ASIA NEWS - Beiten Burkhardt

May 2015
ASIA NEWS
Newsletter
Contents
I.
New Foreign Investment Guidance Catalogue
Page 1
II. Alert on Increase of Fraud Cases Page 3
III. Foreign Direct Investment Forex Policy
Updates Page 4
IV. SAIC Prohibits Anticompetitive Use of IPR
Page 4
I. New Foreign Investment
Guidance Catalogue
The new Foreign Investment Guidance Catalogue jointly promulgated by the National Development and Reform Commission
(NDRC) and the Ministry of Commerce (MOFCOM) came into
force on 10 April 2015. Since first enacted in 1995, it has been
renewed every four years, and the new version replaces the catalogue of 2011.
The catalogue assigns industries to different foreign investment
categories: “encouraged” (349 items), “restricted” (38 items) and
“prohibited” (36 items). All investments in industry sectors not
listed in the catalogue are considered “permitted”. Encouraged
projects are treated favourably in the approval process. For example, import duty exemptions are available for some equipment.
Restricted projects, in contrast, require the approval of a higher
government authority.
The catalogue also stipulates certain shareholding conditions, such
as the mandatory participation of a Chinese shareholder, sometimes in a controlling position. For example, the operation of hospitals and the production of automobiles require a Chinese joint
venture partner. The new catalogue reduced the overall number of
such shareholding restrictions. In the encouraged category, only
16 out of 349 items now require the participation of a Chinese
shareholder (in the 2011 version of the catalogue, this was the case
for 34 of 330 items). This requirement in the restricted category
now exists for 26 out of 38 items (previously 29 out of 81 items).
This means that many areas are still off-limits to wholly foreignowned enterprises (“WFOEs”). In some cases, a joint venture
requirement was replaced with other conditions. For example,
although an accounting and audit firm does not need to be a joint
venture, the managing partner must be a Chinese citizen. Such
personnel requirements were also added for institutions of higher
education, where a principal or “[a] major person in charge of
administrative matters” must be a Chinese citizen. Also, half of the
members of the council, board of directors or joint management
committee of an educational institution run through Sino-foreign
cooperation must be Chinese citizens.
The list of encouraged projects can be considered a macroeconomic wish list of the Chinese government and contains only a
few new entries. Newly added projects are, for example, elder
care institutions, technologies related to the “internet of things”
(in pursuit of the strategy to connect objects digitally, in particular
in economic processes), industrial design and architecture, certain
areas of aircraft technology as well as firefighting and rescue equipment for high-rise buildings.
The list of restricted projects was cut in half from 81 to 38 items,
those projects formerly in the restricted list not falling under the
encouraged or prohibited categories are now considered permitted.
The restricted category has seen the removal of the development
of tracts of land, the construction and operation of high-class hotels
and high-class office buildings, real estate secondary market transactions, real estate intermediary or brokerage companies as well
the construction and operation of power grids. These changes
come almost ten years after MOFCOM, NDRC, the State Administration of Industry and Commerce, the Ministry of Construction,
the People’s Bank of China and the State Administration of Foreign
Exchange jointly stipulated tighter restrictions on foreign investors
in the real estate market.
At that time, in 2006, the real estate market was considered overheated and foreign investment was seen as part of the problem.
This change may be seen in the broader context of attempts to
spur the Chinese economy. However, necessary changes to foreign
investment legislation in the property market have not been made,
and restrictions will remain in place for the time being despite the
greater freedom provided by the new catalogue.
In the infrastructure arena, the authorities have removed the
Chinese shareholding requirement for investments in the construction and operation of intercity railways, urban and suburban rail-
Newsletter
Page 2
May 2015
ASIA NEWS
ways, railways for resource development and branch railway lines
as well as related bridges, tunnels, ferries and station facilities from
the restricted list. Also, there is no Chinese shareholding requirement for the comprehensive maintenance of infrastructure relating
to high-speed railway lines, passenger railway lines and intercity
railways. Again, these changes will only become effective when
specific legislation is enacted.
Regarding manufacturing, the new catalogue continues to favour
foreign investment that can upgrade the sector through new technologies, processes, materials and equipment. In areas where the
requirement for Chinese shareholding has been lifted, the govern­
ment may have determined that Chinese industry has already
reached a competitive level. For example, the manufacture of
certain construction equipment (both for general and special purposes) has been entirely removed from the restricted category.
And the Chinese shareholding ratio requirement has been removed
from the following: lumber processing, papermaking and paper
products; cabin machinery of vessels; yacht design and construction; power transmission and transformation equipment; complete
sets of large coal chemical equipment; light helicopters (under
three tons) and embedded automotive electronic systems.
