S1E1 - Yvonne Cheng – Foreign Investment Law
Highlighted excerpts:
National Treatment
Yvonne: Under the new Foreign Investment Law, the process to setup aforeign invested enterprise is now the same as setting up a purely domesticcompany. Historically, you would gofirst to the local Ministry of Commerce to get approval first and then you go to what is now called AMR, the Administration for Market Regulation. Youmight possibly also need pre-approval from NDRC, the National Reform and Development Commission. Now when you set up a company it is basically the same as domestic investors.
Art: At the ground level, we know that a lot of foreign companies maybestill have trouble getting certain kinds of business licenses. It's a verypractical matter like maybe the law technically allows foreign company participation, but then still getting specific business license, there may still be some difficulties. How do you see this being implemented locally on the ground?
Yvonne: Government agencies that are responsible for giving differentlicenses, I think it's too early to say how it will be implemented but I thinkwhat we can say is how the central government or the legislation Authority want it to be implemented. So first you can see the entire procedure should not impose additional requirements for foreign investors via specific implementation rules.
Art: But there are years of inertia with hundreds of industrial regulationsthat have been published. If you want you set up a company in China and getcertain specific operational licenses, for example, they might require you to have certain years of internal experience in certain industry or have a assets exceeding a certain amount or have some other requirements which domestic companies do not have to meet. Still this is absolutely a step in the right direction overall.
Negative List
Even though we have national treatment for many industries, there is stillof course the negative list which restricts or prohibits foreign investment incertain industries.
Yvonne: In recent times more and more sectors have opened up and gotten offthe negative list. The financial sector,the insurance sector, the automotive industry for example. Those industries cannow have majority foreign ownership.
Art. What do you think will be some of the next sectors that couldpotentially come off the negative list?
Yvonne: Foreign investment in cultural areas like theatres, publicationsmeaning the actual physical publication of reading materials, and even someareas in the telecom sector. You canlook to the free trade pilot zones to get a glimpse of what might be next to come off the negative list.
Venture Capital
Art: Do you see the changed in investment and governance rules, any of thisas being an opportunity for venture capital in China? Becausea lot of venture capital funds might traditionally prefer an offshore structurein the Cayman Islands or BVI as a holding company because they can get very creative with their venture capital industry terms.
Yvonne: We could see more use of onshore structures. However, I thinkoffshore structure will still have its benefits. For example, the PRC companylaw still allows only one class of shares.
Art: And for domestic companies you actually don't even have shares youhave ownership % in the registered capital. It's not exactly shares.
Yvonne: An offshore structure will still have its benefits, giving themmore opportunity in terms of going IPO.
VIEs
Art: A VIE, or variable interest entity, it's a very elaborate structure toactually kind of get around some of these restricted areas of investment thatwe talked about with the negative list and so forth, and traditionally used in for internet companies.
It's a very elaborate and complicated structure and one that's in a bit ofa gray area, but its ultimately a legal structure the government knows exist.So many famous companies like Baidu and Alibaba and others that have listed outside of China have used these structures. The original draft of this foreign investment law in 2015 was actually very negative towards the VIE structure. And then this one is silent. What do you think that means for the future of using the VIE?
Yvonne: The validity and legitimacy of the VIE structure is still in a grayarea. Big famous companies have been using this structure and there will be ahuge impact to the entire market if that has to change. The Hong Kong exchange does requires that if you want to use a VIE structure, you need a lawyer to issue a legal opinion about it.
So if for whatever purpose the government is no longerallowing this structure that means you know, the company might need to goprivate. You would have to totally restructure it all. So I think the government at least for now might be ok to keep this status. It's a bit of a tenuous situation, but it seems like it's tolerated. So many companies have used the structurewould be even it's a very tax inefficient structure.