GC Agenda China: July 2017

Practical Law UK Articles w-009-4595 (Approx. 9 pages)

GC Agenda China: July 2017

by Brad Herrold, Consultant and Practical Law China

NDRC and MOFCOM issue new foreign investment catalogue

On 28 June 2017, the National Reform and Development Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued the seventh revision of the Catalogue of Industries for Guiding Foreign Investment (2017 Catalogue), which will take effect 28 July 2017 and replace the current version of the catalogue (2015 Catalogue).

The 2017 Catalogue closely follows a draft circulated for public comment in December 2016. For information on the draft, see Legal update, Draft revised foreign investment catalogue open for comment until 6 January 2017.

Compared to the 2015 Catalogue, the 2017 Catalogue reflects China's new regime for regulating market access for foreign investment, including:

A negative list approach to regulate or prohibit foreign investment in some industry sectors.
"National treatment" and an online record-filing system for foreign investment in industry sectors not included in the negative list.

For information on these changes, see Practice note, Establishing a China business: Establishment approval and record-filing.

The 2017 Catalogue comprises two sections:

A traditional list of industry sectors in which foreign investment is encouraged, that is, possibly eligible for preferential treatment on taxes, land use rights, employee benefits and so on.
A new, combined list of industry sectors in which foreign investment is prohibited or subject to special administrative measures (including restricted sectors and encouraged sectors subject to a cap on foreign ownership), that is, the negative list.

Under this new approach, foreign investors can refer to the negative list to determine if a proposed investment is subject to MOFCOM’s traditional examination and approval procedure for market access or the less onerous record-filing procedure.

While the 2017 Catalogue does not further liberalise market access for foreign investment in some key sectors such as finance and telecommunications, it does so in various other sectors including, for example:

Services, such as audit, accounting and water conservancy projects.
Manufacturing, such as new energy batteries and civilian satellites.
Mining, such as minerals processing.

For more coverage of this development, see Article, 2017 foreign investment catalogue: the debut of nationwide negative list in China.

Market reaction

Thomas Man, Professor from Practice, Peking University School of Transnational Law

"The new foreign investment catalogue, which is likely the last of its kind, provides the latest evidence of China's commitment to implementing the negative list approach. It is structured as a hybrid of the old approach and the new, with a traditional list of encouraged industry sectors stitched together with a new list of prohibited sectors and sectors in which foreign investment is subject to special administrative measures."

Action items

GC for companies in the services, manufacturing and mining industries will want to closely study the relevant sections of the catalogue to determine if it offers any new investment opportunities and if any restrictions apply. Counsel for all foreign invested businesses should note the relatively rapid pace of China's implementation of the negative list approach and assess the impact of these changes with the help of business and government relations colleagues.

MIIT issues revised telecoms licensing measures

On 13 July 2017, the Ministry for Industry and Information Technology (MIIT) issued the Measures on the Administration of Telecommunications Business Operating Licences (电信业务经营许可管理办法), which will take effect 1 September 2017 and replace the old measures of the same name issued in 2009.

The new measures bring China's telecommunications licensing regime into conformity with recent changes to the rules governing the establishment, administration and supervision of companies. (For more information on these changes, see Practice note, Establishing a China business).

The measures include (among others) the following changes:

The MIIT will establish an online telecoms business administration platform to support the online telecoms licence application, approval and administration, as well as information publication and enquiry.
Telecoms operators are required to identify their network and information security management entities and personnel, establish systems for areas including network and information security, illegal information monitoring and disposal, new business security assessment, network security monitoring and early warning, emergency response and user information security protection, and have appropriate technical support measures.
The competent MIIT office will establish random sampling mechanisms on selected telecoms operators' annual reports, business operations and compliance with relevant telecoms regulations. It will also compile, regularly update, and make public two blacklists (that is, a telecoms business operation abnormal list (电信业务经营不良名单) and telecoms business operation dishonest list (电信业务经营失信名单)).

The measures also impose penalties for various specific infractions of the measures ranging from official warnings to fines, revocation of telecoms licence and criminal penalties.

For more coverage of this development, see Legal update, MIIT issues revised telecoms licensing measures.

Market reaction

Jeanette Chan, Partner, Paul, Weiss, Rifkind, Wharton & Garrison, Hong Kong

"The new measures follow the government's policy of reducing red tape, most notably by removing the capital verification requirement and the requirement that telecoms operators carry out record-filing at the local level after obtaining a licence. The measures also facilitate market entry by permitting a licensed operator to authorise an indirectly majority-held affiliate to operate a licensed telecoms service and by eliminating restrictions on telecoms operators to authorise more than one affiliate to provide the same licensed telecoms service in the same region."

