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GC Agenda China: April 2018
Practical Law UK Articles w-014-4823 (Approx. 7 pages)
GC Agenda China: April 2018
by Brad Herrold, Consultant and Practical Law China
| Law stated as at 27 Apr 2018 |
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.
Xi Jinping announces economic reform measures
On 10 April 2018, President Xi Jinping announced a series of economic measures during his keynote speech at the annual conference of the Boao Forum for Asia (BFA).
The measures are designed to advance China's economic reforms by easing market access restrictions on foreign investment, improving China's ability to attract foreign capital, strengthening protections for intellectual property rights, and expanding imports.
Some of the steps had been announced previously, including for example:
- Reducing market entry, business scope and ownership restrictions on foreign investment in the banking, securities and insurance industries (see Legal updates, China to further open financial markets and CBRC revises administrative licensing rules on foreign-invested banks).
- Restructuring the State Intellectual Property Office (see Legal update, NPC approves State Council institutional reform plan).
President Xi called for revising the negative list for foreign investment by June, increasing imports by lowering import tariffs on motor vehicles and some other products this year, and lifting foreign equity caps in the automobile, ship and aircraft manufacturing sectors as soon as possible.
President Xi also expressed support for accelerating China's accession to the WTO Agreement on Government Procurement and hosting the new China International Import Expo in Shanghai.
The BFA is a non-profit organisation established in 2001 to promote economic exchange and development among business, government and academic leaders in Asia and beyond.
Market reaction
Philip Cheng, Partner, Hogan Lovells, Shanghai
"The reform measures are part of a concerted effort by the Xi administration to attract foreign investment both to support China's drive to develop the next generation of advanced technologies and to promote competition for China's state-owned enterprises. Xi also appears to be offering an olive branch to the Trump administration and other who criticise China's protectionist trade and investment policies. As with all policy statements of reform, the extent of the liberalisation will be determined by their implementation in practice rather than the letter itself."
Action items
Counsel for clients in an industry directly addressed in the speech may wish to work with government relations colleagues to identify any pending policy changes. Counsel for foreign exporters to China will want to pay close attention to any changes in import tariffs. Counsel for clients with foreign-invested entities in China will want to watch for issuance of the new negative list for foreign investment.
Government strengthens internet asset management rectification
On 28 March 2018, the Leading Group on Internet Finance Risk Remediation issued the Notice on Expanding the Rectification of Asset Management Business Carried out through the Internet and Launching Inspection and Acceptance Work (关于加大通过互联网开展资产管理业务整治力度及开展验收工作的通知).
The notice signals the government's intent to impose order in China's rapidly growing internet asset management market. The move, together with a recent announcement that the government is drafting asset management regulations, is part of a campaign begun in 2016 to protect the public by reducing systemic risks to China's internet asset management industry.
The notice contains the following main points:
- It is unlawful to publicly issue or sell any asset management products over the internet, unless the issuer or seller has a valid asset management operating licence or asset management product sales permit issued by the People's Bank of China (PBOC), China Banking Regulatory Commission or China Securities Regulatory Commission.
- Unlicensed internet asset management companies must stop issuing or selling any asset management products and clear all their existing businesses by the end of June 2018, or face having their business licence revoked, their telecoms licence cancelled, and their website or mobile application banned.
- Online platforms are prohibited from selling asset management products for any types of exchange centers (including through any disguised form of providing redirecting services) with the intention to circumvent relevant laws and regulations.
According to the notice, asset management products include without limitation "targeted entrustment plans", "targeted financing plans", "wealth management plans", "asset management plans", and "revenue rights transfers".
For more information on internet asset management, see Practice note: overview, Internet finance in China.
Market reaction
Jun (Joe) Wan, Partner, Hankun Law Offices, Shanghai
"Upon issuance of the notice, traditional internet asset management products such as "designated entrustment investment plans," "designated financing plans," "wealth management plans," "asset management plans," and "investment rights assignments" are regarded as illegal financial activities, which may constitute illegal fund-raising, illegal absorption of public deposits and illegal issuance of securities. We have observed some big-name internet wealth management platforms begin to remove non-compliant wealth management products from their platforms and begin to clear up their outstanding balances of such products. The requirement to complete the rectification by the end of June has become a great challenge for these platforms as the outstanding amount of such non-compliant products is usually huge."
PBOC removes restrictions on foreign-invested electronic payment services
On 19 March 2018, the PBOC issued Announcement No. 7 (2018) (中国人民银行公告(2018)第7号), with immediate effect.
The announcement extends national treatment to foreign-invested third-party electronic payment institutions, that is, it renders foreign-invested payment institutions subject to same market access standards and regulatory policies as purely domestic-invested payment institutions, by expanding the scope of application of the Measures for the Administration of Payment Services of Non-banking Institutions 2010 (非金融机构支付服务管理办法) (2010 Payment Services Measures) to include foreign-invested payment institutions.
To provide third-party electronic payment services in China, qualified foreign investors must establish a foreign-invested payment institution and obtain a payment business operating licence in accordance with the 2010 Payment Services Measures.
In addition, the announcement requires foreign-invested payment institutions to:
- Have secure operating and disaster recovery systems that meet the requisite standards and can independently process payment transactions in China.
