Foreign Investment Bulletin Sep.- Oct. 2016（II）

4 Further issuance and implementation of rules related to the mutual market access mechanism between the stock markets of Mainland and Hong Kong
On September 30, 2016, in order to regulate the services and activities related to the mutual market access between the stock markets of Mainland and Hong Kong, the China Securities Regulatory Commission (the “CSRC”) issued the Several Provisions on Mutual Market Access Mechanism between the Stock Markets of Mainland and Hong Kong (the “Mutual Access Provisions”). The Mutual Access Provisions took effect on the date of issuance, upon which the Several Provisions on Mutual Market Access Mechanism between the Stock Markets of Shanghai and Hong Kong (the “Shanghai-HK Connect Provisions”) was abolished.
In order to guarantee the implementation of the Mutual Access Provisions, the CSRC has reissued the Record-Filing Provisions on Share Placement and Issuance of Companies Listed in Hong Kong to Their Original Mainland Shareholders under the Hong Kong Stock Connect and the Guidelines for Securities and Funds Operational Organizations in Participating in the Mutual Market Access between the Stock Markets of Mainland and Hong Kong.
Shenzhen Stock Exchange issued the Implementation Measures of Shenzhen Stock Exchange on Shenzhen-Hong Kong Stock Connect, and the Administrative Guidelines of Shenzhen Stock Exchange on Investor’s Eligibility under Hong Kong Stock Connect; the Shanghai Stock Exchange updated and reissued the Implementation Measure of Shanghai Stock Exchange on Shanghai-Hong Kong Stock Connect (2016 Second Revision) and the Administrative Guidelines of Shanghai Stock Exchange on Investor’s Eligibility under Hong Kong Stock Connect (2016 Revised); the China Securities Depository and Clearing Co., Ltd has issued the Implementation Rules of Securities Registration, Depository and Clearing Services under the Mutual Market Access between the Stock Markets of Mainland and Hong Kong and other relevant implementation rules.
4.1 Background
On April 10, 2014, in order to facilitate the mutual development of stock markets in Mainland and Hong Kong, the CSRC, Hong Kong Securities and Futures Commission (the “SFC”) decided to commence the trial mutual market access mechanism between stock markets of Shanghai and Hong Kong (the “Shanghai-Hong Kong Stock Connect”). In order to regulate the Shanghai-Hong Kong Stock Connect, the CSRC issued the Provision on Shanghai-Hong Kong Stock Connect on June 13, 2014.
On August 16, 2016, the CSRC and the SFC decided to establish the mutual market access mechanism between stock markets of Shenzhen and Hong Kong (the “Shenzhen-Hong Kong Stock Connect”). After the commencement of the Shenzhen-Hong Kong Stock Connect, the mutual access mechanism between the stock markets of Mainland and Hong Kong consisted of four parts, Northbound Shanghai Trading Link, the Southbound Hong Kong Trading Link under Shanghai-Hong Kong Stock Connect, the Northbound Shenzhen Trading Link and the Southbound Hong Kong Trading Link under Shenzhen-Hong Kong Stock Connect.
4.2 Legal Review
Since the formal launch of the Shanghai-Hong Kong Stock Connect on November 17, 2014, its operation was stable and in order, which provides the foundation and conditions for the launch of the Shenzhen-Hong Kong Stock Connect. The arrangement and framework of Shenzhen-Hong Kong Stock Connect Mechanism basically follows that of the Shanghai-Hong Kong Stock Connect. The Shanghai-Hong Kong Stock Connect and the Shenzhen Hong Kong Stock Connect jointly constitute the mutual market access mechanism between stock markets of Mainland and Hong Kong. The Mutual Access Provisions also mainly adopted the provisions in the Provision on Shanghai-Hong Kong Stock Connect by merely extending its scope to cover the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect and revising a few individual provisions thereto.
Two newly added points in the Mutual Access Provisions are noteworthy: first of all, administrative requirements for investor eligibility for the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect was added. The Mutual Access Provisions requires the investors to comply with the investor eligibility requirements and service rules where its authorized securities companies or agents are located. In order to ensure the implementation of these administrative requirements, the Shanghai Stock Exchange and the Shenzhen Stock Exchange have issued the guidelines of investor eligibility under the Hong Kong Stock Connect. Secondly, provisions to provide room for a currency exchange mechanism in the future have been added. The Mutual Access Provisions added the provision under which trading and payment with currencies other than Renminbi shall comply with regulations issued by the People’s Bank of China.
4.3 Next Steps
The preparatory period for the Shenzhen-Hong Kong Stock Connect is around 4 months, from August 16, 2016 to its formal implementation. It was mentioned by the CSRC when answering questions related to the Mutual Access Provisions on October 2, 2016, that the CSRC will further issue the Provision on Shareholders’ Meeting of Listed Companies, the Guidelines on Articles of Association of the Listed Companies, the Notice of the People’s Bank of China Chinese Securities Regulatory Commission regarding Questions relating to the Mutual Market Access Mechanism between the Stock Markets of Mainland and Hong Kong and other implementation rules. We are awaiting the implementation rules to be issued by the CSRC, the People’s Bank of China, the Shenzhen Stock Exchange, the Shanghai Stock Exchange and other related organizations.
