MOFCOM loosens its grip on foreign investment

“Generally speaking, a company incorporated in China may not sell products other than the products it manufactures itself. So the FICE rules generally expand the scope of business activities for foreign invested companies in China,” says Lovells managing partner Robert Lewis.

WHERE TO NOW FOR MOFCOM?

Some lawyers claim MOFCOM's decision to delegate its powers is to not only encourage foreign investment but also to allow it to concentrate on issues such as anti-monopoly reviews, roundtrip investments, outbound investments and the regulation of real estate investments.

In other words, , MOFCOM's main function will be to concentrate on the formulation of regulations governing foreign investment and supervise the local government's implementation of such regulations. This will allow local governments to play a more active role in implementing MOFCOM's regulations, including examining and approving more foreign invested enterprises.

“The regulations are better seen as a regular adjustment, primarily for administrative efficiency purposes, although it is possible to view this as a loosening of foreign-invest regulations in some respects. Ultimately, there is a limit to the institutional resources of MOFCOM to be committed on foreign investment examination and approval. From time to time, MOFCOM tends to delegate approval authority to lower-level counterparts, in the areas it begins to feel comfortable with,” says Baker & McKenzie partner Howard Wu.

This latest decision follows other similar MOFCOM directives, including the June-issued Circular 23 which delegated review responsibility over filings of real estate foreign invested enterprises (FIEs) to provincial COFTECs.

“These new rules (Circulars 51) reflect the government's increased confidence in managing foreign investment in the wholesale and retail sectors, which were originally viewed as essential to the competition of upstream industries and the health of the overall economy,” says Robert Lewis.

THE RELATIONSHIP WITH THE PRC ADMINISTRATIVE LICENSING LAW

The two circulars were issued by MOFCOM in order to implement a decision by the State Council on October 19 2007 to remove or adjust 186 administrative licensing items. In its decision, the State Council proposed to cancel 128 items and delegate the approval authority with respect to 29 items to lower level government bodies.

The result was a reduction in what was seen as unnecessary licensing burdens for businesses in accordance with the PRC Administrative Licensing Law.

“The PRC Administrative Licensing Law sets out the provisions about the establishment of an administrative licensing, the executive organs for the administrative licensing, the procedures for the administrative licensing, supervision and check and the legal liability and so on, all of which can be applied in overseeing the process,” explains Grandall's partner Zhan Hao.

Complementing the PRC Administrative Licensing Law are other regulations and laws overseeing foreign investment in China such as the Sino-foreign Equity Joint Venture Law of PRC (中华人民共和国中外合资经营企业法) , Sino-foreign Cooperative Joint Venture Law of PRC (中华人民共和国中外合作经营企业法) and the Wholly Foreign Owned Enterprise Law of PRC. Similar to the two Circulars, these all provide details on the procedures for the administrative licensing, general supervision and ensuring of legal liability for foreign investors.

EXCEPTIONS TO THE RULE

Despite the simpler approval process there are still some sensitive matters that MOFCOM view as a central government issue.

Circular 50 stipulates that for investments exceeding US$100 million (for “encouraged permitted projects”) and US$50 million (for “restricted projects”), foreign investors are still required to apply directly to MOFCOM for approval.

However there are ways around such limits.

“Investors will now be especially keen to keep below the established thresholds of US$100million and US$50 million, and subsequently increase their interest bit by bit in a bid to avoid dealing directly with MOFCOM. This will become the game,” says Skadden Arps Slate Meagher & Flom M&A partner Jon Christianson.

“There have been many deals in the past which have been held up by MOFCOM, sometimes for no apparent good reason, and everyone is always looking for ways to avoid having to deal with them.”

There is also no mention of such thresholds in Circular 51, but it does contain conditions under which certain FICEs still require central MOFCOM approval. These include those that are engaged in the wholesaling of audio or video products or the distribution of books, newspapers and magazines. Furthermore, FICEs that distribute anything away from a fixed location, including by way of television, telephone, mail order, internet or automat, are subject to central approval.

What is not clear is the relationship the two Circulars have with the existing examination and approval of foreign invested stock companies by local government regulations. While the Interim Measures on the Formation of Foreign Invested Stock Companies (promulgated by the former Ministry of Foreign Trade and Economic Cooperation MOFTEC in 1995) currently serves as the regulatory rules for the formation of foreign invested stock companies, there are several provisions which conflict with the new PRC Company Law (2005) (中华人民共和国公司法) such as lock-up periods for non-controlling shareholders. Which law has the overriding power is a question even lawyers want answers to.

“It is unclear which provisions will prevail in practice, before MOFCOM finishes amendments to these 1995 rules,” says Jun He partner Xudong Tao.

MOFCOM'S CONFIDENCE

However what Circular 50 might do, according to Clifford Chance partner, Terence Foo is provide the impetus the IPO market has been looking for following a relatively quiet year.

