Member Article

The State Council issued the Decision of the State Council on the Reform of the Investment System on 17 July 2004. The Decision introduces a number of significant changes to the regulatory system applicable to investments in China. The key changes are set forth below. Approval and recordal system The Decision abolishes the government examination and approval system for domestic projects which do not require government investment. The establishment of enterprises for such projects will from now on be effected either through approval or recordal. The domestic approval system shall only be applicable to very large projects and restricted category projects whereas all other projects, irrespective of their size, will be subject to the recordal system. It appears that projects falling under the recordal system no longer need to prepare a feasibility study and will only be required to attend to procedures regarding environmental protection, land use, resource use, safe production, urban planning, etc. For projects that require financial assistance from the government, the scope of the government’s examination and approval shall be restricted to the finance application report. Projects subject to approval The Decision provides for the publication by the State Council of a Catalogue of Projects To Be Approved by the Government (the “Catalogue”). The Catalogue contains a list of large and restricted fixed asset investment projects which require government approval even absent government financing. No authority is permitted to extend the scope of projects subject to approval as specified in the Catalogue without the State Council’s consent. Enterprises that are subject to the approval system no longer need to prepare a project proposal, a feasibility study report or a report on the commencement of construction. Such enterprises shall only be required to submit an application report that addresses issues such as economic security, the rational use of resources, ecological and environmental protection, the protection of the public interest and the prevention of monopolies, etc. Various aspects of PRC investments abroad are still to be subject to approval. The Catalogue The 2004 version of the Catalogue is attached to the Decision. The Catalogue lists projects in 11 industries and also provides rules regarding the approval of foreign investment and overseas investment projects. The Catalogue specifies that certain projects require approval from the competent department of the State Council while others require the approval of the competent departments of the local government. Projects that require approval by the competent department of the State Council are to be approved by the competent department of the State Council in conjunction with the department in charge of the relevant industry. Projects that require the approval of the competent department of the local government are to be approved by the competent department of the local government in conjunction with the department in charge of the relevant industry at the same level. Provincial governments are permitted to further delegate their approval authority except with respect to those projects that the Catalogue specifies must be approved by the competent departments of the provincial government. Foreign investment approval The Decision specifies that foreign investment projects with a total investment amount of US$100 million or more that are listed as permitted or encouraged in the Catalogue for Guiding Foreign Investment in Industries (the “Investment Catalogue”) require the approval of the State Development and Reform Commission. Foreign investment projects with a total investment amount of at least US$50 million that are listed as restricted in the Investment Catalogue also require State Development and Reform Commission approval. The following foreign investment items are to be approved by the Ministry of Commerce: • the establishment of, and changes in, foreign investment enterprises with an investment amount above the limit specified by the State Council (the limit is not specified in the Decision but used to be US$30 million), in an industry in which foreign investment is restricted or involving quota and licence administration; and • the contract, articles of association and major changes (such as increase in investment, equity transfer and merger) expressly specified by the law of large foreign investment projects. All other projects can be approved by the local governments in accordance with the relevant regulations. Other issues The Decision expands the autonomy of large enterprise groups to determine their own strategies and encourages and enlarges the investment scope for private investment. The Decision further opens more financing channels for enterprises. All types of enterprises will be permitted to raise funds through equity financing. The Decision also contains a number of provisions aimed at improving the administration of government investment and sets out various measures to strengthen and improve macro control over investment.