China Amends Laws to Reduce Red Tape – What Foreign Investors Need to Know

The government has taken further steps to reduce bureaucracy in China by amending 14 and abolishing six sets of regulations. The bureaucratic changes aim to cut red tape for enterprises in a wide range of industries. This push forms part of China’s long-term reform efforts to reduce regulatory hurdles and boost market activity. The amended regulations cover industries, such as telecommunications, healthcare, transport, customs, and internet access services, among others. We provide an overview of the changes most pertinent to foreign investors in China.

On April 7, 2022, the State Council issued an order to amend 14 and abolish six sets of administrative regulations across a wide range of industries in order to further cut red tape for companies and help stimulate market activity. The changes will take effect from May 1, 2022.

The order forms a part of China’s reform push to “separate operation permits and business licenses”, which reviews existing laws and regulations to: 1) reduce bureaucratic procedures for businesses by abolishing approval requirements, 2) optimize market access services, and 3) base certain approval procedures on “informed commitment” rather than inspections, among other measures.

The affected regulations cover foreign investment in the telecommunications industry, medical institutions, customs inspection, transport, internet access services, and many more.

Below we provide an overview of the legal changes that may benefit foreign investors in China.

Amended and abolished laws

The amended laws cover the following fields:

• Foreign investment in the telecom industry
• Medical institutions
• Inspection of import and export commodities
• Public security services
• Road transportation
• Pesticides
• Customs statistics
• Customs administrative penalties
• Customs inspection
• Internet access services
• Public security for the hospitality industry
• Quality assurance
• Maternal and infant healthcare
• Radioactive medicine

Meanwhile, the six abolished laws are:

• Interim Provisions of the State Council on General Aviation Administration
• Regulations on Quality Responsibility for Industrial Products
• Rules for the Implementation of Water Freight Transport Contracts
• Rules for the Implementation of Railway Freight Transport Contracts
• Interim Regulations on the Board of Supervisors of State-owned Enterprises
• Regulations on Letters and Calls (regulations on submitting petitions to the government)

Relaxed requirements for foreign-invested telecommunications enterprises

By far the most significant development for foreign investors is the amendments made to the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (the ‘provisions’). Under these provisions, China imposes several restrictions on foreign investment in the telecommunications industry, including caps on foreign ownership and significant reliance on the Chinese partner to handle bureaucratic procedures.

Notably, the telecommunications industry is included on the Negative List for Foreign Investment Access, which lists the industries that are restricted from foreign investment.

Although the caps on foreign share ratios remain in place, the provisions have been significantly stripped down, with several articles deleted entirely, streamlining registration procedures and easing restrictions on foreign-invested telecommunications enterprises (FITEs).

Below we outline some of the most significant amendments made to the provisions.

1. A possible caveat to foreign share ratio restrictions has been added. The provision stipulating the foreign share ratio of telecommunications companies (a maximum of 49 percent for those operating basic telecommunications services and a maximum of 50 percent for those operating value-added telecommunications services) has added the caveat of “unless otherwise stipulated by the state”. This indicates that in certain circumstances, FITEs will be permitted to have a higher foreign share ratio, however, it is not clear what those circumstances may be.
2. The requirements for establishing an FITE have been slightly loosened. Previously, companies had to prove that the main foreign investor in a telecom company had prior “good performance and operating experience in basic telecommunications business”. This requirement has now been removed for investment in FITEs operating in value-added telecom services.
3. The registration procedure for FITEs has been simplified. Previously, in order to set up an FITE, the Chinese partner in the joint venture was required to handle several procedures in the registration process, including applying to the local telecoms management agency to establish an FITE operating in value-added telecom services. This requirement has now been removed. Provisions requiring the Chinese partner to apply for an Approval Certificate for Foreign-Invested Enterprises and submit the said certificate, along with other documents, to the relevant authorities to obtain an operating license, have also been removed.
4. The provision requiring FITEs to obtain approval for investment projects has been removed.
5. The procedures for obtaining a telecom business license have been simplified. FITEs will now be able to apply for a telecom business license from the relevant authorities directly, without the need for the Chinese partner to do so on their behalf. The documents required to apply for a business license have also been changed, so the company now just needs to provide an investor fact sheet rather than a project application report (in addition to the other required documents, which are unchanged). The FITE also no longer needs to provide proof of good performance and operational experience in value-added telecommunications services to apply for the business license. The investor fact sheet must include the following information:
   1. the name and basic information of the investor
   2. the proportion of each party’s capital contribution
   3. the foreign investor’s control of the foreign-invested telecommunications enterprise

This is less demanding than the project application report, which required the investors to disclose information, such as the total investment in the FITE, registered capital, and the duration of the joint venture, among other details.

Relaxed requirements for medical institutions

The State Council order makes changes to Regulations on the Administration of Medical Institutions (the “Regulations”), simplifying bureaucratic procedures for establishing and making changes to medical institutions.

