China has surprised its foreign business community after this year's summer break with key reforms of its foreign investment regime which were anticipated for many years. A key element since the beginning of China's opening up to foreign investors more than 35 years ago, it appears that the approval requirement for each and every investment in China through Sino-Foreign Joint Ventures ("JV") and Wholly Foreign-Owned Enterprises ("WFOE"), as well as for every change in them, has finally disappeared. The changes became effective on 1 October 2016.
Free Trade Zone Precedents
The first step in this direction was taken by the Chinese government three years ago when it allowed its newly established so-called Free Trade Zones ("FTZ"), the most prominent one being the one in Shanghai Pudong, to replace the approval requirement for foreign investment projects with a requirement to file new JVs or WFOE or any changes to them with the local authorities. In the Shanghai FTZ the general time required to complete all procedures for a typical foreign investment application was subsequently reduced from three or four months to four weeks. The pre-condition for any foreign investment project to benefit from these changes is that the project does not fall within any category of the so-called Negative List.
Given that the main feature of the FTZ has been widely understood to be the ability to experiment with liberalisation steps in the areas of finance, foreign exchange and foreign investment, most observers have been expecting the eventual rollout of some of the FTZ features nation-wide. As regards those directed at the simplification of foreign investment approvals, the latest changes to the laws and regulations governing WFOE und JV adopted by the National People's Congress on 3 September 2016 and the draft rules for the new filing regime published by the Ministry of Commerce ("MOFCOM"), seem to do just that. Accelerated reforms may also be an answer to the decrease of economic growth, in particular, in terms of foreign investments. In this sense, the upcoming changes will certainly be welcome.
New Filing Regime and Negative List
What can foreign businesses expect from the new regime? First, for those projects not covered by the Negative List, the replacement of the approval process with a filing procedure will shorten the time required for setting up JV or WFOE and amending their structure. According to the current version of the draft MOFCOM rules, a filing confirmation shall be issued within three working days of the filing submission with the local MOFCOM unit. Importantly, the filing, unlike the current MOFCOM approval, is not a pre-condition for the effectiveness of the changes. This is a significant step towards a less administrative corporate legal system.
The items to file are listed in the draft MOFCOM rules and they mainly consist of those items which have required MOFCOM approval so far. One new item is the identity of the ultimate beneficiary of the investment, i.e. the ultimate person who owns or controls the foreign investor. Consequently, if such ultimate beneficiary changes, this triggers a new filing obligation.
If, however, the business of a JV or WFOE is covered in the Negative List, the current approval requirements still apply, meaning that the respective foreign investment project does not enjoy the benefits of the new regime.
The new procedures do not change any requirements vis-a-vis the local Administration of Industry and Commerce ("AIC") so it is expected that the respective registration formalities with AIC are set to continue.
Much will depend on the content of the Negative List. If the experience with the FTZ negative lists provides any guidance, one can expect that the first version will not allow any liberalisation of specific sectors compared to the current regime provided by the Foreign Investment Industrial Guidance Catalogue. But with every revision of the Negative List, it is expected to become shorter.
Foreign investors shall remember that the MOFCOM approval requirement has not always been the only – even not the most difficult – hurdle on their way to the China market. Increasingly over the past years, sector-specific regulators have taken on a more important role in the regulation of certain markets, and their positive attitude towards certain investors or projects has become even more important if the MOFCOM approval requirement disappears.
The reforms will not improve the sometimes frustrating experience foreign investors have when dealing with Chinese government officials. Real progress would require a reduction in the enormous leeway local authorities and individual officials have to make decisions at their own discretion, likely also in the course of the new filing procedures.
Overall, the upcoming changes are certainly good news to foreign investors in China but they also mean that the regulatory environment for market access is becoming more complex.