Foreign Investment Bulletin Jun, 2015

The China Banking Regulatory Commission (“CBRC”) released the Measures for the Implementation of Administrative Licensing of Foreign-funded Banks (2015 Revision) (the “Measures for Administrative Licensing of Foreign-funded Banks”), which significantly revised the Measures for Administrative Licensing of Foreign-funded Banks (2014 Revision).
The National Development and Reform Commission (“NDRC”) released the Regulation on the Administration of Investment Projects Subject to Government Verification and Approval and Investment Projects Subject to Government Record-filing (Draft for Comments) (the “Regulation on Verification and Record-filing”), which will be the first administrative regulation applicable to the government’s administration of investment projects by way of verification and approval and record-filing.
The Ministry of Industry and Information Technology (“MIIT”) released the Circular of the Ministry of Industry and Information Technology on Liberalizing the Restrictions on Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (For E-commerce Business) (MIIT Circular [2015] No. 196) (the “No. 196 Circular”) to remove restrictions on foreign shareholding in E-commerce.
1. CBRC Further Revised the Measures for Administrative Licensing of Foreign-funded Banks
In accordance with the Regulation of the People’s Republic of China on the Administration of Foreign-funded Banks (2nd Revision in 2014) effective from January 1, 2015 (the “2015 Regulation on Foreign-funded Banks”), the CBRC released the revised Measures for Administrative Licensing of Foreign-funded Banks on June 5, 2015, which significantly revised the 2014 Measures for Administrative Licensing of Foreign-funded Banks.
1.1 Background
CBRC formulated the Measures for the Implementation of Administrative Licensing of Foreign-funded Financial Institutions, which became effective from February 1, 2006.
Later, the Measures for the Implementation of Administrative Licensing of Foreign-funded Financial Institutions was revised and renamed the Measures for the Implementation of Administrative Licensing of Foreign-funded Banks, and became effective on September 11, 2014.
To streamline administration, CBRC further revised the Measures for Administrative Licensing of Foreign-funded Banks.The 2015 Measures for Administrative Licensing of Foreign-funded Banks was implemented from June 5, 2015.
1.2 Legal Review
The highlights of this revisions are as follows.
First, to maintain alignment with the 2015 Regulation on Foreign-funded Banks, the 2015 Measures for Administrative Licensing of Foreign-funded Banks was revised accordingly, such as: (i) for establishing a branch of a foreign bank, removal of the requirement to maintain a representative office in China for two years; (ii) for the working capital of the branches, removal of the requirement that the head office of the wholly foreign-owned bank or Chinese-foreign joint venture bank must “allocate without compensation not less than RMB100 million or the equivalent amount of freely convertible currency”.
Second, the examination and approval authority was divided between CBRC and local banking regulatory bureaus.
Matters subject to examination and approval by CBRC may be classified into the following four categories.
The first category consists of matters to be submitted to, examined and decided by CBRC, such as applications for the verification and approval of the qualification of chairmen, presidents and other personnel who have decision-making power over business and management matters or who play an important role in the risk control of “foreign-funded banks under the direct supervision of CBRC” and applications for changing the names of wholly foreign-owned banks, Sino-foreign joint venture banks, or branches of foreign banks. The term “foreign-funded banks under the direct supervision of CBRC” was introduced in this revision, and means foreign-funded banks, including wholly foreign-owned banks, Sino-foreign joint venture banks and institutions of foreign-funded banks,that establish tier-one branches in 15 or more provinces, autonomous regions and/or municipalities.)
The second category consists of applications for changing the registered capital, applications for operating RMB business or expanding the scope of recipients of RMB business and other applications made by “foreign-funded banks under the direct supervision of CBRC”.
The third category consists of applications made by the other wholly foreign-owned banks and Sino-foreign joint venture banks that are not under the direct supervision of CBRC, such as dissolution, change in shareholders.
The fourth category consists of matters to be submitted to and preliminarily examined by local banking regulatory bureaus and to be examined and decided by CBRC, such as applications for the verification and approval of the qualification of chairmen, presidents (chief executive officers or general managers) of wholly foreign-owned banks and Sino-foreign joint venture banks that are not under the direct supervision of CBRC.
Prior to the implementation of the 2015 Measures for Administrative Licensing of Foreign-funded Banks, most applications must be submitted first to the local banking regulatory bureaus for preliminary examination and then to CBRC for final examination and decision. Now applications in categories (3) and (4) must still be submitted first to local banking regulatory bureaus for preliminary examination and then to CBRC for examination and decision, but applications in categories (1) and (2) can be submitted to CBRC directly.
Meanwhile, CBRC delegated the examination and approval authority for certain matters to local banking regulatory bureaus, such as applications for the following actions: (1) changing registered capital and operating RMB business or expanding the scope of recipients of RMB business made by other wholly foreign-owned banks and Chinese-foreign joint venture banks that are not under the direct supervision of CBRC; (2) modifying working capital made by branches of foreign banks, (3) commencement of business operations made by wholly foreign-owned banks and Sino-foreign joint venture banks.
