GC Agenda China: January 2016 | Practical Law

GC Agenda China: January 2016 | Practical Law

A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.

GC Agenda China: January 2016

Practical Law UK Articles 5-622-0847 (Approx. 12 pages)

GC Agenda China: January 2016

by Brad Herrold, Consultant and Practical Law China
Law stated as at 28 Jan 2016China
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.
The January 2016 edition of GC Agenda China is the twenty-second in the series.

Speedread

A look back at the most recent legal developments for general counsel and their advisers working on China-related matters. GC Agenda China identifies and investigates the key issues affecting businesses, provides insight from leading practitioners and gives specific and actionable guidance in response to these issues.
This month's GC Agenda covers:
  • The anti-terrorism law enacted by NPC.
  • China's two-child policy.
  • The updated telecommunications catalogue released by MIIT.
  • PBOC's new administrative measures on online payments.
  • Three initiatives announced by CNCA to support parallel vehicle imports in FTZs.
  • Draft P2P agency measures.
  • Draft guidelines on abuse of IPR.
  • The State Council's approval for pilot reform of administrative licensing procedures in Pudong.
The January 2016 edition of GC Agenda China is the twenty-second in the series.

NPC enacts anti-terrorism law

On 27 December 2015, the Standing Committee of the National People’s Congress (NPC) enacted the Anti-terrorism Law of the People's Republic of China 2016. The key provisions of the law, which took effect on 1 January 2016, include:
  • Providing broad legal definitions of "terrorism" and related terms.
  • Expanding the government's powers to investigate and prevent terrorist activities in China.
  • Providing a legal basis for combating terrorist activities that threaten Chinese citizens and property interests outside China.
  • Creating a new counterterrorism leading group and national intelligence centre to co-ordinate the efforts of China's national security, public security, judicial and administrative organs.
  • Restricting the dissemination of information about terrorist activities.
The final version of the law does not include some of the more controversial provisions contained in a November 2014 draft, but imposes significant obligations on certain commercial sectors, including:
  • Telecommunications companies and internet service providers must provide technical interface and decryption information to the government during a lawful counterterror investigation.
  • Transportation and logistics companies must implement safety inspection systems. Logistics companies also must maintain registries of customers and their goods.
  • Telecommunications, internet, finance, lodging, long-distance passenger transport and motor vehicle rental companies must verify the identities of their customers.
  • Financial institutions and designated non-financial organisations must freeze the capital and other assets of terrorist organisations and personnel and report to the authorities.
  • Construction companies may be required by government agencies to install surveillance equipment to help prevent terrorist incidents.
  • Businesses that manage "key targets" for terrorist attacks must install surveillance equipment, screen personnel, and otherwise co-operate with the authorities.
The failure to comply with these provisions can lead to significant penalties, including fines and prison terms for companies and senior management.

Market reaction

Paul McKenzie, Managing Partner, Morrison & Foerster, Beijing and Shanghai

"IT companies and companies doing business online can take some comfort in the fact that the legislators backpedaled and have tied the requirement to provide technical interface and decryption information to the government to the conduct of a specific counterterror investigation. But how much process will be involved with requests to provide that assistance is open to question."

Action items

GC for companies engaged in any of the activities listed above should closely study the applicable rules and monitor the implementation of any compliance measures. In addition, GC will want to investigate, together with their government relations colleagues, how to handle conflicts between their obligations to cooperate in countering terrorist activities and to protect personal information.

China implements two-child policy

On 27 December 2015, the NPC amended the Population and Family Planning Law of the People’s Republic of China to end the one-child policy and introduce a two-child policy in its stead. The amendment took effect on 1 January 2016. The two-child policy seeks to encourage Chinese couples to have two children, in contrast to the previous policy which restricted families from having more than one single child. The new policy has significant implications for human resources management, particularly in relation to marriage and maternity-related employee benefits.
The details of these changes include:
  • Termination of leave for late marriage and late child-bearing. Previously, subject to local regulations, employees were entitled to extended marriage leave of three to seven days for marrying three years beyond the statutory minimum age. In addition, female employees were entitled to extended maternity leave of 15 to 45 days and male employees were entitled to paternity leave of three to 30 days. As the amended law no longer encourages late marriage and late child-bearing, the related benefits are terminated, subject to any pending amendments to provincial and municipal family planning regulations.
  • Awards for one-child family cancelled. Couples who only have one child after 1 January 2016 will no longer receive a certificate confirming their status as parents of an only child or any related local subsidies. As, however, the amended law is not retroactive, couples awarded the certificate before 1 January 2016 remain eligible for the local subsidies.
  • Compulsory contraception cancelled. Couples now have the right to decide whether to use contraception or take other birth control measures, and no punishment or penalty will apply to accidental second pregnancies.

