PRC securities law
Charltons provides high impact advice on PRC corporate, regulatory and securities matters to Chinese and international clients in the PRC financial services and securities sector. We have wide experience advising on Mainland market entry by international financial institutions, including institutions applying to be licensed under the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes. We have also advised PRC domestic institutions on applications for Qualified Domestic Institutional Investor (QDII) licences and quotas in order to invest overseas. We have advised on the investment channels and services available to companies seeking to raise funds or investing in or from the PRC, including the PRC securities law framework applicable to offerings of “A Shares” and “B Shares” and the regulatory framework governing foreign investment in the PRC. We also regularly provide day-to-day advice and regulatory updates to financial intermediaries on PRC financial and securities laws and regulations, including securities, fund management, banking and insurance rules.
We also have many years’ experience of bringing Mainland Chinese companies to the Hong Kong market, and can advise on the PRC regulatory and PRC securities law requirements for H Share and red chip listings on the Main Board and Growth Enterprise Market of the Hong Kong Stock Exchange.
2014 has seen the implementation in November of the Shanghai-Hong Kong Stock Connect pilot programme which allows PRC investors to invest directly in Hong Kong listed stocks for the first time, while Hong Kong and international investors are able to invest in stocks listed on the Shanghai Stock Exchange through Hong Kong. Most recently, we have been assisting fund managers and distributors to gear themselves up to take advantage of the new opportunities arising from the anticipated introduction of a similar arrangement for the mutual recognition of funds between the Mainland and Hong Kong. This will allow funds established outside Mainland China to be sold directly to Chinese investors. Likewise, CSRC-approved qualified funds which are managed by CSRC-licensed firms will be capable of being offered in Hong Kong under a streamlined SFC authorisation process.
Other recent developments of note are the establishment of the Shanghai Free Trade Zone which is expected to see experimentation in the opening up of China’s capital account in the future. China’s State Council also published a revised edition of its Foreign Investment Catalogue on 31 October 2014 which considerably expand the industry sectors in which foreign investment is allowed.
Charltons has almost two decades of experience in China, and has offices in Shanghai and Beijing, as well as long established relationships with top Chinese law firms in all of the major Chinese cities. Our deep local knowledge, international perspective and close working relationships with important PRC governmental agencies enables us to provide insightful, smart and practical advice to both PRC and foreign financial institutions operating in the PRC. We have experience of PRC securities law, China’s Qualified Foreign Institutional Investor scheme, listing PRC companies in Hong Kong and other areas of corporate finance law.
Foreign Investment in China
The principal piece of regulation governing foreign investment in China is the Catalogue for Guidance on Foreign Investment in Industries (the Catalogue) which is periodically revised, most recently in October 2014. The Catalogue operates as a means for the Chinese government to channel foreign investment into the industries which it thinks will benefit most from an injection of foreign capital and technology.
Under the Catalogue, China’s industry sectors are divided into four categories for the purposes of foreign investment: “encouraged”, “permitted”, restricted and prohibited. Industries in the “encouraged” sector benefit from policy incentives often in terms of tax and land. Those within the “restricted” category face restrictions such as a limit on the percentage foreign shareholding, a requirement for a Chinese majority shareholder, or a requirement that the foreign investment be approved at the level of the central government.
In 2013, China established the Shanghai Free Trade Zone (FTZ) pilot programme which, among other things, implemented a “Negative List approach” to foreign investment in the FTZ. This means that foreign investment is allowed in all industries on the same terms as Chinese investment provided that the industry in included in the Negative List as either prohibited or restricted for foreign investment.
In June 2014, the FTZ Negative List was updated to substantially cut the number of sectors in which foreign investment is subject to restrictions. The October 2014 revisions to the Catalogue have followed the approach adopted by the revised Negative List and has significantly reduced the number of restricted sectors (down from 79 to 35). Removal from the restricted sector means that foreign investment in these sectors of between US$50 million and US$300 million is allowed subject to filing with the National Development Reform Commission and obtaining approval from the Ministry of Commerce at the local level.
China’s Competition Law
China’s competition law, the Anti-Monopoly Law (AML) came into effect on 1 August 2008 and regulates three principal type of anti-competitive conduct: the entering into of anti-competitive agreements, abuse of a dominant market position; and mergers and acquisitions which eliminate or restrict competition. The primary focus of enforcement has been on merger control, although in recent years the authorities have increasingly turned their attention to other contraventions of the AML. In terms of merger control, the AML covers transactions involving domestic investors as well as those involving foreign investors. All investors, irrespective of nationality must submit a declaration for anti-monopoly clearance if their activities could potentially restrict or prevent competition in the domestic market. Prior notice of transactions that fall within the definition of concentrations of business operators must be given to the Anti-Monopoly Bureau if certain turnover thresholds are reached. The turnover thresholds are that in the previous financial year: (i) either the combined worldwide turnover of all business operators involved was more than 10 billion or the aggregate China revenue of all business operators involved exceeded RMB 2 billion; and (ii) the China revenue of each of at least two business operators was more than RMB 400 million.
Following its review, the Anti-Monopoly Bureau can either prohibit the merger from going ahead, or more commonly, it will impose restrictions to reduce the anti-competitive effect. The first transaction to be prohibited was Coca Cola’s 2009 proposed acquisition of China Huiyuan Juice Group Limited. The second rejection of a merger application occurred in June 2014 when MOFCOM prohibited the formation of a strategic alliance between A.P. Moller – Maersk A/S, MSC Mediterranean Shipping Company S.A. and CMA CGM S.A., three of the world’s biggest container shipping companies. The key factor in the decision was that the alliance would be able to reduce costs due to economies of scale which would have worsened the competitive position of Chinese shipping firms. In the majority of cases, the Anti-Monopoly Bureau has opted in favour of imposing restrictions rather than outright rejection.
Charltons has experience of PRC securities law, China’s Qualified Foreign Institutional Investor scheme, listing PRC companies in Hong Kong and other areas of corporate finance law.