Foreign Investment Bulletin June-July 2017（I）

The State Administration of Foreign Exchange (“SAFE”) Shenzhen Branch is permitted to examine the pilot cross-border transfer of non-performing assets in domestic banks on a case-by-case basis.
The State Council issued the New Edition of Negative List for Pilot Free Trade Zones, which further expands the access scope for foreign investments in the current 11 Pilot Free Trade Zones.
The National Development and Reform Commission (“NDRC”) issued the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017). The negative list regime for foreign investment officially applies to the whole country.
The People's Bank of China (“PBOC”) approves Interim Measures for the Collaboration in the Mutual Bond Market Access between Mainland China and Hong Kong, signifying the official launch of the Northbound Trading in the Bond Connect.
The Vice Minister of Commerce and Financial Secretary of Hong Kong Special Administrative Region (“HKSAR”) 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, which will expand the liberalization of and further facilitate the investment, and foster economic and technical cooperation between the Mainland and Hong Kong.
The Ministry of Commerce (“MOC”) amended the Interim Measures for Record-filing Administration over the Establishment and Change of Foreign-invested Enterprises, encompassing mergers and acquisitions of domestic enterprises by foreign investors as well as strategic investment in listed companies by foreign investors into the record-filing administration.
1 Pilot Cross-border Transfer of Non-performing Assets in Domestic Banks Launched in Shenzhen
On June 1, 2017, SAFE issued the Approving Reply to Shenzhen Branch on Developing Pilot Cross-border Transfer of Non-performing Assets Business in its Administered Banks (Huifu [2017] No. 24) (the “Approving Reply No. 24”), which authorized SAFE Shenzhen Branch to examine the requests made by the banks under its administration to carry out pilot cross-border transfer of non-performing assets business (the “Pilot Business”) on a case-by-case basis.
1.1 Background
The Tentative Regulations on the Attraction of Foreign Capital by Financial Asset Management Companies to the Restructuring and Disposal of Assets promulgated by the Ministry of Finance, PBOC, and the former Ministry of Foreign Trade and Economic Cooperation on October 26, 2001 was the first policy basis for foreign investors to participate in the disposal of non-performing assets. As the transfer of a domestic debtor’s non-performing assets by the domestic bank to foreign investors creates foreign debts for the domestic debtor, such transfer has long been dual-regulated by SAFE and the NDRC, both of which are foreign debt regulators.
In recent years, although relevant laws, regulations, and government administrative measures have been progressively relaxed, no rules have been released regarding the transfer of non-performing assets directly overseas. Therefore, under current regime, investing in the non-performing assets in the domestic banks by way of AMC is the solely legitimate path available to foreign investors. Foreign investors often need to attend the AMCs’ public disposal procedures of non-performing assets and, in view of the principles of transparency, competition and selection of the best, and value maximization set forth in the Administrative Measures for Batch Transfer of Non-performing Assets of Financial Enterprises issued by the Ministry of Finance and the China Banking Regulatory Commission (“CBRC”), foreign investors do not have much bargain power when investing in non-performing assets. In the meantime, foreign investors also encounter high intrinsic uncertainty of public disposal procedures. Under relevant regulations, AMC shall conduct record-filing with NDRC on the outbound transfer of creditor’s rights after a transaction is concluded via public transfer procedures. The certification of record-filing issued by NDRC is mandatory for foreign investors to purchase and remit foreign currency abroad.
1.2 Legal Review
The Approving Reply No. 24 stipulates that outbound transferred assets that SAFE Shenzhen Branch is authorized to examine are limited to the non-performing assets sold by domestic banks. Foreign debts resulting from the Pilot Business shall not be included in the weighted balance of cross-border financing risk (or the short-term external debt balance indicators). SAFE Shenzhen Branch is responsible for the supervision of the Pilot Business, and shall report quarterly to SAFE on the examinations and status of progress. Approving Reply No. 24 will be valid through one year from the date of the reply.
