The Year to Come and Year in Review summarise a selection of major developments you should be aware of from 2021, and a selection of key developments expected in 2022.
A selection of
PRC
law developments across key practice areas in 2021 and 2022
In 2021, changes have been made to strengthen the connection of the financial markets and enhance cross border capital flow between Hong Kong SAR and the mainland China. These developments are likely to continue into 2022 with the opportunities brought about by the development of the Greater Bay Area. We look forward to working with you at this exciting time.
William Liu, Regional Managing Partner, Asia
Automobile industry to fully open up:
With the removal of limits on foreign investment/shareholders in passenger vehicle companies and the creation of two joint ventures in the coming year, mainland China’s automobile industry will be fully open to overseas investment in 2022. This follows the lifting of foreign ownership restrictions on special-purpose vehicles and new energy vehicles in 2018, and commercial vehicles in 2020.
Listed company M&A:
Greater liberalisation of foreign strategic investments in mainland Chinese-listed companies was emphasised by the Ministry of Commerce of the PRC (MOFCOM) in May and July 2021, and is likely to be a priority in 2022. Previous consultation drafts of the amended listed company strategic investment rules have proposed allowing the use of tender offers, lowering investors’ minimum asset thresholds for non- controlling investments, removing the minimum 10% investment restriction, reducing the lock-up period to 12 months, and permitting investments by foreign nationals and cross-border share swaps.
Amendments to the Anti-Monopoly Law:
In October 2021, mainland China’s top legislature published the draft amendments to the Anti-Monopoly Law (AML) for public consultation. The amendments proposed changes to the existing law in both substantive and procedural aspects. These include the concept of market share-based safe harbour for monopoly agreements, potential defence for resale price maintenance, a new type of abusive conduct implemented by digital platforms, personal liability for substantive violations, an increased level of fines for merger control violations and the “stop-the-clock” mechanism. The consultation ended on 21 November after which the amendments and comments are being considered. The final version is due for release by the end of 2021.
National security review enforcement on the horizon:
MOFCOM’s 5-year plan for liberalising foreign investment in October 2021 calls for improvement in the national security review (NSR) regime to achieve a higher level of opening-up for foreign investment. Specifically, the authority recommends a range of actions to increase the enforcement of the NSR regime. These include encouraging foreign investors to make NSR filings, strengthening the monitoring of foreign investments in key sectors and key regions to identify national security risks, and supervising the implementation of NSR decisions. Investors are advised to prepare for the impact of this new approach. MOFCOM also stated that the authorities will only carry out an NSR where necessary and reasonable and will seek to avoid overuse of the NSR.
Further reform in the Free Trade Zones:
In September, initiatives of the State Council for the Free Trade Zones suggest that 2022 will see further reforms to commodities and futures markets, intellectual property securitisations, and improvements to the judicial review of governing law in respect of arbitration awards by tribunals in the Free Trade Zones
The reforms target commodities that are in high demand in mainland China and at a mature stage of development with reliable supply in overseas markets. Market infrastructure will also be further improved, in order to establish a bulk commodities futures market that enables domestic and overseas traders to use Renminbi to price and trade futures at broadly representative pricing.
Passenger vehicle sales:
New rules in 2022 will increase manufacturers’ and distributors’ statutory liability for the repair, replacement and return of passenger vehicles. Enhanced obligations include a seven-day return policy for quality defects in key parts such as engines, batteries and gearboxes, and enhanced rights of return for repeated quality defects of the same type. Compensation to distributors for serious safety defects is also increased. The Government’s financial subsidy on purchases of new energy vehicles is due to expire at the end of 2022.
Regulation of listed companies:
According to the legislative plans of the Government and securities regulatory authorities, 2022 may see the publication of new directives which will give regulators greater powers against misconduct or failures of governance by mainland Chinese-listed companies. The existing framework mainly regulates disclosure of information, governance structures, mergers, restructurings, de-listings and securities issuing and trading. The proposals aim to legislate for a broader range of central government-authorised regulatory powers on listed companies’ behaviour, which may also cover environmental, social and governmental (ESG) issues.
The Chinese mainland authorities’ approach to dealing with Covid-19 in 2022 is likely to be influenced by the success of the containment measures planned for the 2022 Winter Olympic and Paralympic Games. Whether there will be any relaxation of the zero-Covid policy, a corresponding shift of focus to treatment/vaccination, and any related relaxation of restrictions on international travel to mainland China, remains to be seen.