Action items

GC for any company regarded as a telecommunications operator under Chinese law will want to compare the new measures with the old measures and work with business colleagues and external advisors to identify those changes that affect the company's business operations and expansion plans, as well as its compliance mechanisms.

CAC circulates draft rules on the protection of CII security

On 11 July 2017, the Cyberspace Administration of China (CAC) circulated for public comment the Rules on the Protection of Critical Information Infrastructure Security (Draft for Comments) (国家互联网信息办公室关于《关键信息基础设施安全保护条例（征求意见稿）》公开征求意见的通知).

The draft rules flesh out the provisions of the Cybersecurity Law of the People's Republic of China 2016 that deal with the security of critical information infrastructure (CII). (For more information, see Legal update, China passes Cybersecurity Law.)

Under the draft rules, the scope of protection for CII is more clearly defined to include any of the following entities that operate and manage network facilities and information systems, and where any damage, loss of functionality or data leakage of their facilities and systems could threaten national security, the people's livelihood or the public interest:

Government institutions and businesses in the energy, finance, transportation, water conservancy, health care, education, social security, environmental protection and public utilities industries.
Telecommunications networks, radio and television networks, internet and other information networks.
Scientific research and production units in fields related to national defence, large-scale equipment, chemicals, food and pharmaceuticals.
News units and other "key units".

Under the draft rules, CII operators are required (among others) to:

Formulate internal security administration systems and operating procedures and prevent viruses, attacks and other network intrusions.
Carry out regular network security training and assessment for employees and develop contingency plans for security incidents.
Entrust a network security service organisation to conduct at least one annual inspection of security system and rectify any problems.
Conduct a security assessment before exporting personal information and important data collected and generated in China. (For information on the draft security assessment measures, see Legal update, CAC circulates draft rules on exporting personal information and important data).

Comments on the draft may be submitted to the CAC until 10 August 2017.

For more coverage of this development, see Legal update, CAC circulates draft rules on the protection of CII security.

Market reaction

Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai

"Perhaps the most vexing questions raised by the Cybersecurity Law are what "critical information infrastructure" is and whether a company's networks will be subject to the data localisation and other provisions governing CII. With the law having come into effect almost two months ago, the CAC and other authorities are scrambling to provide meaningful guidance. The draft rules provide only limited help, but they do tend to confirm the importance of sector-specific standards both as to what CII is and what specific protective measures are required of CII operators."

Action items

GC for companies likely to be regarded as CII operators will want to work with government relations colleagues, industry regulators and external counsel, and watch for publication of sector-specific guidelines, to determine if they will be subject to the final version of the draft rules and, if so, what specific steps to take to ensure compliance.

Shanghai FTZ issues guidelines on negative list for financial services sector

On 28 June 2017, the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ) Administrative Commission and the Shanghai Financial Services Office jointly released the Guidelines on the Negative List for the Liberalization of Financial Services in the China (Shanghai) Pilot Free Trade Zone (2017 version).

The guidelines, which follow issuance of the Special Administrative Measures (Negative List) for Foreign Investment Access to the Pilot Free Trade Zone (2017 version) (自由贸易试验区外商投资准入特别管理措施（负面清单）（2017年版）), track China's new negative list approach to regulating market access for foreign investment and further implement the State Council's comprehensive reform plan for the Shanghai FTZ (see Practice note, China (Shanghai) Pilot Free Trade Zone: overview).

The guidelines comprise two main sections:

A guiding list governing market access and post-establishment operation compliance for foreign investment in the financial services sector in the Shanghai FTZ.
A set of instructions for using the list.

The list is divided into 10 categories and has 48 special management measures, which include requirements on shareholder assets and performance conditions, capitalisation, ownership structure, the establishment and operation of branches, business scope, operations and exchange qualifications.

None of these restrictive measures are new requirements on foreign investors but merely codify existing provisions that can be found in industry-specific regulations and policies.

The list also includes citations and explanations for each special measure, making this sector negative list more user friendly.

For more information on the 2017 FTZ negative list, see Legal update, China publishes 2017 negative list for FTZs.

For more coverage of this development, see Legal update, Shanghai FTZ issues guidelines on negative list for financial services sector.

Market reaction

Harvey Lau, Partner, Baker & McKenzie, Shanghai

"Taken together with the underlying measures, the guidelines have lifted a number of restrictions on foreign investment in the financial sector in the Shanghai FTZ. In addition, the classification system is user friendly, and it is easy for foreign funded banks to identify applicable restrictions on business scope. What remains to be seen is whether the guidelines will be implemented in the way the regulators intended, that is, under the shadow of financial de-leveraging and foreign exchange control. "

Action items

GC for foreign and foreign-invested financial institutions will want to closely study the guidelines to determine if new opportunities for market entry or expansion in the Shanghai FTZ exist and to identify any applicable restrictions. Counsel also will want to remain mindful of other restrictions not found in the guidelines, such as the fast-changing foreign exchange control regime and the newer requirements found in the 2016 Cybersecurity Law.

