On 5 March 2019, the Foreign Investment Law of the People’s Republic of China (available here in Chinese) (Law) was adopted by the Second Session of the Thirteenth National People’s Congress, and will take effective from 1 January 2020. Upon taking effect, the Law will replace the current three separate foreign investments laws—the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises and act as the foundation law for foreign investors making investments in Mainland China. Below we discuss the effect on foreign investors in the Chinese financial markets.
l. National treatment principal with negative list
The Law provides that foreign investors will not be given less favourable treatment than domestic investors (National Treatment Principal), except for specific industry entry restrictions expressly set out in the “negative list” system (Negative List). The Negative List refers to the special management mechanism for foreign investment into some specific industrial sectors which will be updated from time to time. The latest prevailing version of Negative List was released in December 2018 (available here in Chinese). As for the financial industry, setting up foreign public fund manager companies and foreign securities companies require pre-approval from relevant regulators.
In recent years, we continue to see wholly foreign-owned enterprise (WFOE) private fund managers setting up and carrying out business activities in China. We note that recently JP Morgan Chase and Nomura Holding won the first approval to set up new securities joint venture (JV) in China with majority foreign ownership. With regulators’ commitment to open up China’s financial market, it is expected that a more favorable environment and more equal treatment will be given to foreign financial players going forward.
ll. Adjustment of corporate governance structure after five-year grace period
The Law stipulates that the organisational structure of foreign-invested enterprises shall be governed by the PRC Company Lawand PRC Partnership Enterprises Law and those foreign-invested enterprises established before the Law becomes effective may retain their original organisation structure for a grace period of five years. This means that the established WFOEs and JVs may need to adjust or change the current corporate structure to comply with the PRC Company Lawand PRC Partnership Enterprises Law after the grace period. Under current regulations, the requirements of the PRC Company Lawand PRC Partnership Enterprises Law are very different from current corporate governance structures adopted for foreign-invested enterprises, including but not limited to, quorum, voting mechanism and equity transfer restrictions. The workload of implementing the requirements of the PRC Company Law and PRC Partnership Enterprise Law to the existing corporate governance structure may be time-consuming for current foreign-invested enterprises.
lll. Application to Hong Kong, Macau and Taiwan investors on a “reference or comparison” basis
The Mainland Chinese government has long administered Hong Kong SAR, Macau SAR and Taiwan-sourced investments by referencing to foreign investment regulatory regimes. As for the application of the Law, the PRC authorities express that Hong Kong, Macau and Taiwan investments shall refer to or apply the Law, and the Chinese government will create more favourable conditions for investors from the Hong Kong SAR and Macau SAR to invest in Mainland China.
From the regulatory practices perspective, the Law remains silent with respect to some specific issues. We look forward to receiving further interpretation of the Law and developments of supporting regulations under the framework.