Cross-border transfer security assessments:
Updated draft cross-border data transfer rules were released for public consultation in late October 2021. The draft rules, expected to pass into law quickly in 2022, designate which businesses, in addition to critical information infrastructure operators, must complete regulator-led security assessments before transferring data outside of mainland China’s borders, including to affiliates in Hong Kong and Macau Special Administrative Regions. Proposed thresholds triggering these reviews include transfers of personal information of more than 100,000 individuals or sensitive personal information of more than 10,000 individuals, in each case cumulatively. As in the 2019 draft, a framework applies to the contractual terms to be entered by the data sender and offshore recipient. Although it is not yet clear how closely this will correspond with the template contractual terms to be published by the cybersecurity regulator under the new Personal Information Protection Law, crucial answers for multinationals transferring data to and from the Chinese mainland may be forthcoming in 2022.
Trans-pacific trade:
In September, China applied to join the Comprehensive and Progressive Trans-pacific Partnership (CPTPP). CPTPP is expected to bring lower tariffs and greater trade freedom among member countries, and help existing domestic efforts to deepen reform and open up, particularly in the area of trade and investment deregulation. Further negotiations are anticipated in 2022, with issues such as environment and labour standards, the roles of state-owned enterprises and data traffic expected to dominate the agenda.
Gradual progress towards 2030 peak emissions:
The State Council’s blueprint for the attainment of peak carbon by 2030 contains a range of measures designed to implement a green and efficient energy infrastructure. The plan envisages, by 2025, a reduction in the use of fossil fuels to 20%, and reductions of 13.5% in energy consumption and 18% in carbon dioxide emission per unit of GDP relative to 2020. Further action is expected in 2022 that introduces standards for energy efficient building design, the designation of up to 100 pilot cities and regions that will lead the transformation to peak carbon, and greater use of the “Belt and Road” initiative for green energy development. After many years of trial implementation at local level, 2022 may also finally see the publication of national rules regulating emissions trading.
Regulation of listed companies:
According to the legislative plans of the Government and securities regulatory authorities, 2022 may see the publication of new directives which will give regulators greater powers against misconduct or failures of governance by mainland Chinese-listed companies. The existing framework mainly regulates disclosure of information, governance structures, mergers, restructurings, de-listings and securities issuing and trading. The proposals aim to legislate for a broader range of central government-authorised regulatory powers on listed companies’ behaviour, which may also cover environmental, social and governmental (ESG) issues.
Online lending restrictions:
2022 will see the restructuring of online lending businesses to comply with new rules requiring that, by the end of the year, banks jointly issuing online loans with other institutions must ensure that the percentage of the other institution’s participation is no less than 30%. If a local regional bank participates in online lending, it will only be able to make online loans to borrowers in the location where the bank is registered.
Online lending restrictions:
2022 will see the restructuring of online lending businesses to comply with new rules requiring that, by the end of the year, banks jointly issuing online loans with other institutions must ensure that the percentage of the other institution’s participation is no less than 30%. If a local regional bank participates in online lending, it will only be able to make online loans to borrowers in the location where the bank is registered.
Further reform in the Free Trade Zones:
In September, initiatives of the State Council for the Free Trade Zones suggest that 2022 will see further reforms to commodities and futures markets, intellectual property securitisations, and improvements to the judicial review of governing law in respect of arbitration awards by tribunals in the Free Trade Zones
The reforms target commodities that are in high demand in mainland China and at a mature stage of development with reliable supply in overseas markets. Market infrastructure will also be further improved, in order to establish a bulk commodities futures market that enables domestic and overseas traders to use Renminbi to price and trade futures at broadly representative pricing.
Listed company M&A:
Greater liberalisation of foreign strategic investments in mainland Chinese-listed companies was emphasised by the Ministry of Commerce of the PRC (MOFCOM) in May and July 2021, and is likely to be a priority in 2022. Previous consultation drafts of the amended listed company strategic investment rules have proposed allowing the use of tender offers, lowering investors’ minimum asset thresholds for non- controlling investments, removing the minimum 10% investment restriction, reducing the lock-up period to 12 months, and permitting investments by foreign nationals and cross-border share swaps.
