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China – Foreign Investment Bulletin.

3 June, 2015

 

 
The State Council announced the Circular of the General Office of the State Council on Issuing the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (“Negative List”), according to which foreign investment in sectors other than those specified in the Negative List in pilot free trade zones (“FTZs”) will be administered in a manner consistent with the manner of administration of domestic investment. Simultaneously, the State Council announced the Circular of the General Office of the State Council on Issuing the Tentative Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones (“Tentative Measures”) , implementing on a trial basis the measures for the national security review of foreign investment in support of the “negative list-based” administration mode. In addition, the State Council released the Decision on the Implementation of Access Management Concerning Bank Card Clearing Institutions (“Decision on Bank Card Clearing Institutions Access”), allowing the qualified domestic and foreign institutions to engage in bank card clearing services in China.
 
The State Council Announced The Negative List For FTZs
 
On April 20, 2015, the State Council promulgated the Negative List1  A Negative List Generally Applicable To FTZs in Shanghai, Tianjin, Guangdong and Fujian will come into effect on May 8, 2015, under which foreign investment in sectors other than those specified in the Negative List in FTZs will be administered in a manner consistent with the manner of administration of domestic investment. This will initiate a new round of expansion of the opening-up to foreign investment, and also promote the reform of the administration mode which was originally based on the administrative examination and approval in China to wider areas.
 
Background
 
A “positive list-based” mode is adopted in China for the administration of foreign investment at present, under which foreign investment is administered according to the Catalogue of Industries for Guiding Foreign Investment, which provides for the classes of projects in which foreign investment is encouraged, restricted and prohibited respectively. Under this administration mode, the contract and articles of association of a foreign-invested enterprise can be effective only when they are examined and approved by the commerce authorities. Foreign investors only enjoy the “post-establishment national treatment”.
 
However, under the “negative list-based” administration mode, the State will clearly list the sectors in which foreign investment is restricted or prohibited, and the sectors outside the list will be fully open to foreign investment. The approval system for administration of foreign investment projects will be replaced by a record-filing system, and the contract and articles of association of a foreign-invested enterprise will only need to be filed, rather than being approved. The supervision of the government on foreign investment will gradually change from the pre-establishment supervision to the supervision during and after establishment. Foreign investors will enjoy the “pre-establishment national treatment”.
In 2013, Shanghai FTZ promulgated the first negative list in China with 190 special administrative measures in total. The special administrative measures were reduced to 139 (reduced by 51) when the negative list was revised in 2014. The latest Negative List further reduced the special administrative measures to 122, 17 less than the revision in 2014. In addition, the latest Negative List will be generally applicable to four FTZs.
 
Legal Review
 
The Negative List clearly sets out the special administrative measures regulating the access by foreign investment that are not in conformity with the national treatment obligation, and will be applicable to four FTZs in Shanghai, Guangdong, Tianjin and Fujian.
The Negative List includes 122 special administrative measures, which are divided into 15 categories and 50 industry sectors in accordance with the Classification of National Economic Industries (GB/T4754-2011). The special administrative measures include the specific industrial measures and the general measures applicable to all industries.
 
The special administrative measures relating to the national security, public order, public culture, financial due diligence, government procurement, subsidization, special formalities and tax revenues that are not covered by the Negative List shall be implemented in accordance with the existing regulations. As for the foreign investment in FTZs that relates to the national security, a security review shall be carried out in accordance with the Tentative Measures.
 
The foreign investment in sectors other than those specified in the Negative List in FTZs will be administered in a manner consistent with the manner of administration of domestic investment, and the local people’s governments at the provincial level shall promulgate the guidelines for the administration and provide relevant guidance. The investment in the FTZs by investors from Hong Kong, Macao and Taiwan will be administered by reference to the Negative List. Where there are opening-up measures applicable to FTZs and more favorable to eligible investors under the arrangements for establishing closer economic partnership among Mainland China, Hong Kong and Macao and supplementary agreements thereto, the Cross-straits Economic Cooperation Framework Agreement and the free trade treaties entered into by China, the relevant provisions of such agreements or treaties shall prevail.
 
