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China – Foreign Investment Bulletin.

24 June, 2015

 


The State Council released the State Council’s Decision Regarding the Further Development of E-commerce and the Nurturing of a New Economic Force (“Decision Regarding the Development of E-commerce”) to stimulate the development of E-commerce. The State Council also released the State Council’s Decision Regarding the Cancellation of Non-Administrative Licensing Examination and Approval Items (“Decision Regarding the Non-administrative Licensing Items”) to remove the non-administrative licensing items completely. A China Securities Regulatory Commission (“CSRC”) spokesperson disclosed that CSRC will further lower the barriers to entry in the market for foreign-invested securities companies.

The State Council Released The Decision Regarding The Development Of E-commerce To Further Stimulate The Development Of China’s E-commerce Industry

To further stimulate the development of China’s E-commerce industry, the State Council released its Decision Regarding the Development of E-commerce on May 7, 2015. The 29-pointdecision focuses on: fostering a lenient business environment, encouraging employment and entrepreneurship, stimulating industry restructuring, improving the logistical infrastructure, further opening of the industry to foreign investment, better security for internet transactions, and creation of a comprehensive system. In this decision, the State Council reiterated its decision to remove the restriction on the ratio of foreign equity for foreign-invested E-commerce companies, to reduce administrative pre-approvals, as well as to simplify registration procedures for registered capital. The State Council also assigned tasks to the relevant authorities, and requested that these relevant authorities promulgate regulations to enforce the Decision Regarding the Development of E-commerce by the end of 2015.

Legal Review

In addition to removing the restriction on the ratio of foreign equity for foreign-invested E-commerce companies, the Decision Regarding the Development of E-commerce also contains new information worthy of note.

Firstly, the legal principle that “everything whichis not forbidden is allowed” applies in E-commerce. The State Council stated that market players are allowed to conduct activities that are not forbidden by laws. In contrast, to restrict intervention by government authorities in the E-commerce market, government authorities are not allowed to conduct activities that are not authorized by laws. This will stimulate innovation, creativity, and development in the E-commerce industry.

Secondly, in order to further develop cross-border E-commerce, the Decision Regarding the Development of E-commerce seeks: (1) to introduce negative lists for cross-border E-commerce; (2) to encourage policy banks to provide loans to E-commerce companies to invest overseas and to introduce the regulations for E-commerce companies to go public in foreign stock markets; and (3) to simplify foreign currency exchange registration for outbound investment for E-commerce companies.

Lastly, the Decision Regarding the Development of E-commerce seeks to expedite legislation governing E-commerce. In contrast to the rapidly growing E-commerce industry, legislation in this area is stagnating. So far the only law in this area is the Electronic Signature Law of the People’s Republic of China. In addition, there are certain regulations released by various authorities of the State Council, such as the Ministry of Commerce, Administration for Industry and Commerce, and Ministry of Industry and Information Technology. For the healthy growth and development of China’s E-commerce industry, it is necessary to formulate the E-commerce Law, based on current legislation and international customs and practices. According to the plans of the Standing Committee of the Twelfth National People’s Congress, the E-commerce Law is categorized in the secondary legislative class, meaning the drafts of the E-commerce Law must be formulated and submitted to the Standing Committee for review as soon as practical. The State Council is also required to study and to formulate or revise the relevant regulations from time to time, specifying the evidentiary effect of business records such as electronic bills, electronic contracts, electronic inspection and quarantine reports and certificates, and various electronic trading certificates.

Next Step

In the short term, the various authorities of he State Council (such as the National Development and Reform Commission, Ministry of Commerce, Ministry of Industry and Information Technology, Ministry of Finance, General Administration of Customs, State Administration of Taxation, State Administration for Industry and Commerce, and General Administration of Quality Supervision, Inspection, and Quarantine) need to promulgate, revise, and repeal regulations in accordance with the Decision Regarding the Development of E-commerce. We note that, to implement this Decision and to introduce negative lists for cross-border E-commerce and other purposes, the General Administration of Quality Supervision,Inspection, and Quarantine promulgated (on May 14) its Opinions on Better Performing the Functional Role of Inspection and Quarantine to Promote the Development of Cross-border E-commerce.

