Foreign Investment Bulletin June-July 2017（II）

4 PBOC Continues to Open Up the Inter-bank Bond Market to Foreign Investors by Launching the “Northbound Trading” of Bond Connect
On June 21, 2017, the PBOC issued the Interim Measures for the Collaboration in the Mutual Bond Market Access between Mainland China and Hong Kong (Order of the People’s Bank of China [2017] No.1) (the “Interim Measures”), effective since the date of issuance.
4.1 Background
The Inter-bank Bond Market has started to progressively open up to foreign investors since the PBOC clarified in August 2010 that the access and investment quota approval regime applies to foreign investors.
According to relevant regulations issued by the PBOC prior to the Interim Measures, foreign investors investing in the Mainland Inter-bank Bond Market are subject to record-filing instead of prior approval. The settlement agent entrusted to provide trading and settlement services is responsible for the examination of investor qualification.
Foreign investors permitted with access to Mainland Inter-bank Bond Market include foreign Central Banks, international financial institutions, sovereign wealth funds, and other entities that satisfy the following conditions: (1) financial institutions such as commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions lawfully registered and incorporated outside the People's Republic of China, (2) investment products lawfully launched by such financial institutions, (3) other long-and medium-term institutional investors recognized by the PBOC such as pension funds, charity funds and endowment funds, and (4) qualified foreign institutional investors (“QFII”) and RMB qualified foreign institutional investors (“RQFII”).
In addition, PBOC puts no limit on the investment quota of foreign investors investing in the Mainland Inter-bank Bond Market. Foreign investors are allowed to invest in those trading types permitted by the PBOC such as outstanding bonds.
4.2 Legal Review
The purposes of the Interim Measures are to conduct relevant business concerning the collaboration in establishing mutual Bond Market access between Mainland China and Hong Kong in a standardized manner, protect the legitimate rights and interests of domestic and foreign investors, and uphold the order of the Bond Market. Notwithstanding the above, it is specified that the Interim Measures at this stage apply only to foreign investors investing in the Mainland Inter-bank Bond Market through mutual access between the Hong Kong and Mainland Bond Market infrastructure institutions in respect of trading, custody, settlement, and so on, which is the Northbound Trading. Relevant measures for Southbound Trading will be formulated separately.
In terms of object bonds, the Interim Measures provide that any foreign investor that satisfies the requirements of the PBOC may invest in the Mainland Inter-bank Bond Market through Northbound Trading wherein the object bonds shall include all types of bonds that can be traded and circulated in the Mainland Inter-bank Bond Market. It is understood that foreign investors can invest in the object bonds by subscription to initial bond issuance as well as trading in the secondary market.
The Interim Measures follow the conventional record-filing requirement for foreign investors and provides that the electronic trading platform or other institutions that are recognized by the PBOC may file the record on behalf of foreign investors with the Shanghai Head Office of the PBOC. The available filing agencies include China Foreign Exchange Trade System (“CFETS”), domestic Custody Institutions, and Inter-bank Bond Market Settlement Agent.
The Interim Measures stipulate that overseas Custody Institutions shall open a nominee account at a domestic Custody Institution, which is used to record the balance of all bonds held nominally. Bonds purchased by the foreign investor through the Northbound Trading shall be registered under the name of the overseas Custodian Institution (such as the Central Moneymarkets Unit of Hong Kong Monetary Authority) and entitled to the rights and interests of the bonds according to the law. It should be noted that the foreign investor, as the actual owner of the rights and interests of the bonds, shall exercise creditor’s rights in accordance with relevant laws and regulations of Hong Kong.
Foreign investors are permitted under the Interim Measures to invest with self-owned RMB or foreign currencies. Where an investment is made in self-owned RMB and does not involve foreign exchange, the funds are not required to undergo foreign exchange and settlement under the Northbound Trading at Hong Kong-based Settlement Banks. Where an investment is made in a foreign currency, the funds shall be settled at Hong Kong-based Settlement Banks and in principle, when bonds mature or are sold, the funds shall be exchanged into the foreign currency if such funds are not to be used for further investment, and proceed via Hong Kong-based Settlement Banks.