- Store, process and analyse in Chinese territory all personal information and financial data collected and generated in China. Where international transfers of such information are necessary to process cross-border transactions, the consent of the data subject must be obtained, the overseas data recipients must be required to perform equivalent confidentiality obligations, and the transfer must comply with applicable laws and regulations.
- Meet the requirements of the PBOC on non-banking payment institutions in relation to corporate governance, daily operation, risk management, fund processing, reserve deposit, contingency plans and so on.
For more information on the regulation of third-party payment services providers in China, see Practice note: overview, Internet finance in China.
Market reaction
Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai
"This market opening is potentially very significant for foreign companies in the electronic payment services sector, but it is too early to break out the champagne. In practice electronic payment licences have been difficult even for domestic companies to secure. Will the PBOC also open up the market to new domestic entrants?"
Action items
GC for foreign electronic payment services providers will want to closely study the announcement, as well as the 2010 Payment Services Measures, ensure the company understands the data localisation and other establishment and operational requirements, and coordinate with government relations personnel in approaching the regulators. Counsel may also wish to seek specialist advice in relation to licensing and compliance issues.
State Council imposes security review on outbound transfers of intellectual property rights
On 18 March 2018, the State Council issued the Measures on Work Related to Transfers of Intellectual Property Rights to Foreigners (Trial) (知识产权对外转让有关工作办法（试行）) with immediate effect.
The measures impose a security review on outbound transfers to foreigners of certain types of IPR, either in a technology export, or a merger and acquisition of a domestic enterprise by a foreign investor. The IPR subject to review include patent rights, proprietary rights to integrated circuit layout and design, computer software copyrights, rights to new plant varieties, and so on.
The security review determines the impact of a proposed transfer on China's:
- National security.
- Key technology innovation and development capabilities in important industries.
A transfer of IPR to foreigners means a transfer or exclusive licence by a Chinese entity or individual of IPR in its territory to a foreign company, individual or other organisation, including changes to the rights holder or actual controller of the IPR.
A security review is required where the transfer of IPR involves technology restricted for export under China's catalogue of technologies prohibited and restricted for exports, or is involved in foreign acquisitions of domestic enterprises subject to national security reviews (see Practice note, National security review in China: overview: NSR of foreign acquisitions). The security review does not apply to transfers of trade marks.
The measures require the competent commerce bureau to obtain an opinion letter from the regulator governing the relevant intellectual property and issue a review decision based on the opinion letter and the relevant rules of the technology exports or security reviews of foreign acquisitions.
Market reaction
Gordon Milner, Partner, Morrison & Foerster, Hong Kong
"The measures have attracted media attention but may not represent a huge leap from the current regime. The export of restricted technologies has been subject to review since 2002 and it would be naive to assume that protecting national security and China's key industries did not previously factor into those reviews. Similarly, foreign acquisitions of Chinese companies are already subject to examination and approval by the Ministry of Commerce, and in many respects, the measures merely add more detail to processes that would already have considered issues of national security and key industry protection. The involvement of specialist government departments in these reviews may lengthen the timetables for receiving approvals but is unsurprising given the increasing sophistication and volume of home-grown Chinese IP."
Action items
GC for companies or individuals involved in the export of restricted technology, or an acquisition that would result in an export of restricted technology, will want to closely study the measures before advising on the pending transaction. Counsel also may wish to work with the relevant industry regulators, or government relations colleagues, to identify the procedures and timing for obtaining approval of the transaction under the new measures.
NPC establishes National Supervision Commission and enacts Supervision Law
On 20 March 2018, the National People's Congress (NPC) approved and enacted the Supervision Law of the People's Republic of China (中华人民共和国监察法), with immediate effect.
Before enacting the new law, the NPC added a new chapter to China's Constitution to establish the National Supervision Commission (NSC), a new political organ that is independent from China's judicial and administrative organs.
The new law consolidates in the NSC the roles in supervising, investigating and disposing of acts of corruption previously played by the Chinese Communist Party (CCP), the State Council and the Supreme People's Procuratorate (SPP), though the NSC is required to transfer suspected job-related crimes of public officials to the SPP for review and public prosecution.
The new law gives the NSC, and its subordinate supervisory commissions at the local level, the power to investigate not only CCP members, but most public employees, including government officials, administrators at public institutions (for example universities, R&D centres and hospitals), and management of China's state-owned enterprises.
The new law gives the NSC and its subordinate supervisory commissions expansive investigative powers, including the power to:
- Hold (留置) those being investigated for up to six months (upon approval).
- Freeze deposits, remittances and other assets.
- Search persons and property (upon presenting a warrant).
For more information on the prohibition of bribery and corruption in China, see Practice note, Bribery and corruption (China): overview.
Market reaction
Timothy W. Blakely, Partner, Morrison & Foerster, Hong Kong
"In the NSC, China has created a powerful new agency that will wield broad supervisory powers and coercive investigative tools in furtherance of China's ongoing graft campaign. While the targets of the NSC's investigations will be government officials and others with roles at state-owned enterprises or other public institutions, private companies and individuals are not fully insulated from this development: the NSC is empowered to seek information and evidence from private parties, which must be mindful of and prepare for the potential need to respond to NSC requests for assistance in future investigations."