, Feasibility Study Report and other documents submitted by the investor for application and to approve the registration application.

Establishment procedures have been simplified

The Provisions appears to be an attempt to simplify the FIAE application and registration process. For example, Article 7 (2) of the 2004 regulation provided that the investor who intended to establish a WFOAE had to first submit documents as stipulated by law to the provincial level MOC, which would transmit such application materials to the Ministry of Commerce for approval. The MOC would then decide whether or not to grant the WFOAE establishment within 20 days and issue an Approval Certificate for Foreign Invested Enterprises.

The newly promulgated Provisions simplifies such procedures. Under the new rules, WFOEA application materials will be handled by the provincial level MOC, which is entitled to approve or reject the application without needing approval from the state-level MOC. In addition, the provincial level MOC must make its decision within 20 days of accepting the application and the supporting documentation. It is important to note that it will normally take the investors some time to finalise the application and supporting documentation with the provincial level MOC, and until that is done, the 20-day approval period does not commence.

Conclusion

Over the past 30 years, China has moved to loosen its control over and to encourage foreign investment in the advertising business sector but only in a very measured and incremental process.

In 1995 China issued the Several Rules on the Establishment of Foreign Invested Advertising Enterprises, when the establishment of wholly foreign-owned advertising enterprises were still forbidden in China.

The 2004 regulations integrated approval processes to allow the establishment of FIAEs regardless of the character or other features of the investor.

Two years after China joined the World Trade Organization, an advertising company controlled by a foreign investor was allowed to be established, although the foreign investor was limited to 70% of the equity interest of the FIAE. This equity holding restriction was removed in the 2008 Provisions.

By 2004, the ten largest advertising companies in the world had set up either a form of FIAE in China, most FIAEs were initially established in Shanghai³. As an example of such growth over the past couple of years, the number of employees of one Japanese advertising company has grown from ten employees to more than 300 employees.

According to a recent issue of Venture Source, in the first three months of 2008, 39 FIAEs were established with a total investment of US$719 million⁴. Among them, media and advertising companies received most of the investment. Although the global financial crisis is impacting nearly all business sectors in China, advertising companies are continuing to expand their infrastructure and they are experiencing corresponding revenue growth.

Although the Chinese advertising industry is still in its formative years of development, growth has been extraordinary when one considers the many hurdles that have been overcome to arrive at where it is today. From a regulatory prospect, although the media and entertainment sectors in the PRC remain highly regulated and, in some areas, closed off to foreign investment, issuance of the Provisions reflect an opening up in the advertising sector. Liberalisation can be seen not only in significant changes, such as opening up majority-owned JVs and WFOEs to foreign investors, but also in the streamlined and more permissive establishment procedures for FIAEs.

Endnotes

1. See, Rectification of Name of Advertising, published on Wen Hui Newspaper on Jan. 14, 1979.

2. See, Chinese Advertisement, Independent at the age of thirty. Published on Well-off Magazine.

3. See, http://www.cyol.net/rencai/content/2006-11/16/content_1574749_2.htm

4. See, http://www.xprn.com/pr/08/05/08258721-2.html