Market reaction

Andy Yeo, Partner, Mayer Brown JSM, Shanghai

"Indeed the change from one to two child policy is quite a significant move by the central government which most consider to be a step in the right direction both from human and economic perspectives. In terms of immediate impact on society that I have observed, many employers are challenged by the expected increase in trouble and costs. It used to be that they are reluctant to hire a female who has not had her child, but now even if she does have one, the reluctance will remain. The maternity and related sick leave pay they have to bear will be doubled, and maternity insurance premium is expected to rise which would translate into perhaps higher social security contribution costs, not to mention all the amendments that have to be made to employment contracts and manuals to adjust to the new policy."

Action items

GC for all companies operating in China should conduct a maintenance review to ensure compliance with the amended law, as well as any related amendments to local rules, in relation to employment contracts, employee handbooks and human resource management guidelines.

MIIT releases updated telecommunications catalogue

On 28 December 2015, the Ministry of Industry and Information Technology (MIIT) released the 2015 version of the Classified Catalogue of Telecommunications Businesses (2015 Telecoms Catalogue )(电信业务分类目录), which will take effect on 1 March 2016. Like its predecessors, the 2015 Telecoms Catalogue divides all telecommunications businesses in China, including internet and IT businesses, into two principal regulatory categories:
  • Basic telecommunications services (BTS).
  • Value-added telecommunications services (VATS).
BTS are regulated far more closely than VATS, and the BTS and VATS are each subdivided into tightly regulated Class I services and more leniently regulated Class II services.
The 2015 Telecoms Catalogue creates new BTS categories that do not exist in the current catalogue, which dates from 2003, and eliminates a few obsolete categories.
In relation to VATS, the 2015 Telecoms Catalogue:
  • Captures several types of VATS that do not exist in the current catalogue.
  • Clarifies the scope of "information service business", which covers many of the consumer-facing internet businesses developed in recent years, including online advertising, news sites, e-commerce sites, social media and blogs.
  • Re-categorises "internet access services" as Class II (Class I under the current catalogue) and e-commerce platforms and other kinds of online data processing and transaction processing services as Class I (Class II under the current catalogue).
In a significant conceptual advance from the current catalogue, the 2015 Telecoms Catalogue reorganises the divide between Class I and Class II VATS. Class II VATS now appear to be pure online services (that is, those that do not require a separate dedicated infrastructure). Class I VATS are businesses that require servers and other dedicated hardware.
For information on the specific changes contained in the 2015 Telecoms Catalogue, see Legal update, MIIT releases 2015 Telecoms Catalogue.

Market reaction

Paul McKenzie, Partner, Morrison & Foerster, Beijing

"With the wide-ranging changes in the telecommunications and internet sectors, the 2003 telecommunications catalogue was in dire need of a refresh, and so to that extent, the new catalogue introduces welcome clarity to China’s telecommunications licensing regime. But careful what you wish for. The new catalogue also gives MIIT officials the tools and mandate to tighten licensing policies in relation to telecommunications and internet projects that were previously in a licensing grey area."

Action items

GC for companies that operate businesses that are not expressly regulated under the current catalogue, but that will be regulated under 2015 Telecoms Catalogue may need to find a Chinese partner that is qualified to hold an ICP licence and restructure. Similarly, GC for companies that are operating within the scope of a telecommunications license that refers to one or more categories under the current catalogue may need to revise their licence and business scope to comply with the 2015 Telecoms Catalogue.

PBOC issues administrative measures on online payments

On 28 December 2015, the People’s Bank of China (PBOC) released the Administrative Measures for Online Payment Business operated by Non-Bank Payment Service Providers, which will take effect from 1 July 2016.
The key provisions of the measures include:
  • Personal bank account levelling. Payment service providers are required to divide personal payment accounts into three categories that follow the method adopted for authenticating user identity. For Category I accounts, only one external channel is required to authenticate a user's identity (that is, online ID card verification). Category I account balances may be used only to pay for goods or services or to transfer funds up to RMB1,000. If, however, a payment service provider wishes to increase the transaction limit, it can upgrade to a Category II or Category III account, provided it enhances the identity authentication method.
  • Customer management. Non-banking payment institutions, like banks, must conduct "know-your-client" examinations and implement a real name system for payment accounts. Payment accounts may be opened by a non-banking payment institution only if it has an appropriate online payment licence.
  • Business management. Non-banking payment institutions, like banks, must enter into agreements when obtaining customer authorisation to initiate payment instructions and deduct payment funds. Non-banking payment institutions must verify transactions on behalf of banks where payments are less than RMB200 or are made for public utility fees, taxes or credit cards.
  • Risk management. Non-banking payment institutions, like banks, are subject to compliance duties in relation to anti-money laundering and counter-terrorist financing.
  • Customer rights protection. Non-banking payment institutions, like banks, are subject to privacy protection obligations in relation to personal financial information. Client consent must be obtained before providing personal data to third parties.

