Regulation of foreign investment projects

Circular of the National Development and Reform Commission on the Further Enhancement and Regulation of the Administration of Foreign Investment Projects

Development and reform commissions and economic and trade commissions (economic commissions) of all provinces, autonomous regions, municipalities directly under the Central Government, cities under separate state planning, capital cities at deputy provincial level, and Xinjiang Production and Construction Corp.

Since China's reform of the investment system in 2004, the approval system has been applied to foreign investment projects, which exert positive functions in further perfecting the investment environment, improving the utilization quality of foreign capitals, and enhancing macro-regulation. However, issues such as relaxed enforcement of relevant state provisions and improper administration of foreign investment projects still exist in some areas. Some foreign investment projects are under construction without approval; some constructions do not strictly follow the approved contents; and some investors take advantage of the fluctuations of the international capital market and the regulations of Chinese exchange rate policies to introduce funds in the name of foreign direct investment by way of false JV, false report of total investment and establishment of a shell firm, and settle the exchange capitals to appropriate for other purposes to pursue illegal interests, bringing potential risks for the sound development of Chinese economy and the international payments equilibrium. With a view to further regulate the administration of foreign investment projects and prevention of abnormal inflow of exchange capitals, according to the Decision of the State Council on the Reform of the Investment System (Guo Fa [2004] No.20), the Interim Measures of the National Development and Reform Commission on the Administration of the Approval of Foreign Investment Projects (the Commission Decree No.22), and relevant provisions provided for in other relevant laws and regulations, relevant issues are hereby noticed as follows:

1. Strictly enforcing the approval system for foreign investment projects. Development and reform commissions at all levels shall consider the approval of foreign investment projects from aspects including safeguarding of economic security, rational development and use of resources, protection of ecological environment, optimization of major layout, safeguarding of public interests, prevention of monopoly, investment admission and capital project administration. The principle for foreign investments that approval of projects first and establishment of enterprises second shall be stuck to, preventing the establishment of shall firms. All kinds of foreign investment projects shall be subjected to the approval system, including Sino-foreign equity JV, Sino-foreign cooperative JV, wholly foreign-funded projects, the acquirement of Chinese enterprises by foreign enterprises, the capital increase and reinvestment projects of foreign-invested enterprises (including foreign-invested enterprises having their systems transformed by listing abroad).

2. Enhancing the inspection on the trueness of foreign investment projects. In approving projects, development and reform commissions at all levels shall approve the total investment of projects according to the construction scale of the projects and the main construction contents, and consign qualified consultation agencies to make an evaluation, if necessary. They shall observe and monitor the flow of overseas capitals, strictly administrate the balance between the total investment and capital of foreign investment projects, and implement financing plans. For those need overseas financing, relevant provisions of the state on the administration of foreign loans shall be strictly enforced. The inspection on the backgrounds and credit standings of overseas investors shall be enhanced. For those with unclear backgrounds or unqualified credit standings or having provided incomplete materials, strict inspection shall be imposed to avoid the inflow of exchange capital without true investment backgrounds.

3. Carrying out the system of the administration of foreign investment projects by type and scale. According to the Foreign Investment Industrial Guidance Catalogue, projects in which foreign investment is encouraged and admitted and with the total investment (including increased capitals, the same hereafter) of USD 100 million and above, and those in which foreign investment is restricted and with the total investment of USD 50 million and above, shall be approved by the National Development and Reform Commission; projects in which foreign investment is encouraged and admitted and with the total investment less than USD 100 million, and those in which foreign investment is restricted and with the total investment less than USD 50 million, shall be approved by local development and reform commissions, among which, the projects under the restricted catalogue shall be approved by provincial development and reform commissions and such right of approval shall not be transferred to a lower level by any reason and in any manner.

4. Regulating the administration of newly commenced projects and strictly controlling the approval conditions for all projects. Development and reform departments at all levels shall, in accordance with the Circular of the State Council General Office on Strengthening and Regulating the Administration of Newly Commenced Projects (Guo Ban Fa [2007] No.64), strictly regulate conditions for newly commenced foreign investment projects. If the project application report submitted to development and reform departments by a project entity involves site selecting, land use pre-inspection and environmental evaluation approval, the project entity shall also submit relevant documents. For the handling of relevant documents, the procedures and authorities of relevant competent authorities shall be followed. Projects that may seriously pollute environment and have a high consumption of energy, materials and resources shall be strictly restricted. Projects that have not acquired documents including site selecting, land use pre-inspection, environmental evaluation approval and the evaluation of energy saving according to requirements, and those do not meet the approval requirements of the Interim Measures of the National Development and Reform Commission on the Administration of the Approval of Foreign Investment Projects (the Commission Decree No.22), development and reform commissions at all levels shall not grant approvals. Development and reform commissions at all levels shall increase exchange with departments including land and resources, environmental protection, housing and urban-rural development, commerce (economic and foreign trade), foreign exchange administration, customs and taxation. Each shall be responsible for its own functions and cooperate with others to improve the linkage mechanism for the administration of foreign investment projects.

5. Enhancing supervision and inspection of approved projects. Efforts shall be made to fully carry out statistics of foreign capital projects and information management, supervise and urge project construction entities to undertake constructions according to the requirements of project approval documents, and reinforce supervision over and inspection on them. For projects that without compliance approval, or acquired approval documents by unjust means such as breaking up the whole into parts or providing false materials, or undertook construction out of accordance with project approved documents and appropriated capitals flowed into China for other purposes other than construction, they shall be corrected in a timely manner. For those seriously inviolate regulations, the projects approval documents can be cancelled by law and the projects shall be required to terminate. Projects with aforesaid problems, upon discovery, shall not be entitled to relevant preferential policies such as tax reduction and exemption for the purchase of equipment, and supported to list or issue bonds.

Development and reform commissions of all areas shall reach a consistent understanding, initiatively ensure the state macro-regulation, further deepen the reform of investment system, and enhance and regulate the administration of foreign investment projects according to law. Meanwhile, they shall improve working efficiency, increase the sense of service, and safeguard the legitimate rights and interests of investors. For projects in accordance with the state industrial policies and relevant requirements, efforts shall be made to give positive guidance and support, handle all procedures in a timely manner, initiatively help them solve problems and difficulties arising out of the project construction and lead foreign investment to industries and regions under state encouragement, so as to promote the upgrading of industrial structure and improve the quality and level of the utilization of foreign capitals. All kinds of investment subjects shall strictly follow provisions of state relevant laws and regulations, seriously go through project approval procedures and initiatively accept supervision and administration.

Source: National Development and Reform Commission July 8, 2008