The Interim Measures require the exchange of funds with respect to Northbound Trading be subject to the administration of the purchase and sales of RMB, which implies that the scope of the purchase and sales of RMB has been extended from trade in goods, trade in services, direct investment to bond investment. Hong Kong-based settlement banks shall abide by the relevant anti-money laundering and counter-terrorism financing regulations and the provisions in respect of the purchase and sales of RMB. A Hong Kong-based settlement bank, when selling out the flat position in the domestic Inter-bank Foreign Exchange Market, shall ensure that related foreign investors exchange funds and hedge foreign exchange risks at such bank based on their real and reasonable needs for the purpose of Northbound Trading. The PBOC, in concert with the SAFE, shall supervise the RMB purchase and sales business, entry and exit of funds, hedging of foreign exchange funds, and so on in respect of Northbound Trading, and work with the Hong Kong Monetary Authority (“HKMA”) and relevant regulators of other countries or regions to step up the cross-border supervisory cooperation so as to prevent unlawful leverage of Northbound Trading such as illegal arbitrage and exchange of foreign currency.
4.3 Next Step
The Bond Connect, comprising of Northbound Trading and Southbound Trading, is an institutional innovation in the orderly open-up of Mainland China Bond Market. The early introduction of Northbound Trading helps to gather experience for the upcoming two-way access in the Bond Connect, maintain the stabilization of finance market, and reduce risks in the finance market. For now, the Northbound Trading investors can only trade in outstanding bonds, but it is anticipated that bond repurchase, bond lending, interest rate swap, forward rate agreement, and so on will be available to investors in the future.
In support of the Interim Measures, on June 22, 2017, the PBOC issued the Guide on Registration of Foreign Investors for Northbound Trading in the Bond Connect (PBOC Shanghai Head Office Announcement [2017] No. 1), which provides guidance for the record-filing of foreign investors. In addition, The PBOC and the HKMA have agreed on the principles of cross-border supervisory cooperation under Bond Connect and have signed the Memorandum of Understanding between the People’s Bank of China and Hong Kong Monetary Authority on Strengthening Supervisory Cooperation under Bond Connect. The two parties agreed, in accordance with the laws and legal authorization of Mainland China and Hong Kong respectively, the two parties will establish effective mechanisms for information exchange and execution assistance, strengthen supervisory cooperation and jointly combat cross-border illegal activities so as to ensure effective operation of the scheme.
5 Mainland and Hong Kong have signed the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Investment Agreement” and the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement on Economic and Technical Cooperation"
On June 28, 2017, under the framework of Mainland and Hong Kong Closer Economic Partnership Arrangement (“CEPA”), the Vice Minister of Commerce and Financial Secretary of HKSAR signed the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Investment Agreement” (“CEPA Investment Agreement”) and the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement on Economic and Technical Cooperation” (“CEPA ETC Agreement”). These two agreements took effect on the date of execution and the CEPA Investment Agreement will be implemented from January 1, 2018 onwards.
5.1 Background
To promote trade and investment cooperation between the Mainland and Hong Kong, the Vice Minister of Commerce and Financial Secretary of HKSAR has signed CEPA on June 29, 2003. Since then, the two parties have signed 10 supplementary agreements, the “‘Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement between the Mainland and Hong Kong on Achieving Basic Liberalization of Trade in Services in Guangdong” and the “’Mainland and Hong Kong Closer Economic Partnership Arrangement’ Agreement on Trade in Services” (“CEPA TIS Agreement”).
5.2 Legal Review
5.2.1. CEPA Investment Agreement
The CEPA Investment Agreement consists of 4 chapters, 29 articles and 3 annexes, including market excess, investment protection, Investment Facilitation and Settlement of Investment Disputes.
First of all, the CEPA Investment Agreement clearly set out the definition, characteristics and forms of “Investment”. The Investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, and the assumption of risks. Forms that an investment may take include, though not exclusively: (i) an enterprise; (ii) shares, stocks and other forms of equity participation in an enterprise; (iii) bonds, debentures, loans and other debt instruments including debt instruments issued by an enterprise or one side;1 (iv) futures, options and other derivatives; (v) turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; (vi) intellectual property rights; (vii) license, authorizations, permits and similar rights conferred pursuant to the laws of one side;2 3 and (vii) other tangible or intangible assets, movable or immovable property, and related property rights, such as leases, mortgages, liens and pledges. We noticed that compared to the Law of Foreign Investment (Draft for Comment), forms of investment set out in the CEPA Investment Agreement are more diverse and has included the forms of futures, options and other derivatives, intellectual property and so on.
