Circular on Issues Concerning the Delegation of Examination and Approval Authority for Foreign Investment

Issuing Body: Ministry of Commerce
Issuing Date: June 10, 2010
Effective Date: June 10, 2010

Following the State Council's lead, China's Ministry of Commerce (MOFCOM) has released a circular designed to attract more and better foreign investment by streamlining the approval process for foreign-invested enterprises in industries that meet the Council's broader economic objectives. MOFCOM's Circular on Issues Concerning the Delegation of Examination and Approval Authority for Foreign Investment (MOFCOM Approval Delegation Notice), which was released on June 10, 2010, and became effective immediately, legally delegates authority for many foreign investments valued at less than US$300 million to provincial authorities. This regulation came in response to the State Council's April release of the Several Opinions on Further Utilizing Foreign Capital (Foreign Capital Utilization Opinions).

In the Foreign Capital Utilization Opinions, the State Council outlined a series of broad policies designed to encourage foreign investment in research and development centers, high-end manufacturing, high- and new technology, alternative energy, and other environmentally friendly industries, while discouraging investment in industries that consume large amounts of energy, pollute the environment, or are already over capacity in China. Both the National Development and Reform Commission (NDRC) and MOFCOM have now formulated rules to bring those policies to fruition. Last May, the NDRC issued the Notice Regarding the Delegation of Approval Authority for Foreign-Invested Projects.

NDRC and MOFCOM are also expected to revise the Foreign Investment Industrial Guidance Catalogue, which labels industries as "encouraged," "restricted," and "prohibited" for foreign investment. It was last revised in October 2007.

Key Points of the MOFCOM Approval Delegation Notice

1. The MOFCOM Approval Delegation Notice states clearly that the agency is delegating approval authority for the establishment of and changes to foreign investments (including capital increases) valued below US$300 million to provincial-level agencies under MOFCOM when those investments fall within the "encouraged" and "permitted" categories of the Foreign Investment Industrial Guidance Catalogue. For investments within that catalogue's "restricted" categories, however, the rules remain unchanged: Only those with a total value below US$50 million can win approval from provincial-level agencies, rather than MOFCOM itself.
   
   Until now, foreign investors had to seek central MOFCOM approval once their investment reached a value of US$100 million if it fell in the "encouraged" and "permitted" categories.
   
   For the purposes of determining whether the threshold for seeking MOFCOM approval has been met (the Investment Limit), the value of foreign-invested joint stock companies is calculated on the basis of registered capital. The threshold for companies that have been restructured into foreign-invested joint stock companies should be calculated on the basis of net value of assets. With companies that were acquired, the Investment Limit is based on acquisition price.
   
   
2. For foreign investments that fall within the "encouraged" categories of the Foreign Investment Industrial Guidance Catalogue and that are not subject to national control, the MOFCOM Approval Delegation Notice goes one step further. It delegates approval authority for foreign investments valued above US$300 million to provincial-level agencies under MOFCOM.
   
   
3. The MOFCOM Approval Delegation Notice likewise delegates to the provincial-level agencies under MOFCOM approval authority for the establishment of and changes to foreign-invested investment enterprises with a total registered capital below US$300 million; and for foreign-invested venture capital enterprises (including foreign-invested venture capital management enterprises) with a total investment below US$300 million. Previously, the establishment of and changes to all the above types of enterprises were subject to MOFCOM approval.
   
   
4. With a few prominent exceptions—finance and telecommunications—provincial-level agencies under MOFCOM have even greater authority within the service industry. Except as otherwise provided under laws and regulations, the establishment of and changes to all foreign investments in the service industry (including those above the Investment Limit) are subject to the approval of and administration by provincial- level agencies under MOFCOM.
   
   Foreign investments in the field of finance and telecommunications are not affected by the MOFCOM Approval Delegation Notice and remain subject to previous laws and regulations.
   
   
5. Provincial-level agencies under MOFCOM are also authorized to approve and administer company changes at foreign enterprises that were approved by MOFCOM or other departments under the State Council, except for capital increases that exceed the Investment Limit or that are in finance or telecommunications, as described in the preceding paragraph.
   
   
6. The MOFCOM Approval Delegation Notice directs MOFCOM agencies at all levels to strictly implement China's national industrial policies, conferring approval and/or verifying foreign investments in accordance with macro-economic controls and limits on industries that are over capacity in accordance with relevant regulations.

Conclusion

In contrast to previous delegations of powers by MOFCOM to local agencies, which focused on only one industry, the MOFCOM Approval Delegation Notice delegates power more comprehensively and to a greater extent. These changes signal a relaxation of government control by MOFCOM, reflecting the agency's desire to reform and streamline China's administrative approval and licensing systems.

At the same time, provincial-level agencies under MOFCOM gain much broader powers. Since it is generally easier and less time-consuming to obtain approval from provincial and local authorities than from central authorities in Beijing, this development is likely good news for foreign investors. As provincial and local authorities begin to approve more large projects, however, regional variations in the criteria and standards for approval may emerge.