5 The Ministry of Commerce decides to abolish sixteen departmental provisions including those related to foreign investment in commercial fields and foreign investment in conference and exhibition companies
On November 3, 2016, the MOC issued the Decisions of the Ministry of Commerce on Abolishing Several Provisions to abolish sixteen departmental provisions including but not limited to foreign investment in commercial fields and foreign investment in conference and exhibition companies, which took effect on the date of issuance.
5.1 Background
From 2004 to 2012, the MOC issued the Administrative Measures on Foreign Investment in Commercial Field and six supplementary rules. Foreign invested commercial enterprises refer to foreign invested enterprises providing business services such as commission agency, wholesale, retail and franchising. Incorporation and shop opening of foreign invested commercial enterprises shall comply with relevant legal requirements and shall be approved by the commerce departments. Foreign invested commercial enterprises managing special goods including books, newspapers, refined oil, grain and vegetable oil were subjected to shareholding restrictions for foreign investors formulated by the MOC separately.
From 2004 to 2007, the MOC issued the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules, which sets out detailed provisions regarding operations, services, conditions for incorporation, procedures of approval and other matters related to foreign invested conference and exhibition companies.
5.2 Legal Review
First of all, abolishing the Administrative Measures on Foreign Investment in Commercial Field and six supplementary rules by the MOC complies with the latest change of the Catalogue for the Guidance of Foreign Investment Industries and implementation of the record-filing system.
On one hand, during the period from the implementation of the Catalogue for the Guidance of Foreign Investment Industries (2002 revised) to the period before the Catalogue for the Guidance of Foreign Investment Industries (2015 revised), there were various restrictions over foreign investment in commercial fields in China. The situation was changed by the promulgation of the Catalogue for the Guidance of Foreign Investment Industries (2015 revised).
For example, in the Catalogue for the Guidance of Foreign Investment Industries (2011 revised), the items under the restricted categories relating to wholesale and retail included: (1) direct sale; purchase by post; online sales; (2) bulk purchase of food and wholesale, retail and distribution of food, cotton, vegetable oil, edible sugar, tobacco, crude oil, pesticide, agricultural film and fertilizer (The Chinese party shall be in the holding position of chain stores which has established more than 30 branches, and are selling goods of different types and brands from various suppliers); (3) construction and management of large agricultural products wholesale market; (4) distribution of audiovisual products (except for movies); (5) shipping agencies (with Chinese party in the holding position) and ocean shipping tally (limited to the formation of joint equity or joint cooperation); and (6) construction and management of wholesale refined oil and gas stations (chains of gas stations established by the same foreign investors with more than 30 branches and selling refined oil of different types and brands from various suppliers).
The items under the restricted categories relating to wholesale and retail were largely reduced the Catalogue for the Guidance of Foreign Investment Industries (2011 revised). Currently, the items under the restricted categories relating to wholesale and retail only include (1) bulk purchase of food and wholesale food and cotton, construction and management of large agricultural products for wholesale markets; (2) shipping agencies (with Chinese party in the holding position) and ocean shipping tallies (limited to the formation of joint equity or joint cooperation); (3) construction and management of wholesale refined oil and gas stations (chains of gas stations established by the same foreign investors with more than 30 branches and selling refined oil of different types and brands from various suppliers). Except for wholesale and retail of tobacco, cigarette, refined tobacco leaf and other tobacco products which are categorized as under the prohibited category, the rest of the above restricted items under the Catalogue for the Guidance of Foreign Investment Industries (2011 revised) are re-categorized as permitted projects, in particular the wholesale, retail and distribution of vegetable oil; distribution of audiovisual products and so on.
On the other hand, requirements for approval by the MOC regarding incorporation and establishing branches of foreign invested commercial enterprises under the Administrative Measures on Foreign Investment in Commercial Field and six supplementary rules seemingly contradict the regulation on the record-filing system.
Secondly, abolishing the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules by the MOC complies with the implementation of the record-filing system. Foreign investment in conference and exhibition companies has been categorized as permitted projects all along. The requirements for approval by the MOC regarding incorporation of foreign invested conference and exhibition companies under the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules which seemingly contradicts the regulations on the record-filing system.
After the MOC abolished the Administrative Measures on Foreign Investment in Commercial Field, the Interim Provisions on Incorporation of Foreign Invested Conference and Exhibition Companies and relevant supplementary rules, incorporation of foreign invested commercial enterprises conducting business other than restricted or prohibited projects under the Catalogue for the Guidance of Foreign Investment Industries (2015 revised) or incorporation of foreign invested conference and exhibition companies only require record-filing formalities online without the need to obtain approval from the commerce departments, which will be a great convenience for foreign investors incorporating and establishing branches of foreign invested commercial enterprises and incorporating foreign invested conference and exhibition companies.
5.3 Next Steps
We await whether in the implementation of record-filing system, the MOC and other departments of the State Council will further abolish or modify its departmental provisions which conflict with the record-filing system (for example, the Opinions of Ministry of Construction, Ministry of Commerce, the National Development and Reform Commission, the People's Bank of China, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange on Regulating Access to and Administration of Foreign Investment in the Real Estate Market issued by the MOC and other six state departments on July 11, 2006 regarding approval for incorporation of foreign invested real estate enterprises).