Measures stimulate economic growth following Covid-19 downturn: After the Covid-19 outbreak, the Chinese government prioritised the implementation of a variety of financial measures and other tools to ensure banks had sufficient liquidity, and to reduce interest rates. Exemptions from certain social security contributions and improvements to the efficiency of foreign exchange control and cross-border remittance of Renminbi also assisted businesses to survive the immediate commercial downturn. Having brought the virus firmly under control, China’s economy has begun a relatively fast economic rebound that is allowing regulators to look again at stimulating growth. In Shanghai, for example, the municipal government has released new foreign investment regulations, effective from 1 November, that aim to further accelerate the opening-up of the city at the heart of China’s finance sector.
Final private placement rules released: In February, the China Securities Regulatory Commission (“CSRC”) finalised amendments to the private placement rules for listed companies, with the overall objective of streamlining private offering requirements in mainland China. The new rules increase the maximum discount permitted for the offering price of a private placement to 20%, shorten the lock-up period to 18 months, and offer more flexibility when setting the price reference date for placements to strategic investors. The rules also increase the maximum number of investors allowed in any offering to 35 and extend the validity period of the CSRC’s approval for a private placement to 12 months.
Reform of qualified foreign investor regime: As part of mainland China's ongoing efforts to liberalise its capital markets, the Chinese authorities released a series of regulations in 2020 to reform the country’s qualified foreign institutional investor (“QFII”) and Renminbi QFII programmes. Originally launched in 2002 and 2011 respectively, these programmes allowed foreign institutional investors to trade in the country’s stock and bond markets within certain quotas. The new rules create a unified “qualified foreign investor” (“QFI”) regime, abolish the investment quota restriction of the previous programmes, and expand the scope of permissible investments to include financial and commodity futures and options, and private investment funds. In addition, the eligibility requirement for QFIs is relaxed to allow a wider range of institutions to apply to become QFIs.
Clarification on enforceability of keepwell undertakings: In November, the Shanghai Financial Court delivered a judgment recognising a Hong Kong High Court default judgement against CEFC Shanghai International Group in relation to claims for breach of keepwell undertakings given by CEFC to ensure that its subsidiary remained solvent with sufficient liquidity to meet its payment obligations under various bonds that the subsidiary had issued. Given keepwell deed structures are frequently used as credit enhancement for bonds involving mainland Chinese companies, the PRC court’s judgment is significant because there has remained uncertainty as to how a PRC court would treat a claim under a keepwell deed since a breach of the deed would not typically give rise to a debt claim but only a claim for damages for breach of contract. However, the PRC judgment demonstrates that, in appropriate circumstances where the mainland Chinese keepwell provider is not already insolvent, a PRC court is likely to enforce a Hong Kong court judgment which gives effect to a keepwell deed in accordance with the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Courts of the Mainland and of the Hong Kong SAR pursuant to the Choice of Court Agreements between Parties Concerned.
More clarity under the Foreign Investment Law: The new Foreign Investment Law (“FIL”) has been in force for nearly one year, with numerous foreign-invested enterprises known to have chosen to restructure their corporate governance to reflect the new requirements under the FIL (notwithstanding that the grace period for doing so does not expire until 1 January 2025). The release of various implementing rules this year has provided welcome clarity on some outstanding details under the FIL, including prescribing new reporting requirements for foreign-invested enterprises, in place of the Ministry of Commerce’s filing-based system, and measures, which from 1 October, clarify the scope of application of the administrative complaint mechanisms that are available to foreign-invested enterprises under the FIL. In addition, the PRC Supreme Court (the “SPC”) clarified that agreements governing investment into industries into which investment by foreign enterprises is restricted under the “negative list” may be held valid despite industry approvals having not been obtained, provided that necessary measures are taken to meet access requirements or the negative list is revised to remove the investment restriction.