Restrictions were also lifted for the manufacture of certain chemical raw materials and chemical products, including soda; sulfuric
acid; nitric acid; potassium carbonate; photosensitive materials; benzidine; precursor chemicals and hydrogen. Restrictions
removed from the pharmaceutical and medical area include penicillin; paracetamol; certain vitamins; oral calcium; vaccines incorporated into national immunisation planning; active pharmaceutical
ingredients (APIs) for anaesthetics; certain psychotropic drugs and
blood products.
The development of the manufacturing industry has only been
surpassed by the rapid expansion of service industries in China.
The new catalogue opened certain service fields that involve logistics, sales and retail. For example, foreign investment is no longer
restricted in direct sales and the mail order business. E-commerce
is a so-called value-added telecommunications service. Such services have been subject to a Chinese shareholding ratio restriction
of 50 per cent. Although the catalogue has now lifted this condition
on e-commerce investments, other requirements remain. Foreign
investors are, for example, required to have a proven track record
in e-commerce. Also, the change in the catalogue awaits amendments to existing restrictions in applicable legislation, such as the
Provisions on the Administration of Foreign-Invested Telecom
Enterprises.
Adding “elder care institutions” to the list of encouraged investments recognises the needs of an aging population that is an
increasingly heavy burden for government institutions and families. Already on 24 November 2014, the Ministry of Commerce
and Ministry of Civil Affairs jointly issued an announcement, the
Establishment of For-profit Elder Care Institutions with Foreign
Investment, to encourage foreign investors to establish elder care
institutions through WFOEs. Such foreign-invested and for-profit
institutions have been encouraged to operate on a large scale and
to develop chain brands. Such WFOEs are entitled to the same
tax and other preferential policies (e.g., reduction of or exemption
from administrative and institutional fees) as for-profit elder care
institutions established by Chinese shareholders.
The opening of financial industries has fallen short of expectations. However, foreign investors will in the future be allowed to
hold 20-25 per cent of the shares of a Chinese commercial bank.
Foreign investors are still limited to a 49 per cent holding in a securities company. Trust companies, currency brokerage companies
and insurance brokerage companies are no longer listed in the
restricted category.
The prohibited category saw only marginal changes. For example,
investments are no longer prohibited in green tea, bodiless lacquerware, enamel products and certain types of batteries. But
the media industry remains tightly controlled: online publication
services and online streaming are now prohibited. Newly added
into the prohibited list is consulting on Chinese legal affairs (though
providing information on the environmental impact of Chinese laws
is permitted), thereby failing to meet expectations of foreign law
firms for a widening of their operations in the Chinese legal advisory market.
Whether the new catalogue may soon be replaced with other legal
instruments is difficult to predict. The latest draft of MOFCOM’s
Foreign Investment Law (dated 19 January 2015) prescribes equal
treatment of Chinese and foreign investments. Although the final
form and timing of this law’s enactment remain unclear, the current draft no longer requires foreign investments to be approved.
It merely requires registration, just like domestic Chinese investments. This change would render the catalogue obsolete. However, for the time being, the catalogue and approval process still
apply to foreign investments.
Susanne Rademacher
German Attorney-at-law, Partner
BEITEN BURKHARDT
Rechtsanwaltsgesellschaft mbH,
Beijing
Tim Wöffen,
German Attorney-at-law,
BEITEN BURKHARDT
Rechtsanwaltsgesellschaft mbH,
Beijing
Newsletter
May 2015
Page 3
ASIA NEWS
II. Alert on Increase of Fraud Cases
Although we have previously warned about the risk of fraud in
relation to trade involving China, a recent spike in these cases and
the appearance of new, more complex criminal schemes deserve
a reminder. Even companies without a Chinese trading relationship
should be aware of the pitfalls.
We can illustrate the problem with three different fraud schemes,
from very simple ones that we have witnessed for years to new
schemes of increasing complexity.
A. A container full of scrap
One very common scheme targets opportunistic buyers of seemingly cheap products or raw materials. This is almost always a first
time transaction with a seller in China who was identified through
an online platform. Usually samples of the product are received,
tested and identified as good quality. An order is placed on this
basis, which is usually paid by L/C upon presentation of shipping
documents or even in advance. When the goods arrive it is obvious
that the buyer was defrauded because the container holds different
or obviously substandard goods. Chemicals often feature in this
scheme because the fake nature of the goods escapes detection
upon initial entry.
