Circular on Delegating the Authority to Approve the Establishment of Investment Companies by Foreign Investors

In an effort to make it easier for foreign investors to do business in China, the Ministry of Commerce (MOFCOM) issued two circulars in late 2008 that delegated responsibility and power for approving many new business projects—and changes to existing enterprises—to lower levels of government. We summarized those two pieces of legislation—the Circular on Delegating the Power of Approving Foreign-Invested Commercial Enterprises and the Circular on Delegating the Power of Approving the Establishment and Alteration of Foreign-Invested Joint Stock Enterprises—in, respectively, the November and December 2008 issues of China Law Update. Rather than having to apply directly to MOFCOM for approval, most foreign-invested commercial enterprises and foreign-invested joint stock enterprises are now permitted to submit applications to MOFCOM's provincial level counterparts.

Continuing its efforts to streamline business procedures in China, on March 6, 2009, MOFCOM promulgated the Circular on Delegating the Authority to Approve the Establishment of Investment Companies by Foreign Investors (the Delegation Circular). Effective immediately, many foreign investment companies will, like those commercial and joint stock enterprises, be able to seek approval from MOFCOM's provincial-level counterparts, rather than the central agency. As with those other circulars, this Delegation Circular is intended to make it easier for foreign investors to do business in China, in this case through investment companies.

Foreign investors have been permitted to establish investment companies to engage in direct investment in China since November 2004, when MOFCOM enacted the Provisions on the Establishment of Investment Companies by Foreign Investors. Those provisions required foreign investors to meet high thresholds, and to invest at least US$30 million as registered capital. Because those investment companies were necessarily large, and as a result deemed critical to the national economy, their establishment was subject to MOFCOM approval.

Under the Delegation Circular, the establishment of, or changes to, many foreign investment companies are to be handled by MOFCOM's provincial counterparts. The new rules apply to companies with registered capital below US$100 million, as well as companies seeking to increase their registered capital by less than US$100 million.

In considering whether to approve the establishment of a foreign investment company (or changes to an existing company), provincial agencies are still required to adhere to other elements of the Provisions on the Establishment of Investment Companies by Foreign Investors, as well as the Supplementary Provisions on the Establishment of Investment Companies by Foreign Investors, which were enacted by MOFCOM in 2006.

The Delegation Circular forbids foreign investment companies from being involved in restricted industries. In industries subject to special provisions, provincial authorities must obtain the consent of regulatory authorities in charge of the industry. Similarly, for any particular individual investment by a foreign investment company, the laws, rules and regulations of the relevant industry shall apply.

This delegation of powers appears to signal a relaxation of government control by MOFCOM, reflecting the agency's desire to reform and streamline China's administrative approval and licensing systems. As such, it eases the burden of foreign investment companies in China.