Emergence of workforce sharing arrangements: The Covid-19 outbreak led to a sharp drop in the workload of employees of many offline merchants in mainland China, with some staff temporarily having no work until busyness levels returned. At the same time, the pandemic has driven a surge in orders on e-commerce platforms, some of which have encountered a shortage in labour. To resolve this imbalance, some e-commerce platforms have begun co-operating with offline enterprises to share employees’ time to lessen the pressure on platforms’ workforces while also reducing the labour costs of these offline enterprises. This new employment model – commonly referred to as “workforce sharing” – has become an innovative way to rebalance workforce supply and demand during the pandemic and it will be interesting to see how it influences strategic human resource management as the Chinese economy continues its recovery in 2021.
Financial reform agenda in Greater Bay Area: In April, China released a 30-point agenda reforming cross-border capital flows, insurance business and investment channels in the Greater Bay Area, which consists of the Hong Kong and Macau Special Administrative Regions and nine cities in Guangdong Province (including Guangzhou and Shenzhen). The agenda marks a significant milestone following the publication of the outline development plan for the Greater Bay Area in 2019 and sets out more detail on the expected forthcoming reforms to cross-border financial services as China seeks to build a world-class city cluster.
Further reforms to asset and wealth management: The CSRC’s rules regulating institutions distributing public securities investment funds came into force on 1 October, allowing the distribution of mutual funds and, if registration is completed with the Asset Management Association of China, private securities investment funds. These rules intend to standardise distribution of these investment products, including by clarifying the scope of distribution activities, the licence registration procedures and applicant qualification requirements.
More guidance to enhance antitrust enforcement: In August, mainland China’s antitrust watchdog, the State Administration for Market Regulation (“SAMR”) published four sets of antitrust guidelines to provide more clarity on certain key antitrust issues in mainland China such as leniency, exemptions to resale price maintenance, and the market share-based safe harbour. SAMR also published detailed compliance guidance to help market players establish internal compliance frameworks and identify potential areas of risk.
Expediting review of simple cases and expanding scope of review: Alongside a notice released in April that sought to accelerate merger review processes to facilitate the resumption of production and better control Covid-19, SAMR further streamlined and expedited the merger review process as evidenced by the timeframe needed by the regulator to clear simplified case filings since the reforms were launched. Despite the disruption of Covid-19, the average review period for a simplified case over the first half of 2020 fell to an average of less than 13 days from acceptance of a case. In addition to enhanced speed, SAMR has also expanded its scope of review in 2020. Most notably, in April SAMR accepted the notification of a transaction involving a so-called variable interest entity (or “VIE”) structure for the first time, clearing the case in July, and, in June, SAMR published its first penalty decision for failure to notify an offshore merger that had no mainland China nexus.
Online application of foreign debt filing and registration: In October, China’s National Development and Reform Commission (“NDRC”) released official guidance regarding the launch of an online system to facilitate the filing and registration of foreign debt (including debt incurred offshore by mainland Chinese-controlled entities) under NDRC Circular 2044. Starting from 1 November 2020, the filing and registration application, information reporting, inquiries and feedback in respect of medium-to-long term foreign debt will be processed through that system. For filing and registration of foreign debts online, NDRC requires the original application documents to be delivered to the NDRC office after the online submission is completed. NDRC recommends that companies submit original documents no later than 45 working days before issuing any bonds or drawing down loans.
Adjusting macro-prudential parameter for cross-border financing: In March, the State Administration of Foreign Exchange and the People's Bank of China (“PBOC”) issued a joint notice to increase the level of the macro-prudential parameter from 1 to 1.25. In line with wider government policy shifts, this increase to the parameter, used in calculating the foreign debt quota available to a mainland Chinese corporate or financial institution under the PBOC’s foreign debt quota regime, seeks to encourage more cross-border finance into mainland China.
Private lending interest reform: In August, the SPC revised certain rules concerning the application of law in the trial of private lending cases. Under the new principles, PRC courts will support lenders’ claims in respect of interest payments provided that the agreed annual interest rate does not exceed four times the Loan Prime Rate (“LPR”) on one-year loans released by the National Interbank Funding Centre. Compared to the previous limit of between 24% and 36%, the SPC has effectively lowered the upper limit on private lending interest rates. For instance, the one-year LPR issued on 20 November was 3.85%, resulting in a ceiling under the new rules of 15.4% per annum.