Secondly, the CEPA Investment Agreement also gives a clear definition of “Investors” and sets out the relevant conditions. To be classified as an “Investor”, a Hong Kong enterprise investing in the Mainland in the form of commerce presence shall satisfy the requirements of incorporation or establishment in Hong Kong, obtaining a valid business registration certificate and engagement in substantive business operations in Hong Kong. The criteria for determining the engagement in substantive business operations in Hong Kong follows those of “Service Provider” under the CEPA, and includes that the Hong Kong investor should be incorporated or established in Hong Kong, and have engaged in substantive business operations for 3 years or more (including 3 years), should have paid profit tax, should own or rent premises in Hong Kong to engage in substantive business operations and should employ the required percentage of employees.
Lastly, the CEPA Investment Agreement continues to adopt the negative listing approach adopted in the CEPA TIS Agreement for market access. The CEPA Investment Agreement states that unless it is explicitly listed out in the negative list, one side should give the other side national treatment, most favored treatment and imposes on both sides the substantive obligations regarding performance requirements and senior management, board of creditors and entry of personnel. The CEPA Investment Agreement only contains the negative list of the Mainland for Hong Kong investors, i.e. Schedule of concessions of the Mainland.
5.2.2 CEPA ETC Agreement
The Mainland and Hong Kong signed the CEPA ETC Agreement based on the CEPA and all its supplementary agreements. The CEPA ETC Agreement not only sorts out, updates, classifies and summarizes the economic and technical cooperation under the CEPA and its supplementary agreements comprehensively, but also added new cooperation areas based on the actual need for economic and trade cooperation between two sides4 . The CEPA ETC Agreement consists of 7 chapters and 26 articles, including the Cooperation Objective and Mechanism, the Cooperation in Economic and Trade Areas of the "Belt and Road", the Cooperation in Key Areas, and the Sub-regional Economic and Trade and Investment Facilitation.
The Mainland encourages Hong Kong to participate in the "Belt and Road" Initiative and support to strengthen the sub-regional economic and trade cooperation between the two sides. For this purpose, the CEPA ETC Agreement adds chapters for new cooperation areas in relation to "Belt and Road" Initiative and Sub-regional Cooperation. The Sub-regional Economic and Trade Cooperation includes strengthening the economic and trade cooperation in the Pan-Pearl River Delta Region, supporting Hong Kong to participate in the Pilot Free Trade Zones, and deepening the operation between Hong Kong and Qianhai, Nansha and Hengqin.
The CEPA ETC Agreement listed the cooperation in key areas which include financial cooperation, tourism cooperation, cooperation in legal and dispute resolution services, accounting cooperation, cooperation in convention and exhibition industry, cultural cooperation, environmental cooperation, innovation and technology cooperation, education cooperation, electronic commerce cooperation, medium and small enterprise cooperation, intellectual property cooperation, trademark and branding cooperation and cooperation in traditional Chinese medicine and Chinese medicinal products industry. On top of cooperation areas under the CEPA, the CEPA ETC Agreement adds the areas of cooperation in legal and dispute resolution services, and accounting cooperation, which provides new opportunities for professional services institutions in Hong Kong5.
5.3 Next Step
For implementation of the CEPA Investment Agreement and the CEPA ETC Agreement, the State Council and relevant ministries shall promulgate relevant rules and regulations, which is worthy of our attention.
On July 1, 2017, the National Development and Reform Commission, the People’s Government of Guangdong province, the HKSRA government and the government of the Special Administrative Region of Macau have signed the Framework Agreement on Deepening the Cooperation among Guangdong, Hong Kong and Macau and Promoting the Development of the Greater Bay Area, to jointly promote the development of the Guangdong-Hong-Kong-Macau Greater Bay Area and facilitate the cross-border investment between the Mainland enterprises and enterprises from Hong Kong and Macau. The impact of the CEPA, the CEPA Investment Agreement and the CEPA ETC Agreement on the development of the Guangdong-Hong-Kong-Macau Greater Bay Area is also worthy of our attention.
