October 01, 2008

Circular on Further Strengthening and Standardizing the Administration of Foreign Investment Projects

Issuing Body: National Development and Reform Commission
Issuing Date: July 8, 2008
Effective Date: July 8, 2008

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This article also appeared in the October China Law Update

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In this Circular on Further Strengthening and Standardizing the Administration of Foreign Investment Projects (the Administration Circular), which was issued July 8, 2008, the National Development and Reform Commission (NDRC) attempts to address a number of perceived problems with how foreign investment projects are administered and regulated in China. The perception of the commission is that those problems stem primarily from the improper administration of foreign investment projects and the failure of government agencies to strictly implement applicable regulations. As a result, the Administration Circular does not so much introduce new regulations as remind NDRC branches and officials of existing rules and procedures—and reinforce the NDRC's commitment to enforcing them.

In this Administration Circular, the NDRC specifically cites a number of problems it seeks to address. According to the NDRC, some foreign investment projects, for example, have started construction without the required government verifications, while others have been properly verified but have not adhered to the requirements or limits contained in the verification. Some investors, the NDRC says, have also taken advantage of fluctuations in international capital markets and adjustments to China's foreign exchange policies to bring funds into China under the guise of foreign direct investment in a variety of ways: by establishing fake joint equity ventures; by making false declarations of total investment; and by establishing shell companies. According to the NDRC, those funds are being converted into RMB and used improperly, which the NDRC considers harmful to China's economy and international balance of payments.

The stated purpose of the Administration Circular is to strengthen the administration of foreign investment projects in China and prevent irregular inflows of foreign capital. The circular directs local NDRC counterparts to take the following actions and measures:

  • Strictly implement the verification system for foreign investment projects.
  • Strengthen oversight and authentication of foreign investment projects to prevent the formation of shell companies and the other types of questionable investments mentioned in this circular.
  • Implement the administration of foreign investment projects by class and category.
  • Standardize the administration of new projects and strictly adhere to the criteria for verification of foreign investment projects.
  • Strengthen the supervision and inspection of projects that have already been verified.

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