"MOFCOM's delegation of the approval of foreign-invested companies limited by shares to the provincial level will be welcomed by private equity investors that make onshore investments with the aim to IPO on the A-share market,” he says.

“Traditionally, if the target company was a limited liability company as opposed to a company limited by shares, which was more commonly the case, it has to be converted into a company limited by shares before it could proceed to IPO. This conversion can now be approved at the provincial level, which means a faster path to IPO," Foo adds.

In recent years MOFCOM has loosened its grip on the examination and approval process for foreign investors into China. In 2004, the general policy was the majority of FICEs required MOFCOM approval, yet within two years the restrictions on the number and size of outlets that required central approval were relaxed. Today MOFCOM has ceded further authority to its provincial-level counterparts, retaining only the most sensitive areas as already mentioned.

“Such delegation of authority signals MOFCOM's new-found confidence in its own reporting system,” says O'Melveny & Myers' Michael Moser. “Traditionally, officials with the local counterparts of MOFCOM are often seen as too closely aligned with local interests, (but) in the past couple of years, MOFCOM has steadily centralised its internal reporting lines so that the risks of provincial authorities collaborating with local constituents to bypass central approval procedures are reduced.”

WAIT AND SEE

While many lawyers applaud the two Circulars there are some concerns as to how they will pan out in reality. Some questions have been asked such as what should happen if the business of an applicant involves two or more provinces - for example manufacturing plants in different provinces - where a situation of forum shopping for the approval authority deemed to be the friendliest could occur. In addition there could be cases where provincial commerce departments will delegate even further down the food-chain to specific approval authorities at the municipal level, where a lack of coordination or communication or an abuse of power might surface. In any case it is MOFCOM that has the right to censor and review all projects and therefore can override any of the authorities it has initially delegated power to.

For many lawyers, the best advice they can offer their clients at this point is to take a wait and see approach to see how the newly modified approval regime operates in practice. Either that or wait for the amendments to come through.

MINISTRY OF COMMERCE'S MANDATE

1. To formulate development strategies, guidelines and policies of domestic and foreign trade and international economic cooperation, draft laws and regulations governing domestic and foreign trade, economic cooperation and foreign investment, devise implementation rules and regulations.

2. To formulate development plans for domestic trade, and put forth proposals on reforming the commercial distribution system, while fostering and developing urban and rural markets.

3. To research into and formulate policies for regulating the market operation and distribution order, breaking up market monopolies and regional blockages, to set up and improve an integrated, open, competitive and orderly market system.

4. To study on and work out measures for the regulation of import and export commodities, organise the implementation of import and export quota plans, decide on quota quantity and issue licenses and to draft and implement import and export commodity quota tendering policies.

5. To formulate and execute policies concerning trade in technology, state import and export control, and policies encouraging the export of technology, to push forward the establishment of foreign trade standardisation systems.

6. To study on, put forth and implement multilateral and bilateral trade and economic cooperation policies, be responsible for multilateral and bilateral negotiations on trade and economic issues, coordinate domestic positions in negotiating with foreign parties, and to sign the relevant documents and monitor their implementation.

7. To steer the work of the commercial branches of China's Permanent Mission to the WTO, to the UN and other relevant international organisations, as well as Chinese embassies in foreign countries.

8. To organise and coordinate the work pertaining to antidumping, countervailing, safeguard measures and other issues related to fair trade for import and export.

9. To give general guidance to nationwide efforts in foreign investment.

10. To be responsible for China's foreign economic cooperation efforts. To formulate and implement policies and regulations on foreign economic cooperation, guide and monitor the regulation of overseas contract projects, labour cooperation and designing and consulting businesses.

11. To be responsible for China's efforts in providing aid to foreign countries and regions.

12. To formulate and implement economic and trade policies as well as mid-term and long-term trade planning for the Hong Kong Special Administrative Region (HK SAR), Macao Special Administrative Region (Macao SAR) and Taiwan region.

13. To be responsible for the training, selection and management of Chinese professionals working in the Permanent Mission of the People's Republic of China To the World Trade Organization, the Economic and Commercial Counselor's Offices of the Chinese Embassies and missions to other international organizations.

14. To undertake other assignments entrusted by the State Council.

Source: MOFCOM

A HISTORY OF MOFCOM

1949: The People's Republic of China established the Ministry of Trade.

1952: The Ministry renamed the Ministry of Foreign Trade.

1982: The Ministry of Foreign Trade merged with the Ministry of Foreign Economic Liaison, the State Import and Export Regulation Commission, and the State Foreign Investment Regulation Commission, and became the Ministry of Foreign Economic Relations and Trade (MOFERT).

1993: MOFERT renamed the Ministry of Foreign Trade and Economic Co-operation (MOFTEC).

2003: MOFTEC went through a reorganisation and was renamed Ministry of Commerce (MOFCOM).

2008: MOFCOM now incorporates the former State Economic and Trade Commission (SETC) and the State Development Planning Commission (SDPC).