Circular on Further Improving the Examination and Approval of Foreign Investment

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 rules—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. MOFCOM also later promulgated the Circular on Delegating the Authority to Approve the Establishment of Investment Companies by Foreign Investors, which we summarized in the April 2009 issue of China Law Update; it allowed many foreign investment companies to seek approval from MOFCOM's provincial-level counterparts, rather than the central agency.

The Circular on Further Improving the Examination and Approval of Foreign Investment (the Foreign Investment Delegation Circular) continues that trend of delegating power to MOFCOM's provincial counterparts, particularly for enterprises with working capital of less than US$100 million. Unlike the aforementioned circulars, however (which delegated the power of approval for certain types of enterprises), the Foreign Investment Delegation Circular more broadly distributes authority for overseeing foreign-invested enterprises (FIEs). The key changes are summarized below.

• When FIEs import equipment to China, that equipment is in most cases subject to a five-year period of supervision by the General Administration of Customs, during which the sale and/or trade of the equipment is restricted. In the past, if a company wanted to have those restrictions lifted before the end of the supervisory period, it needed the approval of both MOFCOM and customs. Under the Foreign Investment Delegation Circular, companies no longer need MOFCOM approval
• For most FIEs, the establishment of a domestic branch in China is now subject only to record-filing procedures; the establishment of an overseas branch or office now requires only the approval of MOFCOM's provincial-level counterparts, as well as the written consent of the economic and commercial section of the relevant Chinese consulate or embassy.
• Provincial-level departments of commerce have likewise been delegated authority to approve the establishment of, and changes to, FIEs operating in industries that are officially "encouraged" by the Chinese government. Similarly, provincial authorities have the power to approve most changes for FIEs that were established with MOFCOM approval (other than capital increases above limits set by the National Development and Reform Commission and equity transfers that result in the transfer of control from the Chinese party to a foreign party).
• Provincial authorities have broad responsibility for FIEs within the automobile industry as well as for farm vehicles, motorcycles, engines and related parts production.
• Foreign investors and foreign-invested enterprises involved in M&A activity valued at less than US$50 million (in "restricted" industries) or US$100 million (within "encouraged" sectors) may now work with and through provincial departments of commerce, rather than MOFCOM's central office.

Taken together, this series of MOFCOM circulars delegating powers has the cumulative effect of significantly reducing control of the central government over foreign investment, reflecting MOFCOM's desire to reform and streamline China's administrative approval and licensing systems. As such, the circulars, and the changes embodied in them, ease the burden of foreign investors and foreign-invested companies in China.