Approving Reply No. 24 further provides that the applicants within the jurisdiction of SAFE Shenzhen Branch shall, on behalf of domestic debtors, conduct relevant procedures such as foreign debt registration and foreign exchange in accordance with the Administrative Measures for Registration of Foreign Debts, but Approving Reply No. 24 did not clarify the identity conditions and requirements for “applicants within the jurisdiction”. To our understanding, the applicants who are entitled to file application with SAFE Shenzhen Branch on the Pilot Business shall be the banking financial institutions in Shenzhen. Meanwhile, we noticed that the Approving Reply No. 24 is an answer to the Shenzhen Qianhai Financial Assets Exchange Request for Instructions concerning the Authorization of examining power for Pilot Bank Assets Cross-border Transfer Business (“QFAE”) submitted by SAFE Shenzhen Branch. It is said that QFAE, via the Kua Jing Tong Platform, may distribute to onshore and offshore financial institutions the information related to the transfer of non-performing assets. In the case of outbound transfer, QFAE can serve as an agent for foreign debt registration and foreign exchange at the SAFE Shenzhen Branch. The services provided by QFAE include information distribution, transaction matchmaking, asset registration, fund monitoring, supervision compliance, and so on.
1.3 Next Step
According to this Approving Reply, which authorized SAFE Shenzhen Branch to carry out pilot cross-border transfer of the non-performing assets business, domestic banks are permitted to transfer non-performing assets upon SAFE Shenzhen Branch’s examination. Nevertheless, as bound by the Administrative Measures for Batch Transfer of Non-performing Assets of Financial Enterprises and other relevant regulations issued by the CBRC, for the transfer of non-performing assets of 3 packs and more, domestic banks shall proceed via AMC as set forth in the original rules.
2 New Edition of Negative List for Pilot Free Trade Zones Comes into Force
On June 5, 2017, the General Office of the State Council issued the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (2017 Edition) (the “New Edition of FTZ Negative List”), which entered into effect on July 10, 2017.
2.1 Background
General Office of the State Council once issued the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (the “Original Edition of FTZ Negative List”) on April 8, 2015, which applied to four Pilot Free Trade Zones (the “FTZs”) in Shanghai, Guangdong, Tianjin, and Fujian.
On September 3, 2016, the Standing Committee of the National People's Congress issued the Decision of the Standing Committee of the National People's Congress on Revising Four Laws including the Law of the People's Republic of China on Wholly Foreign-owned Enterprises adding a new article to each of the four laws, which provides that the establishment or alteration of foreign-invested enterprises that does not involve the implementation of special access administrative measures prescribed by the State shall be subject to record-filing instead of prior approval. Soon afterwards, on October 8, 2016, the NDRC and the MOC jointly issued the 2016 Announcement No. 22, which stipulates that the scope of the special administrative measures for foreign investment shall follow the Restricted Catalog, the Prohibited Catalog, and the shareholding/executive requirements in the Encouraged Catalog of the Catalog for the Guidance of Foreign Investment Industries (Revised in 2015).
In practice, FTZ Negative List applies only to the FTZs whereas the currently effective Catalog for the Guidance of Foreign Investment Industries sets forth the scope of special administrative measures for foreign investment in the area outside of FTZs.
2.2 Legal Review
The New Edition of FTZ Negative List contains 95 items in 40 sectors, which are 27 items and 10 sectors less than the Original Edition, among which 6 sectors were removed (i.e. manufacturing of railway transportation equipment, pharmaceutical manufacturing, road transport, insurance business, accounting and audit, other commercial services) while 4 sectors were abolished due to restructuring. The features of the New Edition of FTZ Negative List are summarized as follows:
Firstly, the access for foreign investment to the transportation business is further opened up. For example, the section of railway transportation equipment manufacturing is removed, which means the manufacturing of railway transportation equipment no longer requires joint venture or joint operation with Chinese partners and that the localization ratio requirement of urban railway transportation equipment is lifted. Another example is road passenger transportation which is removed from the restricted category, meaning foreign investments in the road passenger transportation may enjoy national treatment.
Secondly, the limited access to internet-related services for foreign investment is progressively lifted. For example, foreign investors are permitted to operate premises for internet access services.
Thirdly, the access restriction for foreign investment to enter the cultural, sports, and entertainment business is slightly relaxed. For example, foreign investors are now permitted to operate the importation of artworks and digital bibliographic database and its publications as well as other cultural products. Another example is the construction and operation of large theme parks which is removed from the restricted category.