Next Step
 
We are anxiously waiting to see the guidelines for administration to be promulgated by the local people’s governments at the provincial level, the implementation of the record-filing system in practice, and the specific measures to be taken by the national and local authorities for improving supervision during and after establishment of foreign investment.
 
The State Council Announced The Measures For The National Security Review Of The Foreign Investment In FTZs
 
On April 20, 2015, the State Council announced the Tentative Measures 2 in support of the “negative list-based” administration mode, in order to guide the orderly development of foreign investment and safeguard the national security. The Tentative Measures will come into effect on May 8, 2015.
 
Background
 
On April 20, 2015, the State Council announced  the Negative List for FTZs, under which the State clearly lists the sectors in which foreign investment is prohibited or restricted, and the sectors excluded from the list will be fully open to foreign investment. Under the framework of the “negative list-based” administration mode, foreign investors can enjoy the “pre-establishment national treatment”. However, the “negative list-based” administration mode does not necessarily mean that the sectors outside the Negative List will be completely open to foreign investment. For the industries relating to national security, the national security review is still required. Therefore, when introducing the Negative List generally applicable to four FTZs, the State Council also promulgated the Tentative Measures, providing for the national security review measures in support of the negative list approach.
 
Legal Review
 
The Tentative Measures mainly provide for the scope of review, the contents of review, and the working mechanism and procedures for security review.
 
The general principle of the Tentative Measures is to carry out security review with respect to the foreign investment that affects or may affect the national security, national safety security competence, or that involves a sensitive investment subject, sensitive object of merger and acquisition, sensitive industry, sensitive technology or sensitive territory.
 
The scope of security review covers: foreign investment in the military industry, militaryaccessory sectors and other sectors relating to the national defense security as well as in the peripheral territories of key and sensitive military installations in the FTZs; foreign investment in the sectors relating to the national security such as crucial agricultural products, energy and resources, infrastructures, transportation services, culture and information technology products and services, key technologies, major equipment manufacturing in FTZs, whereby the foreign investors acquire the actual control thereof.
 
Next Step
 
It is worthy of further study how the Tentative Measures will be implemented in practice and how the relevant legislation will develop.
 
China Opens Bank Card Clearing Market
 
On April 22, 2015, the State Council released the Decision on Bank Card Clearing Institutions Access 3 . Since June 1, 2015, the qualified domestic and foreign institutions, which obtain the bank card clearing licenses, can engage in bank card clearing services in China. This will completely change the current situation that China UnionPay Co., Ltd. (“UnionPay”) is the only clearing institution in China eligible to provide interbank information transfer services involving the RMB-denominated bank cards.
 
Background
 
Approved by the State Council, the People’s Bankof China (“PBOC”) set up UnionPay in 2002 to be responsible for building and operating the unified inter-bank card clearing and settlement system in China4. Because China did not open up the bank card clearing market, the foreign bank card clearing institutions, such as Visa and MasterCard, are not allowed to engage in RMB-denominated bank cards clearing services in China, even though they have set up representative offices in China for many years.
 
On October 29, 2014, Chinese Premier Keqiang Li chaired a State Council executive meeting, at which he announced the decision to open up the bank card clearing market, according to which all qualified domestic and foreign enterprises can apply for establishment of a bank card clearing institution in China. The foreign institutions solely providing foreign currency clearing services for cross-border transactions basically need not establish domestic bank card clearing institutions5.
 
Legal Review
 
The Decision on Bank Card Clearing Institutions Access provides for the specific requirements for access by bank card clearing institutions, including the registered capital, shareholders, standard bank card clearing system, facilities and offsite disaster recovery system, directors, senior managers, internal control and other aspects. The application process for establishing a bank card clearing institution includes the application                
 
End Notes:    
                                       
1 http://www.gov.cn/zhengce/content/2015-04/20/content_9627.htm
2 http://www.gov.cn/zhengce/content/2015-04/20/content_9629.htm     
3 http://www.gov.cn/zhengce/content/2015-04/22/content_9656.htm
4 http://www.gov.cn/xinwen/2015-04/22/content_2851112.htm
5  http://www.ce.cn/xwzx/gnsz/szyw/201410/29/t20141029_3804026.shtml      
 
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