Tightened regulation of imported food:
The focus on public health continues into 2022, when rule changes will require (from January) that all overseas food manufacturers, processors and storage facilities exporting produce to the Chinese mainland be registered with the local authorities. The changes cover all food products (except food additives) and are not limited to specific products as in the past. Depending on the product category, food producers must register either: a) through the competent authority of the exporting country; or b) directly and/or through a private agent. 2022 will also see more extensive powers for authorities to undertake imported food safety inspections, enhanced independent audits and sanctions for non-compliance.
Shared prosperity:
Following President Xi’s speech in April 2021, which identified shared prosperity as a fundamental goal for China in order to increase the wealth and skills of the population and produce a broad and sound base for future growth, the market expects that the pilot real-estate tax will start to be progressively applied in selected regions in 2022. Greater use of regional development incentives and the improvement of technically skilled labour are among the other policies that may be used to achieve shared prosperity. Further indications of how this goal is likely to be implemented may be seen in the run up to, and following, the 20th Party Congress in October 2022.
Intelligent manufacturing:
2022 is expected to see the roll-out of new standards of intelligent manufacturing that provide a framework for accelerating the transformation of industry in mainland China. In a policy paper released in July, the Government set the target of developing and amending over 100 sets of industry standards in artificial intelligence and intelligent technology/testing equipment, intelligent plant design and systems integration, intelligent supply chain standards (including synergies and evaluation), internet collaborative manufacturing, data generation, AI applications and other intelligence enabled standards as well as industrial Internet of Things by 2023.
NSR of foreign investment:
China’s Measures for the Security Review of Foreign Investment came into force on 18 January 2021, introducing a new national security regime that aims to cover more transaction types and sectors. The measures signal China’s continued efforts to strengthen the national security oversight of foreign investments in response to the tightened screenings Chinese companies now face abroad.
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Foreign investment negative list:
The foreign investment regulatory authorities have been speeding up the formulation of the 2021 foreign investment negative list, which is scheduled to be released by the year’s end. The 2021 version is expected to be further reduced under China’s unwavering commitment for reform.
Continued antitrust enforcement in digital space:
Following the issue of the Antitrust Guidelines for Digital Platforms in February this year, the Chinese State Administration for Market Regulation (SAMR) has intensified enforcement actions in various aspects of digital space in 2021. On the conduct side, SAMR imposed a record fine against Alibaba and Meituan for their exclusivity practices. SAMR also ordered various companies to go through a checklist of more than 100 compliance items to conduct self-rectification or make assurances. On the merger review front, SAMR published more than 30 penalty decisions for failure to notify past online transactions. For example, in Tencent Music/China Music an acquirer was required to remedy the anti-competitive effects and restore competition. SAMR also blocked the proposed merger between HUYA and Douyu, the first digital merger to be subjected to a prohibition decision.
Restrictions on certain transactions:
In June 2021, President Biden issued a new executive order expanding the focus of the Chinese Military Companies Sanctions administered by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) to include the surveillance technology sector, in addition to the defence and related materials sectors of China. The new order eliminates the previous order’s coverage of certain securities that are not publicly traded, and guidance from OFAC now clarifies the role that US persons are allowed to play when covered securities are purchased or sold by a non-US person.
RPM back to the spotlight of antitrust enforcement:
Two years after the last penalty decision against resale price maintenance (RPM) published in 2019 (i.e. Hydron/Horien) SAMR issued an administrative fine, on 15 April 2021, of RMB 764m against Yangtze River Pharma for engaging in RPM practices. In the penalty decision, SAMR analysed some critical aspects of RPM issues, such as the forms of RPM and the availability of suspension application etc. On the heels of the Yangtze River Pharma decision, Gongniu was also pursued by SAMR for engaging in RPM practices and received a fine of RMB 294.81m in September.
Adjusting macro-prudential parameter for cross-border financing:
In January 2021, the State Administration of Foreign Exchange and the People's Bank of China (PBOC) issued a joint notice to adjust the level of the macro-prudential parameter from 1.25 to 1. This parameter, used in calculating the foreign debt quota available to a PRC corporate or financial institution under the PBOC foreign debt quota regime, had been increased to 1.25 in March 2020 to encourage cross-border finance into mainland China. The adjustment this time round signals the new normal of the foreign debt regime emerging from Covid-19.