In the long term, the draft of the E-commerce Law is likely to be published for public review by the end of 2015, and is likely to be proposed for review by the Standing Committee of the National People’s Congress next year. The E-commerce legislation and practices need to be followed with interest.

The State Council Released The Decision Regarding The Non-Administrative Licensing Items To Remove The Non-Administrative Licensing Items Completely

On May 14, 2015, the State Council released the Decision Regarding the Non-administrative Licensing Items. This decision completely removed the non-administrative licensing examination and approval items, which no longer exist as one kind of examination and approval.

Background

The Administrative Licensing Law of the People’s Republic of China (“Administrative Licensing Law”) became effective on July 7, 2004. In accordance with the Administrative Licensing Law and relevant regulations on reforming administrative licensing, the State Council cleaned up various administrative licensing items created by its authorities and temporarilyreserved 211 items as non-administrative items. These reserved items mainly relate to the internal administration of the government and are not within the scope of administrative licensing.

Afterwards, while reforming the administrative examinations, the State Council removed various non-administrative licensing items. Meanwhile, however, certain authorities created new non-administrative licensing items using different means. According to news reports, at the beginning of this term of government, there were 453 non-administrative licensing items. After a total of seven rounds of cleanups in 2013 and 2014, the State Council removed 209 non-administrative licensing items.

In April 2014, the State Council released the Decision to Clean up Non-Administrative Licensing Items of All Authorities of the State Council, and decided to comprehensively clean up non-administrative licensing items created by all authorities within one year. The State Council elected to remove or convert into administrative licensing items all non-administrative licensing items for citizens, legal persons, and other institutions. As for non-administrative licensing items for district governments, the State Council decided to remove such items or convert them into internal approval items. “Non-administrative licensing examination and approval”, as one kind of examination and approval, will not exist any longer.

On May 14, 2015, the State Council released the Decision Regarding the Non-administrative Licensing Items and adopted three methods toclean up non-administrative licensing items: (1) to remove non-administrative licensing items; (2) to convert non-administrative licensing items into new administrative licensing items in accordance with the Administrative Licensing Law when applicable; and (3) to convert non-administrative licensing items into internal approval items. As a result, the State Council removed 49 non-administrative licensing items and converted 84 non-administrative licensing items into internal approval items, which resulted in the deletion of the “non-administrative licensing examination and approval”, as one kind of examination and approval.

The deleted non-administrative licensing items include, inter alia: examination and approval of amounts of foreign debt issued by enterprises; examination and approval of provisions regarding the treatment of non-residents under tax conventions (including the conventions with Hong Kong, Macao and Taiwan); review of whether cost apportionment agreements of enterprises conform to independent trade principles; approval of special tax treatment for enterprises; and examination and approval of representative offices of foreign stock exchanges in China.

The non-administrative licensing items converted into internal approval items include, inter alia: management of the scale of foreign debts; examination and approval of overseas examinations cooperatively organized by national and provincial educational examination institutions and examination institutions or other organizations in foreign countries and Hong Kong, Macao and Taiwan; and examination and approval of matters relating to loans of foreign governments.

Legal Review

“Administrative licensing” refers to permission to undertake specified activities in accordance with an application to do so (submitted by a citizen, legal person or other organization) as approved by an administrative authority upon examination according to the law. According to the Administrative Licensing Law, the creation and enforcement of an administrative licensing item must follow the prescribed limits, scope, conditions, and procedures.
For temporary necessity, the State Council reserved the non-administrative licensing items.. The law, however, does not clearly regulate the limits, scope, conditions, procedures and enforcement of non-administrative licensing items. Furthermore, some non-administrative licensing items actually create administrative licensing obligations for citizens, legal persons, and other institutions. These non-administrative licensing items, however, are not subject to the Administrative Licensing Law. The State Council’s decision to remove the “non-administrative licensing examination and approval” reveals the trend to reform and simplify government administration.