Usually in these cases the companies posing as sellers do not
exist, and the bank accounts are often in Hong Kong, not mainland
China. This makes identifying any counterpart for enforcement
of rights almost impossible. Also the transaction value is usually
relatively low (USD 25,000 - 50,000), making the cost of pursuing
a legal remedy uneconomical.
A small initial investment before the transaction is finalised can
save a trader from wasting significant time and money on a fraudulent transaction. This means conducting basic due diligence on
potential counterparties.
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Be wary if the company address is unclear and does not match
a bank account location and telephone number.
Tell your seller that you will conduct a standard know-yourpartner verification and ask for copies of the company’s business license and the identification certificate (passport or ID
card) of the legal representative.
Have a third party prepare a basic credit report on the potential partner and match the information you receive against the
information provided by your potential partner (such a report
takes a week or two to prepare and costs around EUR 200).
You or a third party should inspect the goods before they are
loaded for shipment at the port.
At the very least, use a simple contract that specifies the
parties (including address and representative), goods, price,
means of shipment and payment as well as quality standard,
and require it to be affixed with the company seal.
These simple and inexpensive measures will help separate good
partners from bad ones. While they cannot offer 100 per cent
protection against fraud, demonstrating that you conduct basic due
diligence and ask questions will both improve your understanding
of your counterparty and alert fraudsters, who are likely to stop
negotiations under a pretext and seek easier prey.
B. The hacker attack
This scheme has also been around for a number of years but is
a bit more sophisticated. It involves an existing trade relationship
with a known partner in China. Hackers take advantage of the weak
IT security of a Chinese seller by gaining access to their online
business correspondence. The hacker follows the progress of a
genuine transaction, takes over communication disguised as the
seller and gives instructions to make a payment to a different bank
account, often outside mainland China (e.g., Hong Kong). Once
the money is paid (often a large down payment) nothing happens
and at some point the buyer asks about the missing goods or
shipment confirmation, only to learn that the actual seller never
received the money.
To protect oneself against such schemes is fairly simple and
requires business partners to always use multiple ways of communication in parallel, including some sort of live communication
(i.e., phone or video call). Confirming an email by fax is also an
effective way to identify the authenticity of a communication. If
not a standard practice, such means should at least be used in
the event of any change of agreed parameters (such as address,
responsible persons, account numbers, payment terms).
C. Conned into a wire transfer
This very complex scheme has evolved more recently, and we
know of at least four cases where it has been tried with some
success. The amounts in question are much higher (we know
of incidents involving EUR 1.5 - 15 million), maybe justifying the
much greater effort on the part of criminals.
The fraudsters identify and do research on companies with trade
or investment business in China. They identify an employee who
is often not a decision maker, but support staff with access to
a person with authority over wire transfers. The staff member
receives urgent emails, seemingly from the top management of
the company, to urgently process a payment to China. These are
usually sent when the manager allegedly sending the emails is on
a vacation or business trip and thus not physically present.
The person posing as manager is insistent, indicating that quick
payment is necessary to secure a deal and the staff member is
sworn to secrecy due to business confidentiality concerns, or to
Newsletter
May 2015
Page 4
ASIA NEWS
avoid tipping off export control or tax authorities, which also helps
to explain the extraordinary nature of communication. In many
cases this correspondence includes faked bank remittance orders
(with fake signatures of the usual signatories), which the fraudsters
ask to process with the house bank. The bank’s suspicion may not
be raised because it will be their usual contact who requests that
the payment is processed. Very often the person targeted is also
put under pressure by an alleged “external adviser” or facilitator
introduced through the fake correspondence.
starting 1 June 2015. Such banks are legally authorised to perform
the examination duties required for forex registrations under SAFE
supervision.
Notice 1 also reforms other aspects of forex control over FDI.
■■
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Once the money is wired all emails and calls usually cease, though
in some cases multiple transfers are attempted.
■■
Only if identified quickly can such wire transfers be stopped. The
fraudsters often use bank accounts under the name of a non-existing company or, to create the impression of legitimacy, a company
that was recently deregistered.
■■
SMEs that are governed informally and managed through personal relationships are particularly susceptible. Multiple layers of
communication as well as strict procedures and risk management
measures that are coordinated with a company’s bank can reduce
the risk of being duped.
