China Investment Policy – Ensuring The Mice Will Be Caught – Coronavirus (COVID-19)

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Although much of the world continues to struggle with the
COVID-19 virus, China is recovering and is very much focused on the
need to kick start its damaged economy. Good news in China would be
welcome news globally, as markets everywhere look for any sign of
growth as a basis for optimism that the world economy generally
will recover strongly in the second half of the year.

The Big Picture

China has gone through a number of phases of expansion over the
last two decades. For much of the last twenty years, it experienced
double digit growth as it attracted enormous inward investment and
the world changed massively as a result of the mass movement of
manufacturing capacity to the PRC.

Over the last decade, Chinese outbound investment has been a
feature of many markets around the world, including manufacturing
and other areas. There are, however, a number of reasons to think
that China will now refocus on boosting its home market by seeking
foreign investment once again.

2019 – Foreign Investment Law

As a result of falling growth projections for 2020, China needs
to refocus on its home economy to preserve jobs and put foundations
in place to assist its recovery. With this in mind, a new Foreign
Investment Law came into effect on 1 January 2020. This was aimed
at further opening up markets with the intention of “levelling
the playing field” for foreign investors. The new law,
however, contained big-picture statements of intent but not enough
detail. Many viewed it as China’s attempt to address
international criticism (particularly from the United States) about
its lack of openness and improve its image as a frustrating place
to do business.

The Foreign Investment Law seeks to simplify the legislation
applicable to foreign investment. Prior to it taking effect, three
principal laws related to each of wholly foreign-owned enterprises
(WFOE), Sino-foreign joint ventures and contractual joint ventures.
Increasingly, these old alternative business vehicles were viewed
as outdated and the separate rules for each as unnecessary.

Building On the Foreign Investment Law – State Council

Although the Foreign Investment Law was seen as being general in
nature, it nevertheless emphasised equal treatment for foreign
investors. It also contained a number of statements about
abolishing forced technology transfer and improving intellectual
property rights protections. In addition to the law, the Opinions
of the State Council on Further Improving the Use of Foreign
Capital dated 30 October 2019 (the “State Council
“) further outlined the general objectives in
opening up the economy. It contained the following features:

Key Industries

(i) New areas permitted – It emphasised the
objective of shortening the national and free-trade zone (FTZ)
negative list and abolishing restrictions on sectors not included
in the negative lists.

(ii) Financial sector (including banks and insurance) -
This involves abolishing many restrictions on the
activities of foreign invested banks, securities
companies and fund management companies, lifting a number
of entry requirements
in respect of thresholds, total
assets, operating years and types of corporation of foreign (and,
in the case of Sino-foreign joint venture, Chinese) investors. The
State Council Opinions promise the adoption of equal
in respect of registration formalities of
foreign-invested and domestic insurance institutions.
Significantly, they also announced the removal of foreign ownership
restrictions (up to 51%) for securities companies, securities
investment fund management companies, futures companies and life
insurance companies in 2020 – this was fully implemented as
of 1 April.

(iii) Motor Cars ‒ Equal market access for
new-energy vehicles produced by domestic and foreign-invested
manufacturers; and reform of existing regulations to allow the
transfer of credits (awarded by selling motor vehicles exceeding
national environmental standards) between various enterprises with
foreign investors.

Promoting investment

(i) Process – The State Council Opinions require
local governments to promote foreign investment and serve
foreign-invested enterprises (FIE) better, by, for example,
delegating more approval powers and streamlining the local approval

(ii) Funding – The objectives are to:

  • Remove barriers to the use of
    overseas funding by supporting foreign-invested enterprises to use
    cross-border RMB funds and simplifying foreign debt registration.
    In response the People’s Bank of China and the State
    Administration of Foreign Exchange acted on the 12th March this
    year by raising the foreign debt borrowing cap applicable to both
    domestic and FIE’s so as to allow borrowing up to 2.5 times of
    net assets shown in a borrowers latest audit report – such
    cap was previously up to twice its net assets.

