On November 7, 2019, the Chinese State Council, the highest level of China’s administrative regulator, issued the Opinions on Further Promoting the Facilitation of Foreign Investment (the Opinions). The Opinions outline the recent regulatory development and the next step actions to further open up the Chinese market to foreign investors. Highlighted below are a few key commitments which may be of interest to international financial institutional investors:
These groundbreaking commitments revealed China’s latest movement to fulfill its promise to open its financial industries further. Market participants should watch closely additional regulatory changes expected to come.
On October 23, 2019, State of Foreign Exchange (SAFE) in China released Circular of the State Administration of Foreign Exchange on Further Promoting the Cross-border Trade and Investment Facilitation (the New Policy), which allows non-investing FIEs to use their equity capital to invest in equity of domestic enterprises. Before the release of the New Policy, only investing FIEs and FIEs with investment as business scope could carry out domestic equity investment with their equity capital injected from offshore shareholders, and these types of FIEs are very difficult to establish due to various practical hurdles. This New Policy now allows all types of FIEs to use their equity capital received from their offshore shareholder to make onshore equity investments that are open to foreign capital (i.e. not on the current “foreign investment negative list”).
According to the New Policy, non-investing FIEs can make equity investment using their foreign equity capital or RMB funds converted from that. If a non-investing FIE carries out equity investment with its foreign currency, the invested entity shall go through a domestic reinvestment registration process and open a foreign-currency capital account to receive such funds. If a non-investing FIE conducts its domestic equity investment with RMB converted from its foreign currency denominated capital, the invested entity shall go through a domestic reinvestment registration process and open a “settled-to-be-paid” account to receive the RMB funds.
The New Policy is expected to attract more foreign funds to make onshore investments via their existing onshore operating subsidiaries, especially strategic investments in enterprises in both the upstream and downstream of the industrial chain in China.
China's top legislature passed the new Foreign Investment Law on March 15, 2019, at the country’s annual People’s Congress. The new law will take effect on January 1, 2020. The so-called three major statutes (and related implementation measures) currently applicable to foreign investment in China (the so-called Three FIE Laws) will be void as of January 2020.
The new Foreign Investment Law, although it is short compared to many other Chinese statutes, delivers a clear message that the Chinese government commits to continuing the “Opening-up Policy” and is willing to build a more level playing field for international companies to invest and do business in China. It is a comforting signal for many foreign as well as Chinese business people in the context of many complicated domestic and international issues faced by China, including the bilateral trade discussions with the U.S.
This new law is very important for international investors that have already been in China, as well as for those planning to get into the Chinese market either by setting up their own subsidiaries or by establishing a joint venture with a Chinese partner. It is advisable to closely watch for upcoming implementation rules, which in China are always equally important as the initial legislation.