Mainland and Hong Kong sign CEPA Investment Agreement and Ecotech Agreement

On 28 June 2017, representatives of MOFCOM and the government of the Hong Kong Special Administrative Region signed two new agreements under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA):

Investment Agreement (CEPA投资协议).
Agreement on Economic and Technology Cooperation (Ecotech Agreement) (CEPA经济技术合作协议).

Both agreements took effect upon signing, though the Investment Agreement will be officially implemented from 1 January 2018.

The agreements are aimed at expanding market liberalisation and facilitating trade and investment between the Mainland and Hong Kong.

The Investment Agreement is the first investment agreement adopted by the Mainland with pre-establishment national treatment commitments made through the negative list approach to regulating foreign investment. (For information on the negative list approach, see Practice note, Establishing a China business: Negative list approach).

The Investment Agreement:

Covers investments in non-services sectors (including manufacturing, mining and investment in assets) which are outside the scope of the Agreement on Trade in Services that was already effective from June 2016. (For information on the Agreement on Trade in Services, see Legal update, Hong Kong and Macau sign CEPA trade services agreements with Mainland).
Commits the Mainland to provide national treatment to Hong Kong investments and investors on par with the Mainland investments and investors, except for the 26 special measures listed in the agreement.
Commits each side to provide non-discriminatory treatment in relation to matters such as restrictions on expropriation of investments, compensation for losses, and transfer abroad of investments and returns.

The Ecotech Agreement:

Strengthens previous CEPA economic and technical commitments in various sectors.
Provides a basis for co-operation in relation to the "Belt and Road" Initiative.
Updates the co-operation activities of the two sides in various sectors, including finance, dispute resolution, technology, e-commerce, intellectual property and product quality.
Systematises sub-regional co-operation in relation to the Pan-Pearl River Delta region, the Mainland's pilot free trade zones, and the districts of Qianhai (in Shenzhen), Nansha (in Guangzhou) and Hengqin (in Zhuhai).

For more coverage of this development, see Legal update, Mainland and Hong Kong sign CEPA Investment Agreement and Ecotech Agreement.

Action items

GC for any company interested in investing or expanding in any of the non-services sectors covered by the investment agreement will want to closely examine the agreement to identify specific opportunities. If the client lacks a qualified presence in Hong Kong, counsel may wish to consider taking advantage of an opportunity by acquiring an existing CEPA-qualified entity.

Mainland and Hong Kong sign arrangement on mutual recognition of family law judgments

On 20 June 2017, the Supreme People's Court (SPC) and the Department of Justice of Hong Kong announced that they had signed the Arrangement on the Mutual Recognition and Enforcement of Judgments involving Civil Marital and Household Cases by Courts in the Mainland and the Hong Kong Special Administrative Region (关于内地与香港特别行政区法院相互认可和执行婚姻家庭民事案件判决的安排).

The arrangement represents the latest in a series of reciprocal judicial arrangements between the Mainland and Hong Kong and permits parties from one jurisdiction to enforce in the other jurisdiction judicial rulings involving civil marital and household disputes.

The arrangement will take effect after the SPC issues a related judicial interpretation and Hong Kong completes the relevant internal procedures.

The arrangement applies to civil cases in relation to the following matters:

Marriage, divorce and the division of marital property.
Maintenance arrangements.
Paternity, child custody and visitation arrangements.
Protection from domestic abuse.

Applications for reciprocity must be submitted to the following courts of competent jurisdiction:

In the Mainland, the people's court in the residence of the applicant, the residence or habitual residence of the respondent, or the place where the property is situated.
In Hong Kong, a District Court.

The arrangement calls for courts to dispose of applications for reciprocity promptly, but does not impose specific deadlines.

A judgment in one jurisdiction that violates the basic principles of law and public policy in the other jurisdiction is not enforceable in the other jurisdiction. The arrangement, however, permits a court to partially enforce a judgment from another jurisdiction.

For more coverage of this development, see Legal update, Mainland and Hong Kong sign arrangement on mutual recognition of family law judgments.

Market reaction

Jianwei (Jerry) Fang, Partner, Zhong Lun Law Firm, Shanghai

"This newest arrangement will help expand the roles of the Mainland and Hong Kong courts in civil and household cases. For instance, the courts in each jurisdiction can now deal with property located in the other jurisdiction when hearing a divorce case, and judgments on such property can be recognised and enforced in the other jurisdiction. In general, these types of reciprocal judicial arrangements help protect the parties involved in divorce and household cases, as well as protect the rights and benefits of children caught up in these cases."

GC Agenda China: July 2017 | Practical Law