GC Agenda China: December 2014

Practical Law UK Articles 2-591-6905 (Approx. 7 pages)

GC Agenda China: December 2014

by Susan Finder, Consultant and Practical Law China

New FTZs announced

On 28 December 2014, the National People's Congress (NPC) Standing Committee (全国人民代表大会常务委员会（全国人大常委会）) issued the Decision of the Standing Committee of the National People's Congress on the Administrative Examination and Approval on Authorizing the State Council to Temporarily Adjust Relevant Legal Provisions in the China (Guangdong), China (Tianjin), China (Fujian) Pilot Free Trade Zones and the Expanded Area of the China (Shanghai) Pilot Free Trade Zone 2014 approving the establishment of three new pilot FTZs for an initial term of three years.

This follows the establishment by the State Council (中华人民共和国国务院) of the Shanghai FTZ on 29 September 2013. Inside the Shanghai FTZ, the laws that apply to foreign investment in the rest of China are suspended and a more liberal regime applies that is intended to make it easier to start and operate a business and to induce foreign companies to move their regional headquarters to Shanghai (although to date no significant tax incentives have been announced for the Shanghai FTZ). For more details of the regime that applies in Shanghai, see Practice note, China (Shanghai) Pilot Free Trade Zone: overview. In particular, the regime in Shanghai has made it an attractive place for foreign investors to incorporate e-commerce enterprises.

As with Shanghai, the new FTZs are being incorporated in large, populous coastal areas with an established commercial and industrial base:

Guangdong, across the border from Hong Kong.
Fujian, which faces Taiwan.
Tianjin, the nearest major port to Beijing.

The new law suspends the application of the basic foreign investment laws (that is, the Wholly foreign-owned enterprise law of the People's Republic of China 2000, the Sino-Foreign Equity Joint Venture Enterprise Law of the People's Republic of China 2001 and the Sino-Foreign Cooperative Joint Venture Enterprise Law of the People's Republic of China 2000) within the new FTZs, and delegates authority to the State Council to issue more detailed legislation.

The new law describes the geographical scope of the three zones but does not further detail the investment policies. Those will be detailed in further legislation by the State Council and by local government, as was the case for Shanghai. Location-specific policies in each FTZ are likely to develop those already implemented by the local governments with responsibility for the relevant zone.

The new FTZs are intended to provide additional experience for the central government in working towards an eventual negative list approach to foreign investment.

Guangdong FTZ

The FTZ in the south Chinese coastal province of Guangdong will have a total area of 116.2 square kilometers, including areas of the municipalities of Guangzhou (Nansha New Area), Shenzhen (Qianhai and part of Shekou) and Zhuhai (Hengqin New Area).

As Catherine Miao, Partner at Jun He in Guangzhou noted, "the Guangdong FTZ is intended to promote integration between the economies of Guangdong, Macao, and Hong Kong".

A Shenzhen official said in a private conversation that the policies for the new Guangdong FTZ will be coordinated with existing national and local legislation on Qianhai. According to the official, the Qianhai area, which currently consists of undeveloped land reclaimed from the sea, is intended to focus on the service industry, particularly financial services, logistics, information technology, and scientific research and development.

The financial policy for the Nansha New Area, jointly announced in last mid December by 10 government regulators (including the People’s Bank of China (PBOC) (中国人民银行), the National Development and Reform Commission of China (NDRC) (中华人民共和国国家发展和改革委员会（国家发改委）), the Ministry of Commerce (MOFCOM) (中华人民共和国商务部), and the China Securities Regulatory Commission (CSRC) (中国证券监督管理委员会)) includes some experimental policies currently implemented in the Shanghai FTZ, such as "allowing foreign investment into various kinds of financial institutions, encouraging financial reforms and innovations and supporting the internationalization of RMB", says Miao, "but it contains no policy for interest rate liberalization and this reflects that the government positions Shanghai and Guangdong differently, the former being the international financial centre and the latter being the regional financial centre", also noted Miao.

Fujian FTZ

The FTZ in the southeast Chinese coastal province of Fujian will have a total area of 118.04 square kilometers, including industrial areas in the provincial capital of Fuzhou, the city of Xiamen, and Pingtan, a new industrial park targeting investment from Taiwan.

The areas in Xiamen include the Xiangyu Bonded Area, the Xiangyu bonded logistics park and the Haicang bonded port area.

Tianjin FTZ

The Tianjin FTZ will have a total area of 119.9 square kilometers, including three sections around the Tianjin Port, Tianjin Airport and the Binhai New Area CBD.

The Tianjin FTZ is intended to focus on logistics and on finance leasing, in particular aircraft leasing since practically all of China’s domestic aircraft leasing is done from Tianjin. The Tianjin FTZ is intended to play an important part in integrating the economies of Beijing and Tianjin municipalities as well as Hebei Province, as well as promoting trade with Korea and Japan.

Expanded Shanghai FTZ

The new law does not detail new investment policies for Shanghai, but it expands the area of the Shanghai FTZ by 91.94 square kilometers, including Lujiazui Finance Zone, Jinqiao Development Zone and Zhangjiang Hi-Tech Zone.

The expansion to include the Lujiazui Finance Zone and the Zhangjiang Hi-Tech Zone has implications for finance, service, and hi-tech industries.