Foreign debt registration:
In August, the National Development and Reform Commission of the People’s Republic of China (NDRC) clarified that if an enterprise controlled by a PRC entity or a person who borrows foreign debt for longer than 1 year from a free trade zone branch or offshore lending centre of a China-incorporated bank, a filing and registration of foreign debt with the NDRC will be required.
Foreign listings of mainland Chinese business thrown into uncertainty:
The Cyberspace Administration for China initiated investigations into the cybersecurity capabilities and practices of a number of mainland Chinese firms listed on the US capital markets in 2021. An updated version of the Cybersecurity Review Measures was also released for public consultation. Compared to the June 2020 version, the new draft requires companies that are seeking a listing abroad, whose data processing activities may affect national security or possess personal data of more than one million users, to undergo a cybersecurity review. Initial capital raisings in Hong Kong SAR seems to be exempt from the new rules, while mainland Chinese listings in the US and other foreign markets have been largely curtailed by the uncertainty of the approval requirements under these new rules.
QFII liberalisation:
Under new Chinese mainland securities regulatory guidelines, investors under the Qualified Foreign Institutional Investor (QFII) and Renminbi QFII schemes have been allowed to trade commodity futures, commodity options and stock index options from November. Stock index options may only be traded for hedging purposes.
Corporate governance of financial institutions:
A new code of corporate governance, effective from June 2021, which draws upon the G20/OECD Principles of Corporate Governance, requires banks and insurance companies to establish effective communication with shareholders and protect the legitimate rights of stakeholders. Directors are required to treat all shareholders fairly and maintain independence and objectivity in performing their duties while implementing a high standard of professionalism and ethics. The code contains specific chapters strengthening the roles and functions of independent directors and improving the quality of information disclosure.
Foreign listings of mainland Chinese business thrown into uncertainty:
The Cyberspace Administration for China initiated investigations into the cybersecurity capabilities and practices of a number of mainland Chinese firms listed on the US capital markets in 2021. An updated version of the Cybersecurity Review Measures was also released for public consultation. Compared to the June 2020 version, the new draft requires companies that are seeking a listing abroad, whose data processing activities may affect national security or possess personal data of more than one million users, to undergo a cybersecurity review. Initial capital raisings in Hong Kong SAR seems to be exempt from the new rules, while mainland Chinese listings in the US and other foreign markets have been largely curtailed by the uncertainty of the approval requirements under these new rules.
National emissions trading has commenced:
In 2021, China launched its first national carbon emission trading scheme. On its first trading day, trading volume topped 4.1m tonnes of carbon emission allowances (CEAs) and a total trading amount of approx. RMB 210m. The objective is to eventually consolidate the existing nine local trading markets after approximately eight years of local trading activities, and is intended to be an essential tool for China to control its overall carbon emissions and thereby fulfil its commitment to reach peak emissions by 2030 and carbon neutrality by 2060.
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Anti-money laundering:
From August 2021, banks and other payment institutions are required to increase internal controls and risk management against money laundering. Financial institutions are required to carry out a self-assessment of money laundering and terrorist financing risks, establish an internal control system based on the scale and risk profile of their business, and develop corresponding risk management policies. They are also required to refine their organisation, human resources security, information system and technical security requirements in relation to anti-money laundering (AML), and to clarify internal audit requirements for AML.
Corporate governance of financial institutions:
A new code of corporate governance, effective from June 2021, which draws upon the G20/OECD Principles of Corporate Governance, requires banks and insurance companies to establish effective communication with shareholders and protect the legitimate rights of stakeholders. Directors are required to treat all shareholders fairly and maintain independence and objectivity in performing their duties while implementing a high standard of professionalism and ethics. The code contains specific chapters strengthening the roles and functions of independent directors and improving the quality of information disclosure.
Cross-boundary wealth management co-operation:
In September 2021, Hong Kong SAR and mainland China’s financial regulators officially launched the Cross-boundary Wealth Management Connect pilot scheme in the Guangdong-Hong Kong-Macao Greater Bay Area, accompanied by guidance and FAQs issued by the regulators. The rules provide detailed guidance by which Hong Kong SAR banks and mainland banks must abide in order to ensure that the services provided under the scheme are within the permissible parameters.
