MOFCOM Devolves Foreign Investment Approval Competency to Lower Levels

Posted on March 17, 2009 by King & Wood

A. General Devolution to Lower Levels

 

China's Ministry of Commerce (MOFCOM) has continued their trend of further delegating approval competency to lower governmental levels. This delegation of approval competency to local authorities will greatly accelerate the approval process for foreign invested projects.

 

MOFCOM issued, on March 5 the Notice on Improving the Examination and Approval over the Foreign Investment (the “Notice”) which simplifies the approval process through the following means:

 

1. In the Notice, MOFCOM delegates its approval competency under certain conditions:

 

FIEs falling within encouraged sectors (regardless of investment amount) which were previously approved at the central MOFCOM level can now be approved by MOFCOM counterparts at the provincial level, vice-provincial city level (1), or national economic development zone level. It is important to note that the usual threshold of USD 100,000,000 total investment does not apply to encouraged sector projects. Accordingly, the basic policy is that encouraged projects can be approved locally except for some specific exceptions such as central government reliant projects (2) or FIEs governed by specific rules or industrial policies.

 

A basic rule has always been for amendments to FIEs to be approved by the original approval authority. The Notice changes this by allowing FIEs originally approved by MOFCOM to have subsequent commercial changes approved by MOFCOM’s local counterparts except for capital increases which require National Development and Reform Commission approvals or share transfers which result in a transfer of the controlling interest to the foreign shareholder.

 

The Notice also largely devolves approval competency for mergers and acquisitions of domestic companies by foreign investors and FIEs to local authorities. Projects falling within encouraged or permitted sectors can be approved locally if the transaction amount is below USD 100,000,000. Local approval can also be obtained in restricted categories if the transaction amount does not exceed USD 50,000,000. It is important to note that in respect of acquisitions the Notice states that competency shall be determined by reference to the transaction amount not total investment. However, it is important to note that this devolution of authority does not waive approval requirements in respect of the Chinese Securities Regulatory Commission (CSRC) or the state-owned assets supervision and management authorities. Accordingly, in many sensitive cases central level approvals will still be required. Similarly, strategic investments in listed companies will still need MOFCOM level approval.
 

 

 

Mark Schaub, Feng Xin, Duncan Hwang of King & Wood's Foreign Direct Investment Practice

 

2. Pursuant to the Notice, MOFCOM will adopt a filing system for the establishment of new branches by FIEs. The Notice clarifies that establishment of a branch by a FIE does not require MOFCOM or local counterpart approval unless specific regulations state otherwise. This clarifies a previously unresolved issue in that MOFCOM local counterparts had varying practices in such regard from region to region (some local MOFCOM counterparts required approval for FIEs to set up a branch engaged trading). The Notice implies that if the FIE’s business scope relevant to a restricted area has been approved, then no additional approval from MOFCOM is required to set up a branch for the approved business. Furthermore, the Notice regulates that if a FIE intends to set up a branch abroad, then this should be approved by the provincial MOFCOM with the consent of the Chinese embassy’s commercial department in the country where such branch is to be located.

 

B. Ease of Approving Holding Companies

 

On March 6th 2009, MOFCOM also issued the Notice on Delegating the Approval Authority for Foreign Invested Holding Companies to streamline the establishment of foreign investment holding companies.

 

This notice provides:

 

1. Proposed holding companies with a registered capital of USD 100,000,000 or less will be examined and approved by the competent MOFCOM counterparts at the provincial or vice-provincial city level. Previously, the establishment of a holding company required MOFCOM level approval regardless of scale.

 

2. Any amendments to established holding companies (i.e. such as name change, revisions to business scope, normal changes to capital structure) can be approved by lower level MOFCOM counterparts except for cases where a single capital injection increases its value by over USD 100,000,000.

 

3. Despite the positive developments, MOFCOM also reinforces in the Notice that holding companies cannot invest in areas that are restricted or forbidden to foreign investment. Further, if required by relevant industry rules, investments by holding companies will still need approval from the industry authorities even if approved at the local MOFCOM level.

 

Summary
The devolution of approval competency for most projects will simplify and speed up the approval process for foreign investors as well as lower the work burden of MOFCOM. In addition, the new policy will make the operations of existing FIEs easier in that many will be able to now bypass central MOFCOM approval for operational actions such as capital increases.
Although, there is no apparent negative impact upon foreign investors in such notices it should be also noted that MOFCOM and other approvals still remain in place under specific circumstances. Foreign investors will need to carefully check which approvals at which level will be required in order to have a valid establishment.

