Mind-Realizing Law

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Upcoming Shanghai FDI Deregulation & Accountability at Individual Level for Local Officials

Posted by on August 5, 2020

Shanghai pioneers the pilot role of the Chinese central government’s spearheading China’s fulfillment of its pre-COVID10 trade/investment-liberalizing commitments at local level.  Below we feature the draft uniform Shanghai FDI regulation, and the underlying nuance-focused public private partnership spearheaded by Shanghai to serve foreign investors better, and potentially scale up Shanghai’s best practice China-wide, for companies to navigate through regulatory & business challenges.

1. Executive Summary

FDI into Shanghai in 1H2020 actually increases 5.4% y-o-y, amounting to US$10.28 billion, to which 19 $100million+ projects contribute 52%, according to figures by Shanghai government, notwithstanding of the unprecedented COVID-19 crisis.  Regulation on Foreign Investment in Shanghai (draft) is under expedited legislative review and public comment solicitation in July.  It aims to cope with the challenges confronting Shanghai, implement the new infrastructure initiatives, and ongoing reform for city-level smart and efficient operation. 

2. Analysis

Given the official, finalized text of the Regulations on Foreign Investment in Shanghai Municipality (Draft) remains unavailable to the public, we provide a summary below that enforces the uniform Foreign Investment Law and its implementation regulation effective on December 31, 2019, with further nuances and even wider accountability, at individual local official level:

  • National Treatment: Ensure pre-establishment national treatment of foreign-invested enterprises (FIEs).

  • Individual Liability of Abusing Officials: Enforce liability of public agencies and officials that allegedly deviate from national treatment, impose forced technology transfer or commit other wrongdoings in administration of foreign investment laws.

  • Lifecycle Investment Facilitation: Establish lifecycle investment facilitation from market access to exist for FIEs, e.g., winding down plants, liquidation, settlements with employees, tax clearance before closure and repatriation of residue values.

  • Capital Gain Tax Holidays for Re-investment: Re-affirm the withholding tax (WHT) exemption for FIE’s re-investment with investment returns within China and free flow of capital gains and profits.

  • Streamline Filings for WFOE/JV Formation and Corporate/Equity Changes: Revoke local MOFCOM filing and consolidate all filings through one-window.

  • Customs Facilitation: simplify customs supervision over regulated and/or boned goods and services, while strengthening supervision of settling banks and 3PLs to ensure trade, AML anti-fraud compliance.

  • Phase-out of Equity Caps and JV Requirements in Liberalized Sectors: Implement the phase-out of foreign ownership restriction in liberalized sectors, with wholly owned foreign enterprise (WFOE) available in sectors from securities, asset management, to futures, commercial vehicle, to vocational education.

  • Enhance Industry-wide Preferential Policies for Select Sectors: materialize the policy direction to prioritize origin-neutral preferential policies for SMEs and emerging companies.

  • Trade Secret Protection: reiterate the accountability of approving/filing authorities to protect business proprietary information, trade secrets of FIEs, except for “state secrets” and those under the regimes on national security and cyber/data security.

  • Geographic Privileges: Enforce geographic restrictions preserved under sector-specific phase-out of foreign ownership restriction, e.g., value-adding telecommunication services (E-commerce), where the headquarters and facilities must be within Shanghai FTZ and comply with various licensing/compliance requirements administered by MIIT.

3. Outlook

Shanghai municipal government highlights the vision of “in China, for China, with China” advocated by China CEO of the French Dassault System, a global leader in 3D simulation systems contributes significantly to both re-investments and participation in COVID-19 public procurement initiatives such as hospital built within weeks.

Consistent with the broader national reforms we alerted, Regulation on Foreign Investment in Shanghai steps up China’s efforts to focus on strengthening the role of FDI at major municipalities such as Shanghai as the center for international economic, financial, shipping, trade and science and technology innovation.

The materialization of further opening first at Shanghai level, from WFOE formation, stopping forced technology transfers, to halting unfair trade practices through “hidden,” local barriers, would strengthen the direction of reciprocity, transparency and restraints of market-distorting behaviors of SOEs (e.g., “involuntary” joint venture requirements).  These issues have been pivotal in reaching regulatory consensus with major trading partners including both US and EU, and to the worries of lacking local enforcement of the Foreign Investment Law by many international businesses in China. 

Companies still must monitor both the legislation and its enforcement in practice to safeguard business freedom and ensure local compliance.

Please feel free to let us know if you have any questions. Thank you.

About the author: Yi Wang, trade and business attorney with public and private sector experience to tackle with regulatory/business challenges. He was one of the two defense counsels to MOFCOM in first Sino-US WTO dispute on semiconductors in 04′, and thereafter, counseled and managed cross-border transactions, regulatory clearance for transactions and trade/FCPA litigation at leading law firms in US/China from 02′ to 14′, and further served with GE Plastics/SABIC from 14′ to 17′. From 17′ to present, he is co-founder of Mind Realizing Law advising international businesses and institutions in operational excellence and private equity transactions with robust anti-corruption / trade compliance perspectives.

(This briefing first appeared at China Big Idea. If our commentaries add values or you simply like our newsletters to monitor with informed assessment, please subscribe at https://chinabigidea.substack.com)