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Barriers lifted for foreign projects
November 06, 2014 | BY
clpstaffThe new 2014 Measures have replaced the approval system for most foreign investment projects with record filing and delegated more authority to local departments. But investors are still waiting for clearer guidelines for criteria and procedure
China has long applied an approval system for foreign investment in accordance with the Tentative Measures for the Administration of the Check and Approval, and Record Filing of Foreign-invested Projects (外商投资项目核准暂行管理办法) (2004 Measures) published by the National Development and Reform Commission (NDRC) on October 9 2004. Under the 2004 Measures, all foreign investment projects (including Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures, wholly foreign-owned projects, foreign investors' merger and acquisition of domestic enterprises and the capital increase of foreign-invested enterprises (FIEs) must be subject to the approval of the relevant authorities (from the State Council to the NDRC and then to the Development and Reform Commission at different levels). Obtaining project approval is one of the most important first steps when making foreign investments in China.
However, with the shift of government functions and plans to open up, the project approval system generally applicable to all foreign investment projects has been changed. On May 17 2014, the NDRC issued Order No.12, the Measures for the Administration of the Check and Approval, and the Record Filing of Foreign-invested Projects (外商投资项目核准和备案管理办法) (2014 Measures) which were implemented on June 17 2014 and supersede the 2004 Measures.
The primary background to the 2014 Measures is that the State Council published the List of Investment Projects Subject to Government Check and Approval (2013) (国务院政府核准的投资项目目录 (2013年本)) (List), which narrowed the scope of foreign investment projects subject to the approval system and clarified that record filing for projects only applies if they are not covered under the scope of approval. The publication of the List propelled the NDRC to revise the 2004 Measures. The 2014 Measures aim to further deepen the reform of the foreign investment management system and to accelerate the construction of a new and open economy.
The highlights
Compared to the 2004 Measures, the 2014 Measures have three major changes:
Combination of approval and record filing
The most important change in the 2014 Measures is that it updates the project approval system which used to apply to all foreign investment projects in the 2004 Measures. According to the new rules, aside from the foreign investment projects which are clearly listed as being regulated by project approval, all other foreign investment projects are regulated by record filing with investment departments at the local level. The process and requirements of record filing are simpler and more convenient compared with those of approval. In addition, under the 2014 Measures, if the local investment department refuses the project upon receiving the application documents submitted for record filing, it must issue a written statement and explain the reasons within seven business days. This will reduce the time costs for foreign investors when investing in China.
Narrowed scope of projects for approval
According to the Foreign Investment Industrial Guidance Catalogue (Amended 2011) (外商投资产业指导目录(2011年修订)) (Catalogue), specific industries are categorised as encouraged, restricted or prohibited for foreign investment. Any industry not listed in the Catalogue is permitted. Foreign investors may establish FIEs in the encouraged and permitted categories as well as in the restricted category if they are willing to abide by certain restrictions. Foreign investors are banned from investing in prohibited industries.
According to the 2014 Measures, the scope of foreign investment projects subject to approval has the following changes:
1. Encouraged projects: The scope of approval has been limited to projects that require a Chinese party to hold controlling shares.
The 2004 Measures require all foreign investment projects in the encouraged category of the Catalogue to be subject to approval. In this category, authority is shared among the State Council, the NDRC and local Development and Reform Commissions according to the projects' total investment amounts (including capital increase). Encouraged projects with total investment amounts of or above US$500 million are reviewed by the NDRC and approved by the State Council; projects of or above US$100 million are approved by the NDRC; and the rest are approved by local Development and Reform Commissions.
In comparison, in the 2014 Measures, only encouraged projects listed in the Catalogue which require a controlling share (including a comparative controlling share) held by a Chinese party need approval. Among these, projects with total investment amounts (including capital increase) of or above US$300 million are approved by the NDRC; the rest are approved by local governments. All other encouraged projects which do not require a controlling share (including a comparative controlling share) held by a Chinese party are subject to the record filing system.
2. Restricted projects: The 2014 Measures delegate the approval authority of foreign-invested real estate projects to provincial governments.
In the 2004 Measures, all restricted foreign investment projects listed in the Catalogue must be subject to approval. In this category, projects with total investment amounts of or above US$100 million are reviewed by the NDRC and approved by the State Council. Those with amounts of or above US$50 million are approved by the NDRC and the rest are approved by provincial Development and Reform Commissions.
In the 2014 Measures, restricted foreign-invested real estate projects are no longer approved by the NDRC and are now subject to approval at the provincial level.
3. Permitted projects: According to the 2014 Measures, all permitted projects are managed by record filing, whereas the 2004 Measures require all permitted projects to obtain approval from Development and Reform Commissions.