Matthias Müller,
German Attorney-at-law, Partner
BEITEN BURKHARDT
Rechtsanwaltsgesellschaft mbH,
Shanghai
III. Foreign Direct Investment Forex
Policy Updates
China has over the past three years gradually loosened forex
controls on foreign direct investment (“FDI”), and this trend has
continued in 2015. In February and March, the State Administration of Foreign Exchange (“SAFE”) promulgated the Notice on
Further Simplification and Improvement of Policies on Foreign
Exchange Administration for Direct Investment (Hui Fa [2015]
No. 13) (“Notice 1”) and the Notice on Reform on Administrative
Approach for Settlement of Foreign Exchange Capital Funds of
Foreign-Invested Enterprises (Hui Fa [2015] No. 19) (“Notice 2”).
Both come into effect on 1 June 2015.
Notice 1 abolishes administrative approval of forex registration for
FDI, a measure that has been in effect within the Shanghai Pilot
Free Trade Zone since the beginning of 2014. This new policy
enables a foreign investor or foreign-invested enterprise (“FIE”) to
make their forex registrations at a qualified bank instead of SAFE
Abolishes a foreign investor’s capital contribution confirmation
registration for shares purchased from a Chinese party.
Abolishes a foreign investor’s confirmation registration for nonmonetary contributions.
Replaces a foreign investor’s confirmation registration for a
monetary contribution with a registration handled by the bank
upon receipt of the contribution.
Replaces the annual forex inspection with a report of existing
direct investment equity submitted by the FIE (or an entrusted
accounting firm or bank).
The Notice 2 introduces a policy that allows an FIE to convert up
to 100 per cent of its registered forex capital into Renminbi based
on actual business needs. The capital conversion ratio may be
adjusted in special cases based on the country’s balance of payments situation. A special account is used to deposit the converted
Renminbi and to pay for subsequent transactions. Previously, the
amount of registered capital that FIEs could convert into Renminbi
was limited to actual transaction amounts.
William Xia, LL.B.,
BEITEN BURKHARDT Rechtsanwaltsgesellschaft mbH,
Shanghai
IV. SAIC Prohibits Anticompetitive
Use of IPR
The State Administration for Industry and Commerce recently
released the Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Exclude or Restrain Competition (the
“Provisions”), which will become effective from 1 August 2015.
Chinese antitrust authorities have been looking more closely at
the use of intellectual property rights (“IPR”) to suppress competition. On 10 February 2015, the National Development and Reform
Commission (“NDRC”), one of the three antitrust enforcement
authorities in China, fined Qualcomm CNY 6.08 billion (approx. EUR
870 million) for abusive patent licensing practices and imposed
several remedies on the company. The NDRC found that Qualcomm was dominant in the markets for licensing CDMA, WCDMA
and LTE wireless communications standards essential patents and
baseband chipsets. The NDRC also found that Qualcomm had
Newsletter
May 2015
Page 5
ASIA NEWS
abused its dominance by charging unfairly high royalty fees, bund­
ling standard essential patents (SEPs) with non-SEPs and impo­
sing unfair conditions on sales of its baseband chips for managing
mobile handset radio functions. This case shows that Chinese
antitrust authorities have not limited their enforcement activities
to traditional manufacturing and service sectors, but have rapidly
turned their attention to electronics and, in particular, the complex
IP-antitrust interface.
Please note
One factor driving the promulgation of the Provisions is that the
terms regarding the improper use of IPR under the applicable AntiMonopoly Law (“AML”) and other IP laws are too general to be
enforceable in practice. The Provisions clarify the concepts of the
“abuse of IPR to exclude or restrain competition” and “relevant
market”. When considering the impact of an IPR license, antitrust
authorities can make a finding about the relevant commodity market based on either technology or product.
© BEITEN BURKHARDT Rechtsanwaltsgesellschaft mbH.
All rights reserved 2015.
The Provisions prohibit business operators from concluding a
monopoly agreement prohibited by the AML by exercising IPR,
unless the operators can prove that the AML contains an exemption. In addition, the Provisions clarify that operators may not abuse
a dominant market to exclude or restrain competition by exercising
IPR and provide specific prohibited actions, such as tying arrangements and attaching unreasonable restrictive conditions.
This publication cannot replace consultation with a trained legal
professional.
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Imprint
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BEITEN BURKHARDT Rechtsanwaltsgesellschaft mbH
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Registered under HR B 155350 at the Regional Court Munich /
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Editor in charge
Matthias Müller,
German Attorney-at-law
The Provisions penalise a company that misuses IPR to exclude or
restrain competition and thereby establishes a monopoly agreement or misuses its market dominance by assessing fines of up
to 10 per cent of the last year’s sales revenue.
Larry Lian, LL.B., LL.M.,
BEITEN BURKHARDT
Rechtsanwaltsgesellschaft mbH,
Shanghai
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