Third, the 2015 Measures for Administrative Licensing of Foreign-funded Banks only require verification of the qualification of presidents of managing sub-branches (meaning sub-branches that have partial or complete jurisdiction over the management of organizations, business, personnel, etc. of such sub-branches as well as other sub-branches or offices under such sub-branches), and removed the requirement for verification of the qualification of presidents of operating sub-branches (meaning sub-branches not bearing management duties for other sub-branches or offices under sub-branches).
Fourth, the 2015 Measures for Administrative Licensing of Foreign-funded Banks provide that an audit report for departure is not required where a proposed person, who is qualified to hold the post of senior executive and has not ceased to hold the position for one consecutive year or longer, is transferred to another position within the same legal person at the same or lower level.
1.3 Next Step
CBRC released the Implementing Rules for the Regulation of the People’s Republic of China on the Administration of Foreign-funded Banks (Revision Draft for Comments) on March 12, 2015. It is worth focusing on the legislation and practice in support of the implementation of the 2015 Regulation on Foreign-funded Banks.
2. NDRC Seeks Comments on the Regulation on Verification and Record-filing
On June 12, 2015, NDRC released the Regulation on Verification and Record-filing (Draft for Comments). The Regulation on Verification and Record-filing will govern fixed asset investment projects that are constructed within China by various types of enterprises without using government investment funds, and outbound investment projects that are constructed by various types of Chinese domestic enterprises on their own and via overseas enterprises or institutions.
2.1 Background
On July 16, 2004, the State Council issued the Decision of the State Council on Investment System Reform (the “Decision on Reform”) to reform the government’s administration system for enterprise investments. It provides that projects not using government investment funds will be subject to the verification and approval system or the recording-filing system (as the case may be), instead of the examination and approval system. Meanwhile, the State Council also formulated the Catalogue of Investment Projects Subject to Verification and Approval by the Government (2004) (the “Verification and Approval Catalogue”) to strictly limit the scope of investment projects subject to verification and approval by the government.
With respect to foreign investment projects, in accordance with the Decision on Reform and the Verification and Approval Catalogue, NDRC issued the Interim Measures for the Administration of Verification and Approval of Foreign Investment Projects on October 9, 2004. Since then, China adopted a unified verification and approval system for the administration of foreign investment projects. The Interim Measures for the Administration of Verification and Approval of Foreign Investment Projects identified the verification and approval authorities in charge of the administration of foreign investment projects according to the classification under the Catalogue of Industries for Guiding Foreign Investment (the “Foreign Investment Catalogue”) (namely, encouraged, permitted and restricted categories) and the total investment (including incremental amount of the investment). For encouraged projects or permitted projects with total investment not less than USD100 million and for restricted projects with total investment not less than USD50 million, project applications shall be verified and approved by NDRC. For encouraged projects or permitted projects with total investment less than USD100 million and for restricted projects with total investment less than USD50 million, project applications shall be verified and approved by the local branches of NDRC, in which restricted projects shall only be verified and approved by provincial branches of NDRC. Since May 4, 2010, NDRC delegated the verification and approval authority for encouraged projects and permitted projects with total investment less than USD300 million to provincial branches of NDRC, except as otherwise required to be verified and approved by departments of the State Council under the Verification and Approval Catalogue.
NDRC issued the Measures for the Administration on Verification and Approval and Record-filing of Foreign Investment Projects (the “Measures on Verification and Record-filing”) on May 20, 2014, whereby the government changed the unified verification and approval system to the verification and approval system and record-filing system for the administration of foreign investment projects. The Measures on Verification and Record-filing classified foreign investment projects into: (1) the category of foreign investment projects subject to verification and approval and (2) the category of foreign investment projects subject to record-filing, according to the (i) classification under the Foreign Investment Catalogue, (ii) the total investment and (iii) the classification under the Verification and Approval Catalogue .
Foreign investment projects subject to verification and approval include: (1) projects subject to the verification and approval by NDRC: encouraged projects with a total investment of USD300 million or more that must be controlled (including relatively controlled) by Chinese shareholders, and restricted projects with a total investment of USD 50million or more (excluding real estate projects); (2) projects subject to verification and approval by provincial branches of NDRC: real estate projects under restricted industries and other restricted projects with a total investment of less than USD50 million; (3) projects subject to verification and approval by municipal branches of NDRC: encouraged projects with a total investment of less than USD300 million that must be controlled (including relatively controlled) by Chinese shareholders; and (4) foreign investment projects other than the foregoing that are listed in the Verification and Approval Catalogue, which shall be subject to verification and approval in accordance with the relevant provisions thereof.