  • Simplify bank formalities relating to
    the use of money sent to China as debt or equity, removing red tape
    to allow funds to be used more quickly and easily.

  • Encourage foreign-invested
    enterprises to make domestic equity investments by using their
    registered capital. It should be noted that the State
    Administration of Foreign Exchange expressly lifted the restriction
    on foreign-invested enterprises using registered capital on 23
    October 2019 (a few days prior to the State Council Opinions) for
    domestic equity investments within China (previously, registered
    capital could only be used for purposes within a company’s
    permitted business scope).

(iii) Simplifying land planning approvals – The
objective here is to combine planning, site selection and land use
pre-examination, merge construction land-use planning permits and
land-use approvals and simplify various review and approval

Equal Treatment

(i) The Opinions envisage the full implementation of the Foreign
Investment Law, the improvement of the complaints system for
foreign-invested enterprises and a reduction in red tape to lessen
the compliance burden on foreign-invested enterprises. In
particular, an appropriate period of time will be allowed between
the introduction and effectiveness of new regulations to help
industry and businesses to adjust, having regard to the business
environment and prevailing conditions. The Opinions also promised
enhanced IP protection, which is particularly important as it
potentially addresses some of the long-standing complaints foreign
investors have made regarding remerges available and other such

(ii) Tapping Foreign Expertise ‒ Loosening
restrictions on (among other things) age, educational background
and work experience to allow people with urgently needed skills to
move within local areas; and reforming work permit and resident
permit procedures for foreigners.

(iii) Remaining Restrictions ‒ Removing obstacles
to fair competition and various restrictions on business/projects
carried out by foreign construction enterprises; improving foreign
investors’ applications for the operation of internet-based
service businesses and entertainment places, among others, and
adopting equal treatment for the approval of domestic and
foreign-invested institutions on product certification.

It also appears that the measure also encourages equal
participation in government procurement and envisages a role for
foreign-invested enterprises in the development of standards
regarding medical devices, food and drugs, and information

Taking the State Council’s Guidance Forward

Many international observers noted in late 2019 that additional
details were needed, so further action has been expected. The first
major regional government to take this forward has been

The Several Measures of Shanghai Municipality on Implementing
the Opinions of the State Council on Further Improving the Use of
Foreign Capital (Shanghai Measures) attempts to
take forward many of the policy ideas set out in the State Council

Industry Sectors

(i) Financial Services – As all restrictions in
financial services industries listed in the 2019 Negative List were
lifted as of 1 April, 2020 (removing limits on shareholding ratios
for certain securities companies and life insurance companies),
Shanghai will pursue its objective to become a world financial
centre and encourage investment in industries such as life
insurance and asset management, and further open up bond and
foreign exchange markets and products.

(ii) Electric Motor Cars – The Shanghai Measures
also mentions the new-energy motor car industry as an area to be
further opened up. Under the Development Plan for Energy-saving and
New Energy Automotive Industry (2012-2020), “New-energy”
motor cars are defined as vehicles that use alternative power
systems which are completely or mainly driven by new energy
sources, mainly including pure electric driving automobiles,
plug-in hybrid automobiles and fuel cell motor cars. Shanghai has
since issued its 2020 Operation Process regarding the
Implementation Rules for Encouraging Purchasing and Using New
Energy Motor Cars in Shanghai, which aims to further shorten the
time required for companies to register new-energy motor car models
as well as the time required for consumers to purchase car plates
and install charging piles.

(iii) Telecommunications, scientific research and technology
service, education and health industries within Shanghai FTZ

‒ Shanghai is also attempting to further open up
telecommunications, scientific research and technology services,
and education and health industries within the China (Shanghai)
Pilot Free Trade Zone (including the Lin-Gang Special Area). No
details are available at the moment.