4. Foreign-invested projects in Articles 1 to 11 of the List: These must be approved according to the rules listed in Articles 1 to 11 of the List.
More authority to local departments
The 2014 Measures delegate the record filing authority of foreign-invested projects to provincial and local Development and Reform Commissions. As for approval, provincial governments are allowed, within the scope permitted by law, to delegate the authority to governments at the local level. The NDRC only retains the approval authority of some foreign projects and is not responsible for record filing any more.
Influence and significance
The promulgation of the 2014 Measures illustrates the need for the government to shift its functions as well as its style. The 2014 Measures require Development and Reform Commissions at all levels in charge of approval and record filing to exercise self-restraint and serve business. The government authorities must perform their duties, improve supervision, management and services, increase administrative efficiency, ease procedural requirements and simplify processes. The 2014 Measures signify a further opening up for foreign investment in China.
Firstly, the regulatory system has been changed to provide foreign investors with more autonomy. As mentioned above, China originally required all foreign projects to be subject to approval. The government approves these on the basis of protecting economic safety, public interest and market access as well as ensuring the capital management of projects. The 2014 Measures' transformation of the approval system to a combination of limited approval and record filing gives enterprises more discretion in their investment.
Second, the conditions for the review of foreign projects have been largely simplified, which reduces costs. The 2014 Measures no longer require enterprises to submit application materials regarding market prospects, economic benefits and technical plans of the project for review. The simplification illustrates that the 2014 Measures value the market's decisive role in allocating resources in order to make it easier for foreign investors.
And, lastly, management has been localised, which facilitates communication with governmental authorities. According to the 2014 Measures, the majority of foreign investment projects will now be governed by local authorities and their regulation will be localised. Enterprises can expect to receive faster responses and feedback from local authorities regarding submitting or supplementing relevant record filing documents, as well as to better communication with the authorities to track progress.
Policy trends and gaps
The promulgation of the 2014 Measures demonstrates the trend of shifting prior regulation to interim and ad hoc supervision for foreign investment projects. The direction of easy entry and strict supervision is consistent with the government's reform of administrative approval mechanisms.
The combination of the approval and record filing systems and the delegation of administrative power to the local government does not mean that the government has loosened the supervision of foreign investment projects. For instance, not all projects are able to obtain record filing at Reform and Development Commissions. These still need to comply with relevant laws and regulations, development planning, industrial polices and access standards in China. The philosophy of the interim and ad hoc supervision raises the standard of regulation of projects. For example, the 2014 Measures add a new chapter named “Supervision and Administration” to emphasise the role of supervision over the whole process and to avoid gaps and loopholes that may exist after the administrative power has been delegated to the lower level. In addition, they incorporate the national security review into the foreign investment project management system to encourage cooperation among the supervisory functional departments. The 2014 Measures also establish a horizontal communication mechanism for information sharing as well as building and refining an electronic information system for project management.
On May 22 2014, NDRC officials were interviewed to introduce the background, significance, content, and solutions related to the publication of the 2014 Measures. The NDRC emphasised that, in the future, entry regulation would explore conferring national treatment to foreign investments except encouraged projects that require a Chinese party to control the shares (including comparative control of the shares) and restricted projects in the Catalogue. All other foreign investment projects will be regulated in the same way as domestic projects.
Inevitably, the 2014 Measures do not cover every detail. For example,
- The 2004 Measures provide that the approval system applies to all foreign investment projects. In practice and based on experience, however, if a foreign investment project does not involve the construction of fixed-asset investment projects (e.g. the establishment of a foreign-invested consulting company), in many places it may still be conducted without obtaining the approval issued by the relevant Development and Reform Commission. It was hoped that this would be clarified in the 2014 Measures. However, the 2014 Measures provide no clear definition of the term “foreign investment project”, and, therefore, whether the 2014 Measures only apply to those that conduct the construction of “fixed-asset investment projects” or to all kinds of foreign projects still remains unclear.
- The 2014 Measures also do not differentiate new from existing projects. So it is questionable whether mergers and acquisitions by foreign investors of an existing Chinese enterprise by purchasing the equities from current shareholders without investing additional capital are to be subject to the approval or record filing procedure.
- Lastly, the 2014 Measures do not provide specific and detailed steps for the record filing procedure itself.
The departments of the NDRC and local governments may promulgate the corresponding detailed rules and operational manuals to address these issues. Current and potential investors from overseas should pay attention to the Chinese legislative and regulatory updates regarding foreign investment.
Jianwen Huang, King & Wood Mallesons, Beijing
More from CLP:
Measures for the Administration of the Check and Approval and the Record Filing of Foreign-invested Projects
List of Investment Projects Subject to Government Check and Approval (2013)
Foreign Investment Industrial Guidance Catalogue (Amended 2011)
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