The Lujiazui Finance Zone is where numerous multinational and Chinese companies are headquartered including several Chinese banks. The inclusion of this area indicates that the Chinese government intends to use the Shanghai FTZ to experiment with greater financial liberalization.

The Zhangjiang Hi-Tech Zone focuses on information technology, biopharmaceuticals and optical-mechanical-electronic integration. The inclusion of this area indicates that the Chinese government wants to experiment with greater openness and flexibility on these industries.

E-commerce in China: 2015 regulatory outlook

According to a research conducted by the McKinsey Global Institute in mid 2014, as a percentage of GDP, China’s Internet economy is larger than that in the United States, France or Germany. E-commerce penetration in China stands at 46% and is predicted to continue to grow in the next few years, with the support of the Chinese government (which in the "Twelfth Five-Year” Plan for E-commerce Development 2012 made it an explicit policy goal to increase the take-up speed of e-commerce within China).

The Chinese government intends to promulgate a comprehensive e-commerce law in 2016. In the meantime, specific legislation with implications for e-commerce is being updated and the State Council and specific ministries and commissions are issuing policy documents and regulations, which have implications for foreign companies doing business online in China or dealing with counterfeit versions of their goods being sold online in China. GC for companies that are subject to specialised regulations, such as cosmetics or food, should track legislative developments particularly closely.

Key areas are regulation and enforcement

Paul Schmidt, Counsel with Jun He in Beijing, noted that in his experience representing foreign companies in China, GC are mostly likely to encounter e-commerce in two contexts:

Compliance with e-commerce regulation.
Enforcement against online sales of counterfeit products.

The regulation of e-commerce is principally aimed at preventing:

Counterfeit products.
Illegal products.
Fraudulent operations.
Poor quality products.
Tax and customs duty evasion.
Misleading advertising.
Unfair trade practices.

Due to the high speed at which new developments take place, the Chinese government has struggled to regulate e-commerce to rid the market of such unfair and fraudulent practices. Winston Zhao, Partner with McDermott, Will & Emery in Shanghai, noted that the current e-commerce legislation, the Measures on the Administration of Online Transactions 2014 and Guidelines for the Performance of Social Responsibilities by Online Transaction Platform Operators 2014, provide "a few principles relating to collecting and using consumers’ information", but that "many more details are needed".

Schmidt noted that GC reviewing their company's on-line marketing programs for China should be aware that complex regulations apply to giveaways and lucky draws. This is because China regulates both very heavily due to the potential for them to be used in pyramid schemes and fraudulent lotteries.

For enforcement, the key is to identify the persons and companies behind the counterfeiters. Schmidt mentioned that brand owners are looking forward to the legislation incorporating a mechanism that will see better cooperation between online sales platforms and brand owners in identifying counterfeiters.

For a stage-by-stage guide to tackling counterfeiters in China, see Practice note, Effective anti-counterfeiting enforcement in China: stage-by-stage.

New e-commerce legislation expected in 2015

In 2015, changes are set to affect online advertising and the safety of food sold online:

Advertising Law. The NPC has issued a second draft for public comments of amendments to the Advertising Law of the People’s Republic of China 1994. The draft amendments clarify that the law applies to online advertising and add specific prohibitions relating to online advertising, including the prohibition of online tobacco advertising and a prohibition on marketing online games to minors.
Food Safety Law. A revised draft of the Food Safety Law of the People's Republic of China 2009 was circulated in 2014 (see Food Safety Law of the People's Republic of China (Revised Draft) 2014). The food safety law is still under discussion by the NPC Standing Committee. In its most recent meeting (in late December), at which a wide range of food safety issues were discussed, the NPC Standing Committee highlighted online sales of food as an important element.

Legislation is pending on other issues, including:

Third-party online payment. According to Zhao, the regulatory framework is still at an early stage of development, and the Chinese government has issued a few measures to regulate this activity on a trial basis (such as the Measures for the Administration of Payment of Non-Financial Institutions 2010 and the Notice of the General Office of the National Development and Reform Commission and the General Office of the People’s Bank of China on Pilot Implementation of Financial Technology Service Innovation for Mobile E-Commerce 2014 (国家发展改革委办公厅、中国人民银行办公厅关于组织开展移动电子商务金融科技服务创新试点工作的通知)). E-payment involves the convergence of financial services and telecommunication businesses, each of which has its distinct regulatory regime and sensitivities.
A single comprehensive data protection law for online consumers.
After-sales service and compensation for damages of e-commerce platform.
Evidentiary rules relating to on-line evidence.
Standards for displaying online products.

GC of foreign multinationals can also contact their company’s home country’s chamber of commerce in China to monitor industry-specific developments affecting e-commerce.

New rules for arbitrating e-commerce disputes

Several of China’s arbitration institutions have recently issued rules focused on disputes arising out of transactions carried out online. CIETAC, for example, has passed the Online Arbitration Rules of the China International Economic and Trade Arbitration 2014, which are effective from 1 January 2015. The Chinese courts are also expected to issue new interpretations on how to handle electronic evidence soon, which is critically important for trials involving e-commerce transactions.

GC Agenda China: December 2014 | Practical Law