Market reaction

Shirley Wang, Partner, Zhong Lun Law Firm, Beijing

"With the boom of internet finance and P2P trading in recent years, the new non-bank payment measures are more focused on the supervision on online payment business, protection of customer rights and real name registration of payment accounts. The impact of the measures will reach beyond the payment market itself to promote the development of the e-commerce and internet finance sectors in China."

Action items

GC for non-banking payment institutions should study the measures closely and suggest (and monitor the implementation of) any necessary changes to operating procedure. GC for other businesses that engage in online commercial or financing activities also should become familiar with the measures.

CNCA announces three initiatives to support parallel vehicle imports in FTZs

On 28 December 2015, the China Certification and Accreditation Administration of the People's Republic of China (CNCA) (中国国家认证认可监督管理委员会) issued the Announcement on the Pilot Measures for Reforming CCC on Parallel Imports of Automobiles in Free Trade Zones (国家认监委关于自贸区平行进口汽车CCC认证改革试点措施的公告), which took effect on 1 January 2016. CNCA administers China's compulsory certification for imported products. The announcement marks the government's latest attempt to reduce the control that foreign car manufacturers and their authorised dealers have over the distribution of imported automobiles in China.
The term "parallel imports" in relation to cars refers to the lawful import of genuine vehicles by dealers that is not authorised by the manufacturer. The vehicles generally reach the market at significantly reduced prices, and authorised dealers have no obligation to provide after-sales services to consumers.
The announcement allows CNCA's designated bodies to carry out certification for dealers conducting parallel imports of automobiles in China’s free trade zones, where a dealer:
  • Does not have authorisation documents from the original manufacturer, provided the dealer has established a recall mechanism and offers the "three guarantees", that is repair, replacement or refunds, for defective vehicles. In this scenario, the certification body will increase the strictness of its certification process.
  • Is not subject to volume requirements for non-production vehicles. In this situation, the certification body must carry out certification consistently and efficiently. The certification body also must strengthen its post-certification inspections to ensure product consistency and compliance with relevant standards.
  • Makes only standard compliance modifications to the vehicles (excluding structural modifications). Under this scenario, the certification body must be allowed to carry out inspections of the factory where the modifications are made to confirm that the vehicles otherwise comply with industry policies and customs, inspection and quarantine regulations.

Market reaction

Zhang Guodong, Senior Partner, Jincheng Tongda &Neal, Beijing

"The CNCA's new rules follow the gradual moves by Chinese regulators to facilitate parallel vehicle imports. Last year, China started a parallel vehicle imports pilot in Shanghai and other FTZs, but outdated certification regulations and poor after-sales service impeded progress. The [new] rules are part of a larger effort to lower the high cost of many premium foreign brands in the domestic market, which includes, among others, antitrust law enforcement against the anti-competitive business practices of carmakers and legislative initiatives, such as the amendment of car distribution rules and the drafting of antitrust guidelines in the motor vehicle sector, etc."

Action items

GC for companies involved in parallel automobile imports should closely examine the rules contained in the announcement and consider discussing current practices with the relevant officials in a free trade zone to ensure compliance and engender future goodwill.

CBRC circulates draft P2P agency measures

On 28 December 2015, the China Banking Regulatory Commission (CBRC) circulated the Interim Measures on the Administration of the Business Activities of Network Loan Information Agencies 2015 for public comment. The draft measures apply to businesses, referred to as network loan information agencies, which facilitate direct lending activities between natural persons, legal persons and other organisations over the internet by providing information on lenders, borrowers and loan financing projects, credit rating services, and so on.
Under the draft measures, network loan information agencies must:
  • Verify borrower and lender qualifications.
  • Provide objective, factual, comprehensive and timely information.
  • Maintain complete and accurate records and report to an online lending central database to be created by the CBRC.
  • Establish risk control measures.
  • Terminate loan facilitation activities where they discover fraud or other circumstances that damage lenders.
  • Assist the government in preventing money laundering and terrorist activities.
The draft measures prohibit network loan information agencies from:
  • Using their network platform for personal fundraising activities.
  • Issuing loans, providing loan guarantees or creating cash pools.
  • Selling financial products or providing asset brokerage or management services.
  • Making promises in relation to returns on loan principal or interest.
  • Intentionally providing misleading information in relation to a financing project.
Borrowers and lenders are bound by principles of voluntariness, trustworthiness and personal risk, and are required to provide truthful, accurate and complete information.

Market reaction

Harvey Lau, Partner, Baker & McKenzie, Shanghai

"While the consultation paper does not mention the qualification of, or capital requirements for the P2P platforms, the filing by a P2P platform with the local regulators does not constitute recognition or evaluation of the P2P platform’s operational capability, regulatory compliance or credit standing. To a certain extent, it reflects the regulators’ position that the P2P business should mainly be driven by market forces, and the regulators’ involvements should be kept to the minimum. It also reflects the government’s desire to encourage further innovation to the financial industry, but at the same time keeping the risks at bay."

