February 02, 2022
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Snapshot: foreign investment law and policy in China - Lexology

Law and policy

Policies and practices

What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

Opening up is the hallmark of contemporary China. Foreign investment plays a significant role in the construction of a prosperous society and has made an important contribution to China’s economy. In his keynote speech, titled 'Let the Breeze of Openness Bring Warmth to the World', to the fourth China International Import Expo (CIIE) in November 2021, President Xi Jinping asserted that China will neither change her resolve to open further at a high standard nor her determination to share development opportunities with the rest of the world.

As the only major economy to register positive growth of trade in goods in 2021, China has overcome the impact of covid-19 to achieve innovative growth in foreign trade. Also in his keynote speech to the CIIE, President Xi Jinping stated that China will further reduce the barriers to foreign investment, and expand the opening of telecommunications, healthcare and other services in an orderly fashion. The list of industries for encouraging foreign investment is to be revised and enlarged to guide more foreign investment toward sectors such as advanced manufacturing, modern services, high and new technology, energy conservation and environmental protection, and toward the Central, Western and North-Eastern regions. Moreover, stress tests for high-standard opening up will be conducted in pilot free trade zones and the Hainan Free Trade Port.

China has relatively strict currency controls. However, in the trend of further opening up, the government has relaxed some restrictions.

In December 2020, the People's Bank of China Shanghai Branch issued the Notice on the Cancellation of the Special Deposit Accounts for Renminbi Capital Funds for Foreign Direct Investment in the Lin-Gang Special Area of Shanghai Pilot Free Trade Zone (Shanghai Yin Fa [2020] No. 247), which allows foreign-invested enterprises registered in Lin-Gang Special Area to no longer open special accounts of renminbi capital funds when they make capital contributions in renminbi.

Opinions of the People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange on Financial Industry Support for the Comprehensive Deepening of Reform and Opening-up in Hainan Province (Yin Fa [2021] No. 84) were published in March 2021. The 33 Opinions concern six priorities, namely, enhancing the convertibility of renminbi to support the liberalisation and facilitation of cross-border trade and investment, improving Hainan's financial market system, further liberalising Hainan's financial industry, improving financial product and service innovation, improving the level of financial services and strengthening financial regulation to guard against and resolve financial risks.

The Notice of the State Council on Printing and Distribution of Several Measures for Promoting Reform and Innovation in Trade and Investment Facilitation in Pilot Free Trade Zones (Guo Fa [2021] No. 12) issued by the State Council on 2 August 2021 laid down measures to promote reform and innovation in trade and investment facilitation in pilot free trade zones, including to conduct a pilot scheme in renminbi and foreign currencies combined bank accounts, to adopt uniform standards, rules and processes for the opening, change and cancellation of renminbi accounts and foreign currency accounts, and to allow eligible financing lease companies registered in pilot free trade zones to share external borrowing quotas with their subordinate special purpose vehicles under a full-coverage macro and prudential framework of cross-border financing.

Main laws

What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

The main laws include the following:

Scope of application

Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

The PRC FIL 2020 is the primary law regarding foreign investment, which is applicable to all foreign investment activities carried out directly or indirectly by foreign investors in China, including independently or jointly with other investors, establishing new foreign-invested enterprises; obtaining shares, equities, property shares or other similar rights and interests of Chinese domestic enterprises; investing, independently or jointly with other investors, in new projects in China; and investing through other means stipulated in laws, administrative regulations or provisions of the State Council. For the purpose of facilitating the implementation of the PRC FIL 2020, the State Council of China further promulgated the Implementing Regulations to construe and detail certain clauses in the PRC FIL 2020, which has the same scope of application as the PRC FIL 2020.

The Measures came into effect in January 2021. For the purpose of the Measures, 'foreign investment' refers to any investment activity carried out directly or indirectly by a foreign investor within China, including: (1) a foreign investor, solely or jointly with any other investor, invests in the establishment of a new project or the establishment of an enterprise in China; (2) a foreign investor, by means of merger or acquisition, acquires the equity or assets of any enterprise in China; and (3) a foreign investor makes investment in China by other means.

Where foreign investors carry out investment activities in China directly or indirectly, the foreign investors or foreign investment enterprises must submit investment information to competent commerce authorities in accordance with the Measures for Foreign Investment Information Reporting.

The Negative List stipulates the special management measures for the market entry of foreign investment, such as equity requirements and senior manager requirements. Foreign investors must not invest in the sectors in which foreign investment is prohibited under the Negative List, and the market entry licensing of foreign investment shall be required for the investment in those sectors that are included in the Negative List and in which investment is not prohibited. Sectors not included in the Negative List shall be managed according to the principle of equal treatment of domestic and foreign investment. For some sectors such as culture and finance, besides the requirements stipulated in the Negative List, foreign investors must also comply with requirements relating to, for example, administrative approval, qualification requirements and national security, which are provided in other laws and regulations. The Negative list will be updated by relevant authorities on a regular basis.

In accordance with article 31 of the Anti-Monopoly Law of China, a foreign investor participates in the concentration of undertakings by merging and acquiring a domestic enterprise or by any other means, which involves national security; the matter shall be subject to review on national security as is required by the relevant state regulations, in addition to the review on the concentration of undertakings.

Order No. 4 published by the Ministry of Commerce came into effect on 19 September 2020. As stated in Order No. 4, the state shall establish an unreliable entity list and take corresponding measures against any of the following actions of foreign entities in international economic, trade and related activities:

  • activities that endanger China's national sovereignty, security and development interests; or
  • activities that violate normal principles of market transactions; discontinue normal transactions with Chinese enterprises, other organisations or individuals; or adopt discriminatory measures against Chinese enterprises, other organisations or individuals, which seriously damage the legitimate rights and interests of Chinese enterprises, other organisations or individuals.

Any foreign entity that is included in the unreliable entity list may be restricted from investment activities, or prohibited from investing, in mainland China.

Definitions

How is a foreign investor or foreign investment defined in the applicable law?

The PRC FIL 2020, as the primary legislation on foreign investment, defines ‘foreign investment’ as investment activities carried out directly or indirectly by foreign natural persons, foreign enterprises or other foreign organisations (‘foreign investors’) in China, including:

  • foreign investors, independently or jointly with other investors, setting up foreign-invested enterprises in China;
  • foreign investors obtaining shares, equities, property shares or other similar rights and interests of Chinese domestic enterprises;
  • foreign investors, independently or jointly with other investors, investing in new projects in China; and
  • investment through other means stipulated in laws, administrative regulations or provisions of the State Council.

Under Order No. 4, foreign entities means foreign enterprises, other organisations or individuals.

For the purpose of the Measures, 'foreign investment' refers to any investment activity carried out directly or indirectly by a foreign investor within China, involving the following circumstances:

  • a foreign investor, solely or jointly with any other investor, invests in the establishment of a new project or the establishment of an enterprise in China;
  • a foreign investor, by means of merger or acquisition, acquires the equity or assets of any enterprise in China; and
  • a foreign investor makes investment in China by other means.

Special rules for SOEs and SWFs

Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

China does not have specific rules for investment made by SOEs and SWFs yet.

Relevant authorities

Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

According to the Measures, a working mechanism for the security review of foreign investment (Working Mechanism) is responsible for organising, coordinating and guiding the security review of foreign investment. A Working Mechanism office is established under the National Development and Reform Commission (NDRC) and led by the NDRC and the Ministry of Commerce to undertake the daily work on the security review of foreign investment.

Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

The authorities have great discretion.



source: https://www.lexology.com/library/detail.aspx?g=8d9f2ea0-4000-4242-b2f0-21712db83bf0

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