Next Step

The authorities of the State Council, such as the National Development and Reform Commission, State Administration of Taxation, and Ministry of Commerce, need to implement the Decision Regarding the Non-administrative licensing Items and clean up the non-administrative licensing items. On May 25, 2015, the State Administration of Taxation released the Decision Regarding the Implementation of the State Council’s Decision Regarding the Cancellation of Non-Administrative Licensing Examination and Approval Items, and converted 23 non-administrative licensing items into internal approval items. The relevant legislation and the practices of other authorities need to be followed closely.

CSRC Disclosed That It Will Lower The Barriers To Enter The Market For Foreign-Invested Securities Companies.

On May 15, 2015, CSRC held its routine press conference and disclosed that it will further lower the barriers to enter the market for foreign-invested securities companies.

Legal Review

According to the Rules on the Establishment of Foreign-invested Securities Companies, which was revised in 2012, the ratio of foreign equity or the rights and interests of foreign shareholders in a foreign-invested securities company cumulatively (including direct shareholding and indirect control) cannot exceed 49%. In addition, a foreign-invested securities company may only undertake business activities including underwriting and sponsorship of stocks (including common stock denominated in RMB and stock denominated in a foreign currency) and bonds(including treasury bonds and corporate bonds); foreign stock brokerage; brokerage of bonds (including government and corporate bonds) and proprietary trading; and other business activities approved by the CSRC.
As stated in the Supplementary Agreement X of the Closer Economic Partnership Arrangement between Mainland and Hong Kong and the Closer Economic Partnership Arrangement between Mainland and Macao (“CEPA”), the Mainland has made commitments to Hong Kong and Macao respectively as follows.

Hong Kong/Macao-funded financial institutions that satisfy the requirements for establishing foreign-invested securities companies will be allowed to set up one fully-licensed joint venture securities company in Shanghai, Guangdong Province and Shenzhen in accordance with the relevant Mainland requirements. The Hong Kong/Macao-funded securities company may not hold more than 51% of the shares of the joint venture. The Mainland shareholders are not necessary to be securities companies.

Additionally, Hong Kong/Macao-funded financial institutions that satisfy the requirements for establishing foreign-invested securities companies will be allowed to set up one new full-licensed joint venture securities company in accordance with the relevant Mainland requirements in certain reform experiment zones for “piloting financial reforms” as approved by the Mainland. The Mainland shareholders are not necessary to be securities companies. The Hong Kong/Macao-funded securities company may hold no more than 49% of the total shares inthe joint venture. The requirement for a single Mainland shareholder to hold 49% of the shares in the joint venture was removed.

Lastly, Hong Kong/Macao-funded securities companies will be allowed to hold more than 50% of the shares in joint venture securities investment advisory companies in certain reform experiment zones for “piloting financial reforms” as approved by the Mainland.
Pursuant to the Catalogue for the Guidance of Foreign Investment Industries, which was revised in 2015, a securities company, upon establishment, is limited to engaging in the underwriting and sponsorship of ordinary RMB-denominated stocks, foreign stocks, treasury bonds and corporate bonds, the brokerage of foreign stocks, and the brokerage and proprietary trading of treasury bonds and corporate bonds. The securities company may apply to expand its business scope two years after establishment, provided that it satisfies the relevant conditions. The ratio of foreign equity in a foreign-invested securities company cannot exceed 49%.

On May 15, 2015, the CSRC disclosed on its official Weibo that Sino-foreign joint venture securities companies that satisfy relevant requirements will be allowed to gradually expand their business scope. In the meantime, the CSRC is accelerating the implementation of the commitments to Hong Kong and Macao financial institutions under CEPA.

Next Step

The CSRC’s implementation of CEPA and provisions regarding the proportion of foreign investment as well as the business scope of securities companies in the Catalogue for the Guidance of Foreign Investment Industries deserve our special attention.

Jun He 4  

 

For further information, please contact:
 

Catherine Miao, Partner, Jun He 

miaoqh@junhe.com

 

Vivian Pan, Jun He 

panym@junhe.com

 

Irene Peng, Jun He

penghy@junhe.com

 

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