Encouragement and Assistance

(i) New Incentives – certain qualifying Shanghai
foreign investment and capital increase projects may qualify for
grants and other benefits from Shanghai district governments based
on the size and importance of such projects. Further details are to
be formulated at the district government level. At the moment,
details are unclear as to what industries may benefit or what size
of investment will qualify for these new incentives – the
Shanghai Measures use very general wording such as “overall
contribution” and “the development goals of
Shanghai”, but foreign investors may wish to touch base with
their local district government to check what kind of incentives
may be available.

(ii) Help with work and resident permit procedures
– This is another measure aimed at foreigners working in
Shanghai. Although there are few details, this appears to be aimed
at reducing delays and red tape and making it easier for foreigners
to obtain work and residence permits.

(iii) Simplification of bank formalities related to foreign
direct investment and foreign debt
– The Measures
indicate that simplified measures for foreigners will be introduced
to exchange salary into foreign currency – a further attempt
to make life easier for them. It is also envisaged that it will be
easier for foreign-invested enterprises to complete foreign
exchange registration and to borrow from overseas. This measure
also confirms that foreign-invested enterprises (even without an
investment business scope) can use registered capital for
re-investment within China.

Legal Reform

(i) Land planning approval process – Combining multiple
review and approval procedures into one certificate.

(ii) Accelerating implementation of the Foreign Investment
– This indicates an intention to speed up the
introduction of the details have been missing in the Foreign
Investment Law.

(iii) Administrative Penalties – Providing
exemptions for minor violations – this appears to be an
intention to limit strict administrative liability for certain
violations, but it is subject to the introduction of detailed
regulation. This, however, appears to continue a trend, for
example, the Shanghai Administration for Industry and Commerce
(AIC) in 2019 issued a list of minor violations for which
administrative penalties might be exempted, such as, a company
failing to timely register the change of its registered address but
correcting this breach after being ordered to do so. We can now
expect more such relaxations aimed at rewarding compliance with

(iv) Intellectual Property – Measures are to be
introduced aimed at making legal action involving foreign-invested
enterprises easier. Increased penalties will also apply to IP
infringement cases.


(i) Listening to concerns – The Shanghai Measures
suggest a wish to listen better, improve communications with
foreign-invested enterprises by appointing liaison officers for
certain such companies that are viewed as key, and optimise the
complaint mechanism.

(ii) Consultation – There is a new commitment to
request submissions/opinions from foreign-invested enterprises and
chambers of commerce on foreign investment-related regulations. The
Shanghai Measures appear to acknowledge the need for time to digest
and prepare for relevant regulations by providing a reasonable time
gap between the issuance date and the effectiveness date. English
translations of foreign investment-related regulations are also to
be issued as standard practice.

(iii) Participation in Government Projects
There is a desire to enhance foreign-invested enterprises’
rights to participate in standard formulation and government
procurement processes.

More Reforms Expected

The Foreign Investment Law and the State Council Opinions
demonstrate an intention to develop a more transparent and open
business environment to enable China to remain competitive. It is
likely that China will continue to be selective about what
investment in which area it wishes to encourage, and more detailed
industry and area-specific policies are expected. Shanghai will not
be alone in following up with actions

On 21 April, the Ministry of Commerce forwarded the Shanghai
Measures to all other provinces for their reference, asking them to
issue further policies and measures to stabilise the foreign
investment environment in their areas. It is therefore likely that
measures similar to those introduced in Shanghai will be developed
over the coming weeks and months.

The outlook for 2020 is complicated as the world enters
recession, and demand for Chinese-made goods drops. This backdrop
combined with mounting challenges in trade and China’s
relationship with Europe, the United Kingdom and the United States
make reform even more important.

China has adapted many times in its recent history and is doing
so again. As Deng Xiaoping famously said: “It does not matter
if a cat is black or white, as long as it catches the

Originally published Apr 28, 2020.

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