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China: New rules promote foreign investment while tightening regulatory enforcement



Khoonming Ho

Lewis Lu

In the course of May to July 2017, a series of new Chinese regulations relaxed restrictions on foreign inbound investment while, at the same time, enhancing the tax and regulatory enforcement capacity of Chinese government authorities.

In terms of liberalising measures, the Bond Connect scheme, changes to foreign investment procedures, and a revised catalogue of industries for guiding foreign investment are notable.

The new "Bond Connect" scheme, which allows foreign investors to invest in the China interbank bond market via Hong Kong, was launched on July 3 2017. A scheme expansion to allow equivalent outward bond investment from China is expected to follow. The China interbank bond market is the third largest in the world, after the US and Japan, at $10 trillion, but currently foreign investors only hold 2.7% of the total. The opening facilitated by Bond Connect, and enhanced attractions for foreign investment in Chinese listed securities (e.g. in June 2017 Morgan Stanley Capital International announced the planned addition of China A-shares to their Emerging Markets Index), should foster increased inflows. Bond Connect follows on from earlier Stock Connect schemes for foreign stock investments, via Hong Kong, in the Shanghai (2014) and Shenzhen (2016) A-share markets, which also facilitated equivalent China outbound equity investment. These were accompanied by clarifications on tax treatment, so the equivalent may be anticipated for Bond Connect.

Moving from portfolio investment to direct investment, a number of changes have been made to facilitate foreign investment, both substantive and procedural. On May 27 2017 the Ministry of Commerce (MOFCOM) issued, for public consultation, draft administrative measures for establishment and alteration of foreign-invested enterprises (FIEs). Building on revisions to inbound investment laws made by the National People's Congress (NPC) in September 2016, this institutes a 'negative list' system for foreign investment in China, whether greenfield or M&A. Unless investment in a given economic sector is flagged as 'restricted' or is subject to special conditions (e.g. a Chinese co-investor requirement) then no pre-approval is needed by the foreign investor and they simply record the investment with MOFCOM. The prior system required all foreign investments to obtain pre-approvals.

In parallel with this, on June 28 2017, MOFCOM and the National Development and Reform Commission (NDRC), which is China's national economic planning agency, jointly issued a revised catalogue of industries for guiding foreign investment. This replaces the 2015 version, bringing the structure of the document in line with the new negative list approach. It also reduces the sectors for which foreign investment limitations exist from 93 to 63, liberalising certain service and advanced manufacturing sectors. This was paralleled by the issuance, also in June, of optimised negative lists for the China free trade zones (FTZs), including a special list for the Shanghai FTZ financial services sector.

At the same time as opening up to inbound foreign investment, a number of recent regulatory changes look to ensure ordered economic transformation and boost enforcement capacity, such as social credit ratings, a centralised national personal and property data system, closer regulation of the sharing economy, and enhanced monitoring of Chinese overseas spending.

On June 22 2017, the NDRC and State Administration of Taxation (SAT) signed a joint cooperative framework agreement for the collective use of social and taxpayer credit ratings to drive enforcement. Such ratings, which range from A to D for tax purposes, are becoming an increasingly core tool for ensuring legal and regulatory compliance in China. The setting of the ratings draws on the vast amounts of information collected by Chinese government agencies and increased big data analytical capabilities. Ratings can be used for targeted audit action, as well as for 'nudging' compliant behaviour. For example, the new NDRC-SAT framework builds on a 2016 cooperation agreement between a wider group of 29 government agencies to grant 41 incentives (e.g. quicker forex and customs clearance, easier financing, less onerous tax procedures) for taxpayers with high credit ratings.

On May 23 2017, the central government announced the establishment of a new centralised system for pooling and utilising information on personal income and property holdings. This will bring together more systematically the existing dispersed data pools held by different government bodies, and should support the rollout of the planned new individual income tax (IIT) and real estate tax (RET).

On July 3 2017, eight government agencies issued initial guidance on better regulation of online platform business models, which are booming in China. This will involve enhanced scrutiny of the setup and operation of such businesses, and more disclosure and government assistance requirements for operators. In the tax space, greater tax-relevant information will be harvested from platform enterprises on their users and vendors/service providers.

On May 26 2017, the State Administration of Foreign Exchange set out new daily reporting requirements for Chinese bank card issuers on overseas spending by Chinese individuals overseas. This includes card use with overseas ATMs and shops, as well as with overseas online vendors, with data to be supplied at a detailed individual transaction level. This is with a view to better controlling capital outflows from China.

Khoonming Ho ( and Lewis Lu (

KPMG China

Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421


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