6 Mergers and Acquisitions of Domestic Enterprises as well as Strategic Investment into Listed Companies by Foreign Investors are subject to the MOC Record-filing Administration.
On July 30, 2017, the MOC released the Decision on Amending the Interim Measures for Record-filing Administration over the Establishment and Change of Foreign-invested Enterprises (MOC 2017 Order No. 2) (the “Decision”) and the Announcement on Matters Relating to the Record-filing Administration over Establishment and Change of Foreign-invested Enterprises ([2017] No. 37) (the “Announcement No. 37”), clarifying that the mergers and acquisitions of domestic enterprises and strategic investment into listed companies by foreign investors shall fall within the scope of the record-filing administration provided that no special access administrative measures or acquisition of a related party is involved.
6.1 Background
Under the Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, mergers and acquisitions of domestic enterprises by foreign investors are subject to approval by the authority. In addition, acquisitions of A-shares of the listed company which have finished reform of non-tradable shares and of the newly listed companies by means of long-and-mid-term strategic investment of mergers and acquisitions with certain scale are subject to MOC’s prior approval under the Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies.
From October 1, 2016, according to the Interim Measures for Record-filing Administration over the Establishment and Change of Foreign-invested Enterprises (the “Record-filing Measures”), except for those involving special access administrative measures, the establishment and alteration of foreign-invested enterprises are no longer subject to prior approval, but shall be governed by the record-filing administration. However, the Record-filing Measures did not explicitly include the mergers and acquisitions of established enterprises as well as strategic investment into listed companies into the record-filing system, and hence prior approval from relevant authorities were still required pursuant to the Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors and the Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies.
6.2 Legal Review
Under the Record-filing Measures as amended by the Decision, a non-foreign-invested enterprise (the “non-FIE”) changing into a foreign-invested enterprise (the “FIE”) resulting from acquisition or consolidation by merger or otherwise, and not involving special access administrative measures or acquisition of a related party, shall undergo the record-filing formalities and fill in the Establishment Application Form; whereas a foreign investor investing in a listed company shall complete the record-filing formalities before or within 30 days after the security registration with the competent securities registration and settlement institution and, if the listed company is a FIE, fill in the Establishment Application Form or the Alteration Application Form.
The term “special access administration measures” refers, within the FTZs, to those set forth in Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (2017 Edition), and outside of the FTZs, to the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments) in the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017). Additionally, the term “acquisition of a related party” is defined as domestic companies, enterprises or natural persons using the companies legally established or controlled by them in foreign countries to nominally merge or acquire the domestic companies that are related to them. The mergers and acquisitions and strategic investment by foreign investors that involve the aforesaid special access administration measures and acquisition of a related party do not fall within the record-filing administration and shall obtain relevant approval before conducting investments.
It shall be noted that under the amended Record-filing Measures, the shareholding chart of the FIE’s ultimate actual controlling party is added as requested document which shall be uploaded to the Comprehensive Administration System. Furthermore, if a foreign investor pays with the shares of an overseas company, the Certificate of Foreign Investment of the domestic enterprise shall be provided.
6.3 Next Step
The amended Record-filing Measures is another huge step on the way towards the construction of an open economic system, implementation of high-level opening-up, unifying of laws and regulations on domestic and foreign investments, and the innovation of foreign investment legal system.
1.Some forms of debt, such as bonds, debentures and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics.
2.Whether a particular type of license, authorization, permit or similar instrument (including a concession to the extent that it has the nature of such an instrument) is an asset that has the characteristics of an investment also depends on such factors as the nature and extent of the rights that the holder has under the laws of one side. Among such instruments that do not constitute an asset that has the characteristics of an investment are those that do not create any rights protected under the laws of one side. For greater certainty, the foregoing is without prejudice to whether any asset associated with such instruments has the characteristics of an investment.
3.The term “investment” does not include an order or judgment entered in a judicial or administrative action.
4.http://tga.mofcom.gov.cn/article/zwyw/zwxx/201706/20170602600690.shtml
5.http://tga.mofcom.gov.cn/article/zwyw/zwxx/201706/20170602600690.shtml