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This article presents a general overview of the proposed restructuring plan, and in this regard, for more detailed regulatory information, please contact Xiaohu Ma in our Hong Kong office, Chuck Comey in our Tokyo office, or Steve Toronto in our Beijing office

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situituations.

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PRC Government Restructuring

April 2003
by Charles C. Comey, Xiaohu Ma

On March 10, 2003, the National People's Congress approved a proposed plan for the restructuring of certain ministries under the State Council (the "Restructuring"). The following summarizes the Restructuring's key aspects and implications for foreign investors in China.

Overview of the Restructuring

The Restructuring has just been approved, and the detailed responsibilities of the various new ministries remain to be determined by the State Council at a later stage. However, based on current information, the most significant changes to be implemented thus far include:

In a significant development for foreign investors, the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") has been restructured into a new Ministry of Commerce ("MOC"). The MOC absorbed (1) all of MOFTEC's foreign investment and other authority, (2) certain responsibilities from the State Economic & Trade Commission ("SETC"), including overall domestic and foreign trade and economic policy and administration, and administration of industrial product and raw material import and export, and (3) the responsibility from the State Development Planning Commission ("SDPC") to administer agriculture import and export.
The SETC and the State Economic System Restructuring Office ("SESRC") have been abolished.
The SDPC was renamed the State Reform and Development Committee ("SRDC") and has been restructured to absorb (1) most of the SDPC's current responsibilities, (2) all the SESRC's responsibilities, and (3) certain responsibilities from SETC such as administration of technical renovation investment (investment in existing projects), industry planning and planning for the import and export of important industrial products and raw materials.
A new State Asset Regulatory Commission ("SARC") has been formed to assume (1) all existing responsibilities from the Central Enterprise Working Committee of the PRC Communist Party, (2) from the SETC, authority to administer the reform of state-owned enterprises, and (3) from the Ministry of Finance, authority to regulate state-owned assets and investments therein.
The China Banking Regulatory Commission, headed by veteran PRC banker Liu Mingkang, has been formed to regulate and implement further reform in the banking industry.

Implications for Foreign Investors

Apart from certain general trends that are discussed below, the specific policy implications of the Restructuring remain to be seen and no doubt will continue to evolve over time. However, the Restructuring does have immediate procedural consequences for foreign investors that include the following:

Foreign Investment Generally. The MOC, rather than MOFTEC, will generally handle approval of constituent legal documents for foreign-invested enterprises ("FIEs"), such as joint venture contracts and articles. Since the MOC now absorbs all existing responsibilities of MOFTEC, we do not anticipate any immediate substantive change in approval procedures for FIE constituent documents.

In addition, foreign-invested project proposals and feasibility study reports will now all be approved by SRDC or its local counterparts, rather than, as previously, the SDPC and (in the case of certain technical renovation projects utilizing foreign investment) SETC.

State-Owned Assets. The SARC together with its local counterparts now regulates the PRC's state-owned asset regime. Previously, such matters were primarily under the joint jurisdiction of SETC, the Ministry of Finance and Central Enterprise Working Committee of the Communist Party.

Retail. The MOC now approves foreign investment in the retail industry, rather than the SETC.

Banking. The China Banking Regulatory Commission now regulates foreign banks with branches, Sino-foreign joint venture banks and wholly foreign-owned banks (in addition to domestic banks). The People's Bank of China previously handled bank regulation.

Domestic Distribution. The MOC, rather than SETC, now regulates domestic distribution of products by foreign-invested enterprises.

Anti-Dumping. The MOC now oversees anti-dumping policy and enforcement. Previously, MOFTEC and SETC jointly handled anti-dumping.

Further Observations

Overall, the Restructuring represents an important further step forward towards a more market-orientated economy in China. In particular, the establishment of the MOC streamlines the PRC's administration of foreign and domestic trade and, consistent with China's WTO commitments, sends a strong signal to foreign investors that China is committed to eventually extending national treatment to both purely domestic Chinese companies and foreign-invested enterprises.

Importantly, by streamlining the administration of state-owned assets, the creation of the new SARC should help to facilitate the restructuring of state-owned enterprises using foreign investment. It should also be noted, however, that the new SARC will act in its capacity both as a shareholder and as a regulator of state-owned enterprises. Hence the SARC's creation could result in further government involvement in the operation of state-owned enterprises, potentially complicating the rationalization of these businesses.

The dissolution of the once-powerful SETC could signal a trend toward reduced government interference with the operations of various industries, such as the power, coal and petrochemical industries. We believe that in the wake of the SETC's demise, various industry associations promoting their own agenda will play a more important role in shaping policy going forward.

Finally, the scale of the Restructuring is massive, and will take time to be fully implemented, particularly at local levels. During the transitional period, the assistance of counsel will be particularly important in confirming policy views and navigating the approval process for foreign-invested projects.