Key changes in laws and regulations concerning foreign direct investment since 2001

Over the past two years , China has been revamping, adjusting and perfecting its existing laws, rules and regulations on foreign investment in order to prepare for the new dynamics that will prevail upon China's accession to the WTO. A complete, unified and transparent legal system that meets the needs of a socialist market economy and conforms to the rules and requirements of the WTO, as well as the conditions of the country, has been put into place. Since 2001, China has made the following efforts to amend and revise its laws and regulations concerning foreign investment in China:

• The foreign investment laws and regulations have been overhauled, with modifications or revisions made to parts that are in conflict with the rules of the WTO. A key step in this direction was the revision of the basic foreign investment laws, namely, the Law of People's Republic of China on Sino-foreign Equity Joint Ventures, the Law of People's Republic of China on Sino-foreign Contractual Joint Ventures, the Law of People's Republic of China on Wholly Foreign-owned Enterprises and the detailed provisions or rules of implementation thereof. Clauses such as those pertaining to foreign exchange balance of FIEs, local content, export obligations and the filing requirements for FIEs' production plans have been abolished. Work on the revision and amendments have been completed, and the revised version of the pertinent laws and regulations has been promulgated for implementation.

• In order to catch up with the strategic restructuring of the national economy and the changes required by China's accession to the WTO, the State Council promulgated, on 11 February 2002, a revised version of the Provisions on Guiding the Direction of Foreign Investment , and, with the approval of the State Council, the State Development Planning Commission, the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation jointly announced, on 11 March 2002, a new version of the Catalogue of Industries for the Guidance of Foreign Investment . The new industrial policies as reflected in the Catalogue continue to observe the principle of active, rational and effective utilization of foreign investment. Both the new Provisions and the new Catalogue went into effect as of 1 April 2002.

• The new Catalogue consists of four categories of industries where foreign investments are encouraged, allowed, restricted or forbidden. The Catalogue has greatly expanded the scope of industries that are open to foreign investments. First, the number of industries in which foreign investments are encouraged has increased from 186 to 262, whereas the number of industries to which foreign investments have restricted access has been reduced from 112 to 76. Second, the restrictions on the share holdings of foreign investors have been relaxed ; for example, the requirement for a dominant Chinese share holding in jointly built and used dock facilities at a port has been abolished. Third, new areas of investment that previously forbade foreign involvement, such as telecommunications, urban piping facilities such as gas supply, heat supply, and water supply and drainage, are now opened up to foreign investments. Fourth, greater access to service sectors such as banking, insurance, commerce, foreign trade, tourism, telecommunications, transportation, accounting, auditing and legal services has been given to foreign investors. Fifth, foreign investments in the Western Area of China are encouraged and foreign investors investing in that area will enjoy even greater relaxation of the restrictions on foreign investors' share positions and access to industries. Finally, the Catalogue allows the mechanism of market competition full play, which is reflected in the inclusion of general industrial products in the category of industries in which foreign investments are allowed. The intention is to speed up the modernization of both industry and product structures through competition.

• The Ministry of Foreign Trade and Economic Cooperation, the Ministry of Finance and the People's Bank of China jointly promulgated the Interim Provisions on Financial Asset Management Companies Absorbing Foreign Capital to Participate in the Asset Restructuring and Disposal , allowing foreign-invested companies to participate in asset restructuring and the disposal of the financial assets of management companies. At the same time, the provision has also legally defined the scope of the financial assets that can be transferred to foreign investors, the evaluation of their value and procedures for transfer.

• A series of laws and regulations on foreign investment have been perfected and promulgated.

• The Ministry of Foreign Trade and Economic Cooperation, the Ministry of Science and Technology, and the State Administration of Industry and Commerce have jointly promulgated the Provisional Regulations on the Establishment of Foreign-Invested Venture Capital Investment Enterprises . This regulation has drawn from the venture capital mechanism in various countries and international practice in an attempt to regulate foreign-invested venture capital companies in terms of their equity investment in non-public, hi-tech enterprises and in related venture capital management services.