 

[1] Vice-provincial cities, as an administrative division in China, are not treated as a province from an administrative perspective, but are distinct from a financial perspective.
[2] According to a notice issued by National Planning Commission (the predecessor of National Development and Reform Commission), central government reliant projects include the FIEs using state subsidies, FIEs investing in infrastructure, etc. But this notice was issued in 1999 based on the old Industry Category for Foreign Investment in 1997 which has been revised largely afterwards, thus may be out of date.
 

 
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Foreign Exchange Capital: Restrictions on Domestic Investment

Posted on October 20, 2008 by King & Wood

 

 Recently, the Chinese government issued a couple of new laws and regulations to curb overseas “hot” money and strengthen the administration of foreign exchange. On August 5, 2008, the State Council amended and promulgated the Regulations on Foreign Exchange Administration of the People's Republic of China which requires that foreign exchange and the fund for settlement in a capital account should be used as approved by relevant approval authorities. On August 29, 2008, the Circular of Relevant Implementation Questions Concerning the Improvement of Administration of Payment and Settlement of Foreign Exchange Capital of Foreign Invested Enterprises (the “Circular”) was then issued by the State Administration of Foreign Exchange (“SAFE”), according to which the RMB settled from the capital account of a foreign invested enterprise (“FIE”) should be used in accordance with the business scope approved by the governmental agencies and may not be used to make equity investments in China. This means foreign investors cannot directly make use of the foreign exchange in their capital account to invest in China, which is expected to have a major impact on domestic re-investment by FIEs.

 

  In the past, a number of foreign investors used to invest in China by first establishing a FIE and then using the FIE as an investment arm to re-invest in China. Please note such an FIE referred to here is not the so-called “foreign funded investment company” (“Investment Company”) which is a special entity set up by foreign investors to mainly engage in direct investment in China. Rather it refers to such a FIE whose business scope may include production, retail, wholesale of products, consulting or technology services or other businesses rather than “investment” as permitted under PRC law.

 

 Interestingly, the item of “investment” is normally not allowed to be included in the business scope of a FIE by approval authorities like the Ministry of Commerce (“MOFCOM”)  and corporate registration bodies like the State Administration for Industry and Commerce (“SAIC”) along with their local counterparts. However,  the Provisional Regulations on Investment within China by Foreign Invested Enterprises which was promulgated dated July 25, 2000 jointly by MOFCOM and SAIC does grant a FIE a qualification to re-invest in China. In practice, a FIE is permitted to conduct investment in China e.g. acquiring the equity interests of other FIE(s) or domestic company(s), but a FIE is required to use RMB to make such investment under the current PRC law. Thus a question arises: if a FIE has no or cannot obtain sufficient amount of RMB by whatever lawful means, could it be allowed to convert funds into RMB from its capital account for the purpose of investment?

 

Huang Caihua, Associate, Foreign Direct Investment

 

Before the issuance of such a Circular, the above-mentioned question has for a very long time confused not only foreign investors, its lawyers, and other consultants, but also some local officials of SAFE partly due to the reason that SAFE did not clarify this question by issuing an official and universally-applicable rule. As a result the answer to this question has to depend, to large extent, on the local regulatory practice. Not surprisingly, in practice, some local offices of SAFE held a view that a FIE should not be allowed to exchange the foreign currency from its capital account into RMB for purposes of re-investing in China on the grounds that the foreign currency deposited in such account had been specially approved to satisfy the defined project as described in the business scope. In the meantime, some others officials held different views and allowed the FIE to settle the foreign exchange into RMB to satisfy the needs of re-investing in China. This is particularly the case where a local government is thirsty for foreign investment and it may be driven to take a more flexible policy.

 

Now, with the promulgation of the Circular, the door to direct re-investment by FIE(s) using the RMB settled from its foreign exchange capital account in China is closed. If a FIE happens to come upon a good investment opportunity, it will have to use its accumulated RMB profits or income or borrow RMB from domestic banks.

 

As is known in recent years, international “hot” money has unnerved the Chinese government which has thus taken a series of measures to cope with the issue. Without doubt the new rule is intended to strengthen the administration of foreign exchange flow and curb the inflow of hot money. However while it may contribute to the strengthening of its foreign exchange administration and the stability of its economic growth, it may also add the cost of making re-investment by foreign investors through their FIE(s) in some cases more difficult from a commercial perspective.
 
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