Private fund management:
New rules took effect in January that regulate certain aspects of administrating privately offered investment funds, including expressly allowing a single entity to establish two or more administrators operating different businesses. The rules stress that the core business of privately offered investment funds is securities and equity investment, and the use of fund assets to offer loans or guarantees is strictly prohibited. However, a fund may provide short-term loans or guarantees to its investee enterprises, for the purposes of equity investment, in excess of 20% of the fund’s paid-up capital.
QFII liberalisation:
Under new Chinese mainland securities regulatory guidelines, investors under the Qualified Foreign Institutional Investor (QFII) and Renminbi QFII schemes have been allowed to trade commodity futures, commodity options and stock index options from November. Stock index options may only be traded for hedging purposes.
REITs:
At the end of January, the stock exchange published new rules on the conditions for applications, procedures of confirmation, offering, listing and trading, and management of real-estate investment trusts (REITs). In February, the Asset Management Association of China followed through with guidelines on due diligence and financial statements, information disclosure and the duties of trustees of REITs. The rules require the due diligence of REITs to be conducted comprehensively, prudently and precisely, with full assessment of the authenticity, security and stability of the infrastructure projects. Furthermore, to minimise repeated due diligence, the continuity of advisors is encouraged.
NSR of foreign investment:
China’s Measures for the Security Review of Foreign Investment came into force on 18 January 2021, introducing a new national security regime that aims to cover more transaction types and sectors. The measures signal China’s continued efforts to strengthen the national security oversight of foreign investments in response to the tightened screenings Chinese companies now face abroad.
Continued antitrust enforcement in digital space:
Following the issue of the Antitrust Guidelines for Digital Platforms in February this year, the Chinese State Administration for Market Regulation (SAMR) has intensified enforcement actions in various aspects of digital space in 2021. On the conduct side, SAMR imposed a record fine against Alibaba and Meituan for their exclusivity practices. SAMR also ordered various companies to go through a checklist of more than 100 compliance items to conduct self-rectification or make assurances. On the merger review front, SAMR published more than 30 penalty decisions for failure to notify past online transactions. For example, in Tencent Music/China Music an acquirer was required to remedy the anti-competitive effects and restore competition. SAMR also blocked the proposed merger between HUYA and Douyu, the first digital merger to be subjected to a prohibition decision.
Private fund management:
New rules took effect in January that regulate certain aspects of administrating privately offered investment funds, including expressly allowing a single entity to establish two or more administrators operating different businesses. The rules stress that the core business of privately offered investment funds is securities and equity investment, and the use of fund assets to offer loans or guarantees is strictly prohibited. However, a fund may provide short-term loans or guarantees to its investee enterprises, for the purposes of equity investment, in excess of 20% of the fund’s paid-up capital.
REITs:
At the end of January, the stock exchange published new rules on the conditions for applications, procedures of confirmation, offering, listing and trading, and management of real-estate investment trusts (REITs). In February, the Asset Management Association of China followed through with guidelines on due diligence and financial statements, information disclosure and the duties of trustees of REITs. The rules require the due diligence of REITs to be conducted comprehensively, prudently and precisely, with full assessment of the authenticity, security and stability of the infrastructure projects. Furthermore, to minimise repeated due diligence, the continuity of advisors is encouraged.
Education sector:
Since 24 July 2021, all “academic subject-based” training institutions have been prohibited from conducting an IPO or otherwise raising funds from capital markets. Moreover, listed companies may not invest in such institutions.
Extra-territorial application of foreign legislation:
On 9 January 20210, MOFCOM issued Order No. 1 of 2021 on Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, which came into effect immediately. The order seeks to provide a framework to “counteract the impact on China caused by unjustified extra-territorial application of foreign legislation and other measures, safeguard national sovereignty, security and development interests, and protect the legitimate rights and interests of citizens, legal persons and other organisations of China” (Article 1).
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Anti-foreign sanctions:
The Anti-foreign Sanctions lLaw, which came into effect in June, creates a new legal framework to combat both foreign unilateral sanctions that purport to interfere in China's internal affairs and certain illegal activities that may endanger China's national sovereignty, security and development interests.
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Restrictions on certain transactions:
In June 2021, President Biden issued a new executive order expanding the focus of the Chinese Military Companies Sanctions administered by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) to include the surveillance technology sector, in addition to the defence and related materials sectors of China. The new order eliminates the previous order’s coverage of certain securities that are not publicly traded, and guidance from OFAC now clarifies the role that US persons are allowed to play when covered securities are purchased or sold by a non-US person.
Read more