2.3 Next Step
The State Council once issued the Opinions on Implementing Negative List System for Market Access on October 2, 2015, which suggests implementing the negative list system in some regions from December 1, 2015 to December 31, 2017 in order to gather experience, make improvements, explore a uniform negative list and its corresponding institutions, and officially implement a nationwide uniform negative list system in 2018. Therefore, to understand precisely the upcoming negative list applicable to the whole country, we advise close monitoring towards this amendment of FTZ Negative List.
3 Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) Issued
On June 28, 2017, the NDRC and the MOC jointly issued the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017), the seventh amendment since the first issuance of Catalog for the Guidance of Foreign Investment Industries in 1995.
3.1 Background
As stated above, in September 2016, the Standing Committee of the National People's Congress revised four laws including the Law of the People's Republic of China on Wholly Foreign-owned Enterprises adding a new article to each of the four laws stipulating that the establishment or alteration of foreign-invested enterprises that does not involve the implementation of special access administrative measures prescribed by the state shall be subject to record-filing instead of prior approval. However, the lagging enactment of the scope of special access administrative measures causes the determination of scope of the special administrative measures for foreign investment to refer to the Restricted Catalog, the Prohibited Catalog, and the shareholding/executive requirements in the Encouraged Catalog of the Catalog for the Guidance of Foreign Investment Industries (Revised in 2015).
In January 2017, the State Council issued the Circular on Several Measures concerning the Expansion of Opening-up and the Active Use of Foreign Capital, promoting a new round of high-level opening-up by revising the Catalog for the Guidance of Foreign Investment Industries and the relevant policies and regulations, easing access restrictions on foreign capital in fields such as services, manufacturing, and mining sectors, supporting foreign capital to participate in the implementation of the innovation-driven development strategy and the transformation and upgrading of manufacturing, and encouraging overseas talents to start entrepreneurship in China.
Given the above background, the NDRC and MOC issued the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) on June 28, 2017, which came into force on July 28, 2017.
3.2 Legal Review
Compared to the previous versions of the Catalog for the Guidance of Foreign Investment Industries, the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) experienced significant alteration in respect of structure. The Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) is divided into the Catalog of Encouraged Foreign Investment Industries and the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments) wherein those items in the Restricted Catalog and the Prohibited Catalog and the shareholding/joint venture/joint operation requirements in the Encouraged Catalog of previous versions are now integrated into the Negative List for Access of Foreign Investments, in which section all access restrictions are specified. This is the first time when the negative list regime for foreign investments has been implemented in the whole country.
With respect to the contents, the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) continues to reduce restrictive measures, retaining 35 items in the Restricted Catalog and 28 items in the Prohibited Catalog, which amount to 63 items in total and are 30 items less than the previous version. The opening-up in services, manufacturing, and mining sectors are the highlights. For the services sector, access restrictions in road passenger transportation, accounting audit, and agricultural products wholesale markets, among others, are removed. For the manufacturing sector, access restrictions in railway transportation equipment, automotive electronics, new energy automobile battery, motorcycles, edible fats, biology liquid fuel, among others, are removed, and the access restriction in electric vehicles is eased. For the mining sector, access restrictions in unconventional oil and gas and rare metals, among others, are removed.
It shall be noted that for an investment item which falls simultaneously within the Catalog of Encouraged Foreign Investment Industries as well as the Special Administrative Measures for Access of Foreign Investments (Negative List for Access of Foreign Investments), that foreign investors will be entitled to the encouragement policies while in the meantime subject to access regulations.
3.3 Next Step
The issuance of the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017) signifies a relatively high level of opening up as 11 items in the previous version that require control or 50% minimum shareholding of Chinese party are removed from the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017), so as 4 items that require joint venture or joint operation. Notwithstanding the above, we noticed strengthened control over foreign investments in the cultural field in that four items, being (1) editing of books, newspapers, periodicals audio-visual products, and electronic publications, (2) radio and television video-on-demand services, and installation services for ground receiving facilities for television broadcasting by satellite, (3) services for internet information release by the public, and (4) humanities and social sciences research institutes, are added as Prohibited items.
to be continued