Action items

GC for companies operating in this sector or dealing with other businesses that operate in this sector should inquire into the qualifications requirements for network loan information agencies and become familiar with the record-filing procedures with CBRC, MIIT and the China Internet Network Information Center, or CNNIC. They also should study the "negative list" of prohibited business activities set forth in the draft measures.

NDRC circulates draft guidelines on abuse of IPR

On 31 December 2015, the Price Supervision and Anti-monopoly Bureau of the National Development and Reform Commission (NDRC) circulated the Anti-monopoly Guidelines on the Abuse of Intellectual Property Rights (Draft to Solicit Comments) 2015 for public comment. The draft guidelines address each of the three main types of anti-competitive conduct detailed in the Anti-Monopoly Law of the People’s Republic of China 2007 (2007 Anti-Monopoly Law):
  • Monopoly agreements.
  • Abuse of a dominant market position.
  • Concentrations of undertakings.
Each section contains a list of factors to consider in evaluating the impact of potentially suspect conduct on competition.
Under the draft guidelines, IPR agreements that could eliminate or restrict competition and be regarded as monopoly agreements under the 2007 Anti-Monopoly Law include:
  • Joint development agreements.
  • Patent pool arrangements.
  • Cross licensing agreements.
  • Agreements that:
    • formulate standards;
    • impose price restrictions;
    • provide exclusive grant back arrangements;
    • contain "unquestionable" or non-negotiable terms;
    • restrict the use of IPR in a specific field, geographic location or sales channel;
    • restrict the use of IPR with a specific trade partner or with third parties;
    • specify production or sales volumes.
IPR agreements will not be considered as monopoly agreements where the parties meet one of the following conditions:
  • The market share of parties in a competitive relationship does not exceed 15% in the relevant market.
  • The market share of parties in a non-competitive relationship does not exceed 25% in any relevant market.
To determine whether a business operator is exploiting its IPR to abuse a dominant market position, the draft guidelines employ the following two-step approach:
  • Identifying the relevant market and whether the IPR holder has a dominant market position.
  • Determining if the IPR holder is abusing its market dominance.
The section on concentrations of undertakings is incomplete in the draft.

Market reaction

Scott Yu, Partner, Zhong Lun Law Firm, Beijing

"As China has become a key 'glocal' battleground for IP intensive industries, the draft IP antitrust guidelines reflect Chinese antitrust enforcers' nuanced approach in balancing the need to encourage innovation through IP protection and the need to curb certain anti-competitive behaviour by essential IP holders."

Action items

GC for companies with significant IP portfolios should review their client's licensing agreements and other IPR arrangements in view of the guidelines (and, in particular, the relevant lists of factors to be used by NDRC officials in evaluating the impact of these arrangements on competition). In certain cases, GC may wish to recommend discussing concerns directly with the NDRC and other AML regulators to gain an increased level of certainty into their interpretations of the guidelines and the company’s justifications for any potential anti-competitive conduct.

State Council approves pilot reform of administrative licensing procedures in Pudong

On 22 December 2015, the State Council authorised the Shanghai Municipal People's Government to experiment with a pilot reform in Pudong New District to simplify the government's administrative licensing procedures, except in cases involving national security, public safety or environmental protection, for a three-year period. The changes are divided into five categories:
  • Approval cancellation, where no administrative licensing is required.
  • Approval replaced by record-filing, where a lower level of scrutiny is applied to administrative licensing. For information on the distinction between approval and record-filing, see Practice note, Establishing a China business: Levels of scrutiny.
  • Approval with government notification-commitment, where approval is still required, but the approval authority must list all approval criteria in a prescribed notification letter and commit to issue approval once all criteria are satisfied.
  • Approval with improved transparency and predictability, where approval is still required, but the approval authority’s discretion is curtailed by issuance of clear approval criteria and a specified timeline for approval.
  • Approval subject to enhanced market access supervision, where the administrative licensing procedure is strengthened in cases where the business activity that is subject to approval involves national security, public safety or environmental protection.
The pilot programme follows the recent "business licence going first" reforms implemented by the State Administration for Industry and Commerce (SAIC) from 2014. For more information on that programme, see Practice note, Establishing a China business: Issuance of a business license.

Market reaction

Philip Cheng, Partner, Hogan Lovells, Shanghai

"Overall, this is a positive development and consistent with the message of lowering market entry barriers. But as with any form of liberalisation in China, the key to success will be consistent implementation and broad application throughout China."

Action items

GC for companies with operating entities in Pudong New District, as well as those considering market entry in Shanghai, may wish to examine the categories more closely to determine how the new administrative licensing procedures could affect their businesses or business plans going forward.