what we think

Opening its economy to foreign investment has been one of the cornerstones to China’s economic policy over the past decade. Foreign capital has contributed, and in some cases has been the main drive, to development of countless industries, and as such as been an integral part of China’s economic success story.

In recent years however, promoting foreign direct investment has taken a backseat to other forms of economic incentive. China’s 2009 stimulus package mainly promoted domestic industry and encouraged domestic spending, and the new PRC Corporate Income Tax Law that went into effect on 1 January 2009 eliminated many of the tax benefits that foreign-invested manufacturing companies had previously enjoyed.

However, China has not lost its appetite for foreign capital and know-how, as was made clear by the State Council in the Several Opinions On further Utilizing Foreign Capital (GuoFa [2010] No. 9, the “Opinions”) issued on 6 April 2010. The Opinions are a policy document and do not introduce specific rule changes. Nevertheless they provide an importance guidance of the important changes to China’s foreign investment regime in the near future, including beneficial treatment for certain favored industries, simplifying approval and registration procedures, and providing better opportunities for financing. To respond to the Opinions of the State Council, the State Administration for Industry and Commerce (SAIC), which registers companies in China and overseas their activities, made its own Comments on Bringing the Function of the Administration for Industry and Commerce into Full Play to Further Providing Better Service for the Development of Foreign-invested Enterprises (“SAIC Comments”) on 7 May 2010. The Ministry of Commerce (MOC) also issued, on 10 June 2010, the Notice Regarding Further Delegating Approval Authority for Foreign Investment (“MOC Notice”) to implement the Opinions.

Encouraging foreign investment

1. The Catalogue for the Guidance of Foreign Investment Industries (the latest version was published in 2007), which determines in which industries foreign investment is encouraged, permitted, restricted or prohibited, will be revised. Industries to be encouraged include high-end manufacturing, high and new technology, modern services, new energy and energy-saving, and environmental protection. Projects that pollute, consume a lot of energy and resources will be further restricted. The Opinions do not provide any further detail or on the timing of the amendments. During the press conference organized at release, an official verbally confirmed only that the amendments will be made to optimize China’s industrial structure and adjust the country’s direction of development.
2. Supporting policies will be implemented to bring in advanced technologies and management experience, to encourage foreign investment in the service outsourcing industry and raise China’s international competitiveness in this field.
3. R&D cooperation between foreign and domestic companies is encouraged, with foreign-invested R&D centers offered tax exemptions for customs duty, VAT and consumption tax for importing goods for technology developments. China will also promote the establishment by foreign investors of functional entities.such as regional headquarters, R&D centers, purchasing centers, and financial management centers.
4. Foreign capital is encouraged to participate in restructuring of domestic enterprises, and A-share listed companies will be supported to bring in domestic and overseas strategic investors.
5. The Catalogue of Priority Industries for Foreign Investment in the Central-Western Region will be supplemented to encourage labor-intensive projects in China’s central and western regions, with some restrictions on environmental grounds.

Facilitating establishment

1. The authority to approve foreign investment projects with a total investment less than USD 300 million (previously USD 100 million) and that fall under the encouraged or permitted categories of the Catalogue for the Guidance of Foreign Investment Industries will be delegated to local administrations, except for specific industries. Service companies (excluding those in finance and telecommunications) shall be approved at local level as well. The MOC Notice confirms the same, and adds that restricted projects of less than USD 50 million should also be approved at local level.
2. Designed to increase transparency and cut red tape, approval procedures for foreign investment project are to be simplified, with lower requirements on approval accounts and more online administrative licensing processes. The initiative is also confirmed in the SAIC Comments, which emphasize its plans to offer more online registration services. In some localities the important first step of name pre-approval can already be completed online.

Easing finances

1. Procedures for foreign exchange capital settlement will be simplified, and those foreign-invested companies that abide by the law but are temporarily unable to contribute capital on time may be permitted to extend the deadline of contribution. The SAIC Comments expressly set out that investors which have already established their subsidiary and have contributed the first installment of registered capital, but have financial difficulties and are therefore unable to contribute capital as per the agreed payment schedule, are permitted to extend the period of capital contribution. Generally this is already permitted as long as the extension does not go beyond the legal limit of two years of business license issuance. The Comments do not clarify whether the period of contribution may now be extended beyond this period.
2. Qualified foreign-invested enterprises will be encouraged to publicly issue stocks, corporate bonds and medium-term notes within China to expand on their financing options, while financial institutes in China will be encouraged to lend to foreign-invested enterprises. To diversify financing options, the SAIC Comments further allow a Chinese subsidiary to convert debt towards its parent company into registered capital. This was already permitted where such debt came from
   registered external loans, but the SAIC Comments seem to imply that trade debts may also be converted. Currently this is not feasible: an investor can only increase the subsidiary’s registered capital and physically contribute the increased capital, and only after such contribution the subsidiary can use this capital to pay back the debt. It remains to be seen how this clause will be interpreted in implementation, but it seems to open an interesting possibility for companies that wish to expand their business despite sizeable (trade) debts to their shareholders.

Finally, to optimize the investment environment, the SAIC Comments include two clauses on improving the SAIC’s role in protecting the trademarks of foreign investors and their subsidiaries. Not only should authorities be more active in fighting counterfeits and taking actions based on unfair competition, but foreign-invested companies should also be guided to improve on the registration, utilization, protection and management of their trademarks. IP infringements remain a major challenge for many foreign companies operating in China; thus more initiative from the authorities will be welcome.

The Opinions and the subsequent SAIC Comments and MOC Notice seem designed to make life easier for foreign investors (and their advisers!) who establish or operate subsidiaries in China. On the other hand, these guidelines remain broadly worded, and for many issues further regulation will have to be adopted before the principles can be implemented. Above all however, these policy documents indicate a renewed interest in and focus on foreign investment, and this is good news for the many foreign businesses that wish to expand into China in the coming years.

For more information on foreign investment into China, please contact authors Maarten Roos ([email protected]) or Chen Yun ([email protected]), or your usual contact at R&P China Lawyers.