China: China's New Foreign Investment Law: The Impact On Financial Institutions

The impact of the foreign investment law on financial institutions

Introduction and overview

Much has already been written about the Foreign Investment Law (the "FIL", full text in Chinese here, in-house English translation available upon request) which was voted into law by China's highest legislative body, the National People's Congress ("NPC") of the People's Republic of China1 ("China" or "PRC") on March 15, 2019. The FIL will take effect from January 1, 2020, and the existing legislation that has formed the backbone of Foreign Direct Investment ("FDI") regulation in China since the 1980s (currently scattered over three laws2) will be repealed on the same day. This note will focus on the impact of the FIL on foreign-funded financial institutions ("FFFIs") and related developments.

Impact of the FIL on FFFIs

The FIL is an attempt by the PRC government to align the corporate governance rules applicable to domestic capital companies on the one hand and foreign invested enterprises ("FIE") on the other. As noted in our separate note3, the most significant impact of the FIL is the shift of corporate governance structures and corporate actions from those set out in the FIE Laws to those provided under the PRC Company Law ("Company Law") or the PRC Partnership Law. The same basic premise applies to financial institutions.

In addition, due to the evolving nature of PRC legislative history, it has long since been a challenge for FFFIs to identify a definitive, comprehensive list of the rules applicable to them (the "Conclusive List Issue"); and due to the inconsistency between those applicable rules (i.e. those imposed by their regulators, e.g. the China Banking and Insurance Regulatory Commission ("CBIRC")4 (the "Industry Rules")) and those under FIE Laws, it is even more challenging for FFFIs to understand which set of rules would prevail over the other (the "Inconsistency Issue"). The introduction of the FIL is an attempt to resolve the Inconsistency Issue (although in our view, it does not really address the Conclusive List Issue).

Alignment of corporate governance

Historically, regulators have stipulated various rules on corporate governance which apply generally to the sector, but FFFIs are carved out. FIE Laws also contain corporate governance provisions applicable to FIEs. For example, the China Insurance Regulatory Commission Opinions on Regulating the Articles of Association of Insurance Companies5 requires the shareholder(s) meeting to be the supreme governance body, and prohibits insurance companies from allowing the shareholder(s) meeting to delegate its legal powers to the board of directors ("Board"), or any other organization or individual in its Articles of Association. But in its final clause, it states "these opinions are applicable to insurance companies and insurance asset management companies lawfully established within China. In the event that the laws and administrative regulations have separate provisions on foreign-funded insurance companies, the provisions of such laws and administrative regulations shall be applicable." In other words, there is a carve-out for legislation regulating FFFIs. Under the FIE Laws, foreign funded insurance companies ("FFICs") in the form of EJVs or cooperative joint ventures ("CJVs") still have the Board as their supreme governance body and thus do not need to follow the regulator's requirements in terms of corporate governance.

The FIL requires governance structures of entities formed under the FIE Laws to align with those under the Company Law to be consistent with those of their domestic capital counterparts over a five year period counting from the effective date of the FIL6, so now FFFIs will need to consider whether to shift over to those corporate governance-related regulatory requirements when they next seek to amend their Articles of Association and Joint Venture Contracts/Shareholders Agreements.

Inconsistency issue

With the introduction of Article 417 on the FIL, and based on Article 218 of the Company Law8, it is now clear that in case of inconsistency, industry rules applicable to FFFIs will prevail over the FIL, and the forthcoming implementing rules for the FIL and other rules applicable to FIEs 9 will continue to prevail over inconsistent provisions of the Company Law.

In reality, taking FFICs as an example, after the FIL comes into force, given that the Foreignfunded Insurance Company Administrative Regulations10 ("FFIC Regulations") and the Foreign-funded Insurance Company Administrative Regulations Implementing Regulations11 ("FFIC Implementing Regulations") are basically silent on the issue of corporate governance, so in that case, presumably, the corporate governance provisions in the Company Law would apply to FFICs. However, the minimum registered capitalisation provisions set out in Article 7 of the FFIC Implementing Regulations which provide that equity joint venture ("EJVs") and wholly foreign-owned enterprise ("WFOE") insurance companies need to have a minimum registered capital of RMB 200 million (fully paid up in cash) would still apply. Furthermore, in the same way the sector-specific application procedures, including the two-step establishment process (which is common to both domestic capital and FFFIs) and the capitalisation and qualification requirements applicable to most FFFIs (which tend to be FFFI-specific), including FFICs would presumably still apply after the FIL comes into force. To the extent China has not applied national treatment to the sector e.g. life insurance, where under the current 2018 Special Administrative Measures on the Access of Foreign Investment to China ("Negative List") only a 51% foreign shareholding is permitted pending full liberalisation in 2021, then additional qualification and procedural requirements may apply to foreign investors. Arguably once you have full 'national treatment' then query whether China still has the right to impose any additional procedural or qualification requirements for establishment that are not imposed on domestic capital counterpart applicants.


1 In this note, references to China exclude the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan

2 The PRC Sino-Foreign Equity Joint Venture Law ("EJV Law"), the PRC Wholly Foreign-Owned Enterprise Law ("WFOE Law"), and the PRC Sino-Foreign Cooperative Joint Venture Law ("CJV Law"),(together the "FIE Laws").

3 The note covering the corporate law implications of the FIL can be viewed< href=""target=_blank>here.

4 The CBIRC is the main regulatory body in charge of banking and insurance industry. It was created by the merger of the CIRC and the China Banking Regulatory Commission ("CBRC") in April 2018.

5 Promulgated by the CIRC, effective 1 October 2008.

6 Article 42 of the FIL.

7 Article 41 of the FIL provides that "where the State stipulates otherwise with respect to the administration of foreign investors investing in the banking, securities, insurance and other such financial sector industries in the PRC, or in PRC securities markets, foreign exchange markets and other financial markets, such provisions shall apply".

8 Article 218 of the Company Law provides that "This law shall apply to limited liability companies and joint stock limited liability companies with foreign investment, but where the laws relating to foreign investment make other provisions, such other provisions shall be applied".

9 Strictly speaking, Article 218 of the Company Law only carves out provisions in "laws" (法律), i.e. the FIL, however, in the past, the PRC Ministry of Commerce ("MOFCOM") tended to give this an expanded interpretation to also include administrative regulations and departmental rules.

10 Promulgated by the State Council on, and effective on 6 February 2016.

11 Promulgated by the then CIRC on, and effective on 13 February 2018.

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