The main change to the regulations is an amendment to the wording to enable some medical institutions to be exempt from obtaining an “approval letter for the establishment of the medical institution”. The regulations have been changed to require only some medical institutions – those stipulated by the State Council – to obtain this certificate. This refers to amended requirements released in 2020 that exempted some medical institutions, mostly domestic institutes that provide non-core medical services, from obtaining the license. Many of the below changes reflect this overarching amendment.

1. Exemption for some medical institutions to obtain approval certificate. A caveat has been added to the article requiring individuals or companies setting up medical institutions to apply for an “approval letter for the establishment of the medical institution” from the local health department. The added clause states that companies or individuals must apply for the certificate in accordance with the State Council regulations on which companies or individuals should obtain approval.
2. Exemption for clinics to obtain a practicing license. Clinics only need to file with the local county-level health department before they can operate, and do not need to obtain a “medical institute practicing license”.
3. Simplified registration procedure to practice medicine for institutes exempt from obtaining approval letter. For medical institutions that do not require an approval letter, the registration to practice medicine can be handled by the local health administrative department, rather than higher-up departments.
4. Clarifications for obtaining consent for medical procedures. The new version of the regulation states that medical personnel need to clearly explain the diagnosis and treatment of patients, something which was not included in the previous version. Moreover, the latest amendment removes the requirement to obtain consent from a patient through a “signed agreement” from the patient’s family or contact person in order to undergo surgery or other special treatment or medical procedure. Instead, it states that medical personnel must clearly explain the risks associated with the treatment or procedure and then obtain “clear consent” from the patient. The new version also requires the medical personnel to advise the patient on the possible risks associated with the procedure.

Minor amendments to regulations in other fields

Some minor changes have been made to other laws governing a range of fields, which may be significant for companies seeking to set up in the related fields. Below we outline some of these amendments.

Imports and exports inspection

Changes to the Regulations for the Implementation of the Import and Export Commodity Inspection Law of the People’s Republic of China reduce requirements for the establishment of customs inspections agencies, and certain punishments have been abolished.

1. Simplified requirements for the establishment of customs inspection agencies. A clause stipulating certain conditions and registration requirements for the establishment of inspection agencies engaged in the inspection and appraisal of import and export commodities within China has been removed.
2. Abolished fines and punishments for certain violations. An article dealing with punishments for import-export inspection agencies who violate certain regulations has been amended to remove a fine of up to RMB 100,000 (US$15,665) for agencies that “operate outside of their business scope”. The clause stating that in serious situations, inspection agencies can have their inspection and appraisal qualification certificate revoked by customs has also been removed.

Internet access services

The Regulations on the Administration of Business Sites for Internet Access Services, which regulates internet access service sites, such as internet cafes and computer lounges, have been changed to ease cybersecurity review requirements for companies to receive approval to begin operations.

Now, rather than having to undergo a cybersecurity inspection by the public security bureau (PSB) before getting approval to begin operations, companies only need to make a promise to the PSB that it will meet certain cybersecurity requirements, and then sign a letter of commitment after receiving approval from the PSB.

However, a new article has also been added (Article 32), which requires the PSB to conduct a spot cybersecurity inspection of the premises within the first 20 days of the company starting operations. If in the process of this inspection, the company is found to have reneged on the promised cybersecurity responsibilities, it can be liable for a fine of up to RMB 15,000 (US$2,350) and in serious circumstances be ordered to close or have its license revoked.

Pesticides

Amendments to the Pesticide Management Regulations relax requirements for the registration of new pesticides. In order to register a new pesticide for sale, the pesticide needs to undergo a “registration test”. A previous requirement for this registration test to be submitted to the agricultural department of the State Council. However, this requirement has now been removed, and applicants are only required to submit the test to the local agricultural department instead.

Radioactive drugs

The Measures for the Administration of Radioactive Drugs have been amended to streamline procedures for establishing a radioactive drug production and operation enterprise. Previously, companies were required to seek approval from the relevant department of the State Council in order to receive a “Radioactive Drug Manufacturing Enterprise License”. Now, the measures have been amended to allow companies to seek approval from the local department in their jurisdiction instead. The review and approval of the company’s establishment will also be handled by local authorities instead of the central government.

How effective will the amendments be for boosting market activity?

It will be difficult to see the effects of the amendments to the regulations in the short term, especially as companies grapple with more imminent issues, such as the ongoing supply chain issues, COVID-19 restrictions, and high commodity prices, to name a few.

However, though some of the amendments may be small, they may have a significant impact on players in the various sectors affected in the longer term, especially in the possible recovery period after the current COVID-19 restrictions are lifted and operations return to normal.

For instance, the amendments to the regulations on foreign investment in China’s telecom industry will allow for more streamlined procedures for foreign investors to enter an industry that has been relatively difficult to operate in the past, even if some restrictions still remain. The changes to the requirements for medical institutions may also help cultivate more companies in the medical services industry, in particular those providing non-core medical services.

It is also possible we will see further reductions in bureaucratic requirements in the future, as the government continues to review regulations as part of the reform to separate operation permits and business licenses.

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