Those foreign investment projects that do not fall in the scope of projects subject to verification and approval shall be subject to record-filing by the competent departments of local governments. The Regulation on Verification and Record-filing issued by NDRC is the first administrative regulation to regulate the administration of foreign investment projects by way of verification and approval as well as record-filing by the government.
2.2 Legal Review
Compared to the Measures on Verification and Record-filing currently in effect, the Regulation on Verification and Record-filing is different in the following aspects.
First, the Regulation on Verification and Record-filing will be enacted as an administrative regulation, with a higher position in the legislative hierarchy than that of the two departmental regulations issued in 2004 and 2014, respectively. This demonstrates that the government is paying more attention to the administration of project approval.
Second, the Regulation on Verification and Record-filing will be generally applicable to investment projects within China by foreign-invested enterprises, investment projects within China by domestic enterprises and outbound investment projects by Chinese enterprises. This means that NDRC and its branches will follow the national treatment principle to treat project applications made by domestic enterprises and foreign-invested enterprises equally.
Third, with respect to foreign investment projects subject to verification and approval, the Regulation on Verification and Record-filing introduces more conditions, compared to the Measures on Verification and Record-filing. Compare to the current regulations, the verification and approval authorities must additionally examine whether the project is in compliance with relevant laws and regulations, macro control policies and technical policies of the State.
2.3 Next Step
The State Council has not released the new Verification and Approval Catalogue in connection with the Regulation on Verification and Record-filing. We will monitor whether the new Verification and Approval Catalogue will expand or contract the scope of the Verification and Approval (2014 Revision).
In addition, the Regulation on Verification and Record-filing introduces new systems, such as online examination and approval regulatory platforms for investment projects. We will monitor the progress and effects of such systems.
3. MIIT Removed Restrictions on Foreign Shareholding in Online Data Processing and Transaction Processing Business (For E-commerce Business)
MIIT issued the No. 196 Circular on June 19, 2015, deciding to, on the basis of the pilot program in the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”), liberalize the restrictions on foreign shareholding in E-commerce nationwide, which foreign shareholding now be up to 100%. The No. 196 Circular is effective from the date of issuance.
3.1 Background
The online data and transaction processing business refers to the provision of online data processing and transaction/matter processing services for users through the communication network by means of various data and transaction/matter processing application platforms that are connected to the communication network. The online data and transaction processing services include transaction processing services, electronic data interchange services and network/electronic equipment data processing services. Online data and transaction processing is a value-added telecommunications business.
Foreign investment in value-added telecommunications business has evolved from prohibition to gradual liberalization in China.
Since January 1, 1998, telecommunications businesses were classified as prohibited foreign investment projects. From December 11, 2001, to implement China’s commitments upon joining the Word Trade Organization, China permitted foreign investment in value-added telecommunications businesses with foreign shareholding not exceeding 30% and promised to permit foreign shareholding not exceeding 49% no later than December 11, 2002, and to permit foreign shareholding up to 50% no later than December 11, 2003. From January 1, 2002, foreign shareholding cannot exceed 50% for foreign-invested telecommunications enterprises engaged in the value-added telecommunications business. Since then, this restriction on foreign shareholding has not been further liberalized.
After the establishment of the Shanghai FTZ in 2013, China gradually liberalized the restriction on foreign shareholding in E-commerce in the Shanghai FTZ. From January 6, 2014, foreign shareholding in E-commerce was permitted to be increased to up to 55%. From January 13, 2015, foreign shareholding was further permitted to be increased to 100%.
Under the Foreign Investment Catalogue (2015 Revision), foreign shareholding in value-added telecommunications businesses still cannot exceed 50%. But the restriction on foreign shareholding in E-commerce was removed. MIIT issued No. 196 Circular accordingly.
3.2 Legal Review
Though No. 196 Circular removed restrictions on the foreign shareholding in E-commerce, when applying for the permit for operating the same, foreign investors must still satisfy other conditions and follow the relevant examination and approval procedures as required by the Provisions on the Administration of Foreign-invested Telecommunications Enterprises. The conditions mainly include: (i) the minimum registered capital for a foreign-invested telecommunications enterprise (specifically, for operating value-added telecommunications services nationwide or in more than one province, autonomous region, or municipality, the registered capital is no less than RMB10 million; for operating value-added telecommunications services within a province, autonomous region, or municipality, the registered capital is no less than RMB1 million); and (ii) the qualification of the primary foreign investors (specifically, the foreign investors must have a good record of and experience in operating value-added telecommunications businesses).
3.3 Next Step
No. 196 Circular is considered as a major positive policy to promote the delisting of VIEs from overseas stock exchanges and to return to the domestic stock exchanges for listing.
Certain overseas private equity funds or venture capital funds may not have a good record of and experience in operating value-added telecommunications businesses. It is worth monitoring whether the Chinese telecommunications authorities will further liberalize the conditions for access by foreign investors to E-commerce.