• China's Securities Regulatory Commission and the Ministry of Foreign Trade and Economic Cooperation jointly issued Opinions on Issues Relating to the Involvement of Foreign Investment in Listed Companies , which sets out the conditions and procedures regarding Initial Public Offerings (IPOs) of foreign- invested enterprises on the A share and B share markets within the territory of China. According to the Opinions, foreign-invested enterprises are allowed, on the strength of the Provisional Regulation on Domestic Investment by Foreign-invested Enterprises , to acquire the unlisted shares of domestic listed companies, and foreign-invested joint-stock companies with B shares are allowed to float the nontradable shares held by foreign investors on the B- share stock market.

• The Ministry of Foreign Trade and Economic Cooperation has also published Supplementary Provisions (II) to the Interim Provisions on Foreign Investment Establishing Investment-type Companies , on the strength of which foreign-invested investment companies are given greater scope of business. They are allowed, for example, to:

  • provide related technical training to domestic enterprises;

  • act as an initiator to establish foreign-invested joint-stock companies;

  • purchase both domestically and internationally manufactured components and semi-finished products for conversion into finished products for sale on the domestic market;

  • import, from their parent companies, small amounts of products that are not subject to the regulation of import quotas and are the same or similar to those being produced by their invested enterprises in China for trial sales in the domestic market.

• The Ministry of Foreign Trade and Economic Cooperation has revised and promulgated Provisional Administrative Measures Regarding the Examination and Approval of Foreign-invested Leasing Companies, and issued a Notice on Issues Regarding the Expansion of Import and Export Rights by Foreign-Invested Enterprises, which allows FIEs with annual export values exceeding US$10 million to procure products from other enterprises for export, and foreign-invested research and development centres to import some hitech products for test-marketing in China. In addition, amendments have been made to the Regulations on the Merger and Division of Foreign-Invested Enterprises , which has further defined the practice of merger between FIEs and domestic enterprises.

• Laws and regulations on foreign investment in the service sector have been revamped . In order to facilitate the opening of the service sector to the outside world in a positive, smooth, appropriate and orderly manner, China has also promulgated laws and regulations regarding the service sector, including:

  • Interim Measures on the Administration of Establishing Employment Agencies in the Form of Equity and Contractual Joint Venture;

  • The Rules of the People's Republic of China on International “Marine Transportation, Notice Regarding the Printing and Issuance of the Opinions on the Encouragement of the Township and Village Enterprises to Expedite the Structural Adjustment in their Utilization of Foreign Investment;

  • Regulations on the Administration of Travel Agencies (Revised);

  • Administrative Rules of the People's Republic of China on Foreign-invested Insurance Companies “ Regulations on the Administration of Foreign- invested Telecommunications Enterprises;

  • Regulations on the Administration of Foreign Investment in Road Transportation Industry;

  • Rules and Regulations of the People's Republic of China on the Administration of Foreign-invested Financial Institutions;

  • Regulations on the Administration of Foreign Investment in International Freight Forwarding Sector;

  • Rules regarding the Administration of the Resident Representative Offices of Foreign Law Firms,

  • Provisional Regulations on Foreign Investment in Cinemas;

  • Administrative Measures Regarding the Contractual Joint Venture of Audiovisual Product Distribution;

  • The Decision of the State Council Regarding the Revision of the Rules and Regulations on Sino-foreign Cooperative Exploitation of Onshore Oil Resources;

  • The Decision of the State Council Regarding the Revision of the Rules and Regulations on Sino-foreign Co- operative Exploitation of Offshore Oil Resources Interim Measures on the Administration of Sino-Foreign Equity and Contractual Joint Venture in Medical Institutions;

  • Interim Measures on the Administration of the Examination and Approval of Foreign Wholly- owned Shipping Companies;

  • Provisional Regulations on the Establishment of Foreign-invested Printing Enterprises;

  • Provisions on the Administration of the Talent Market;

  • Rules and Regulations on the Administration of Publications, etc.