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Shareholding Ratio Restriction to Be Loosened Soon?

Date:08-04 10:08 Source:www.eeo.com.cn Authour:Wang Guoxin and Liu

Four Major Free Trade Zones will Open up Three Auto Industrial Fields and Wholly Foreign-Owned Enterprises will be Allowed

Loosening the shareholding ratio restriction on joint ventures manufacturing motorcycles in the four free trade zones is being seen as the beginning of the gradual loosening of the ratio restriction on auto joint ventures. With Policy on Development of Automotive Industry and Catalogue for the Guidance of Foreign Investment Industries still in force, foreign investors are strictly banned from controlling auto and motorcycle joint ventures, which, of course, has won precious time for local auto makers and given them opportunities to develop. Policy on Development of Automotive Industry, in particular, though amended in 2004 and 2009, has always emphasized the red line for the shareholding ratio since it was first promulgated in 1994.

The red line for the shareholding ratio is under fierce debate.

Shareholding Ratio Restriction to Be Loosened Soon?

Decision of the State Council on Interim Adjustment of Relevant Administrative Regulations, State Council Documents and Department Rules Approved by the State Council in Pilot Free Trade Zones

State Council/Document [2016] No.41

People’s governments of all provinces, autonomous regions and municipalities directly under the Central Government and ministries and commissions of and departments directly under the State Council:

In order to ensure relevant reform and opening-up measures will be smoothly implemented in pilot free trade zones, in accordance with Decision of the Standing Committee of the National People's Congress on Authorizing the State Council to Make Interim Adjustments to Administrative Approvals Required in Relevant Laws and Regulations in Extended Areas of China (Guangdong) Pilot Free Trade Zone, China (Tianjin) Pilot Free Trade Zone, China (Fujian) Pilot Free Trade Zone and China (Shanghai) Pilot Free Trade Zone, General Plan for China (Guangdong) Pilot Free Trade Zone, General Plan for China (Tianjin) Pilot Free Trade Zone, General Plan for China (Fujian) Pilot Free Trade Zone and Plan for Further Deepening the Reform and Opening-up of China (Shanghai) Pilot Free Trade Zone, the State Council has decided to make interim adjustments to relevant provisions in 18 administrative regulations including Detailed Rules for the Implementation of the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises in China, 4 State Council documents including Decision of the State Council on Reform of the Investment System, and 4 department rules approved by the State Council including Catalogue for the Guidance of Foreign Investment Industries (Amended in 2015) (see the attachment for the list of provisions subject to interim adjustment).

Relevant departments under the State Council and the people’s governments of Tianjin Municipality, Shanghai Municipality, Fujian Province and Guangdong Province will, in accordance with the above-mentioned adjustments, adjust their own department or local rules and regulatory documents and establish management systems that meet the requirements for conducting pilots.

The provisions of this decision will be adjusted from time to time based on the pilot results of the reform and opening-up measures in the pilot free trade zones.

Attachment: List of Administrative Regulations, State Council Documents and Department Rules Approved by the State Council subject to Interim Adjustment in Pilot Free Trade Zones Decided by the State Council

Major changes to the current policies for auto industry experimentation

An unprecedented change is likely to take place soon in the auto industry. On July 19th, the State Council issued Decision of the State Council on Interim Adjustment of Relevant Administrative Regulations, State Council Documents and Department Rules Approved by the State Council in Pilot Free Trade Zones. In this document, the State Council has made some major changes to the current policies for auto industry experimentation in free trade zones.

According to this document released online by the Chinese government, as mentioned in Item 27 and 28, automotive electronics and key components, and parts of new energy automobile (mainly referring to batteries) have been put on the white list for policy experimentation. It is stated in Item 27 that “foreign investors are allowed to set up wholly foreign-owned enterprises in the R&D and production of automotive electronic bus network technology and EPS electronic controllers” in free trade zones. Details are provided in the table below.

Shareholding Ratio Restriction to Be Loosened Soon?

In Item 28, it is specified that “foreign investors are allowed to set up wholly foreign-owned enterprises in the manufacturing of energy batteries (energy density ≥ 110Wh/kg, and cycle life ≥ 2,000 times)” in free trade zones. Details are provided in the table below.

Shareholding Ratio Restriction to Be Loosened Soon?

With regard to provisions in conflict with the new policy, this document states that the implementation of the original provisions will be suspended and the competent department of industry and information technology under the State Council will amend relevant administrative measures jointly with other departments. But if you think the battery and automotive electronics fields opened up in Item 27 and 28 involve only auto parts, then the adjustment made in Item 46 will definitely have great impact on the auto industry.

It is stated in Item 46 that the State Council shall “suspend the implementation of relevant provisions and allow foreign investors to set up wholly foreign-owned enterprises in the production of motorcycles, and the competent department of industry and information technology under the State Council will amend relevant administrative measures jointly with other departments” in free trade zones.

However, nothing is mentioned in this document regarding the adjustment of the shareholding ratios of auto manufacturers, which means the original shareholding ratio restriction still applies in free trade zones. Details are provided in the table below:

Shareholding Ratio Restriction to Be Loosened Soon?

The red line for the shareholding ratio is under fierce debate

Nevertheless, loosening the shareholding ratio restriction on joint ventures manufacturing motorcycles in the four free trade zones is being seen as the beginning of the gradual loosening of the ratio restriction on auto joint ventures. With Policy on Development of Automotive Industry and Catalogue for the Guidance of Foreign Investment Industries still in force, foreign investors are strictly banned from controlling auto and motorcycle joint ventures, which, of course, has won precious time for local auto makers and given them opportunities to develop. Policy on Development of Automotive Industry, in particular, though amended in 2004 and 2009, has always emphasized the red line for the shareholding ratio since it was first promulgated in 1994.

However, this red line is under fierce debate. Recently, officials from both the Ministry of Industry and Information Technology (MIIT) and the National Development and Reform Commission (NDRC) have indicated that it is only a matter of time before the shareholding ratio restriction on auto joint ventures is loosened. Some people believe that as partners of auto joint ventures, large state-owned automobile groups are relying on these joint ventures and making no attempt to make independent progress, and that therefore we should lift the foreign equity cap and let them all compete freely. Li Shufu, Chairman of the BOD of Geely Group, is a strong supporter of this view. He has been calling for loosening of the shareholding ratio restriction for a long time.

Actions are pushing China towards loosening the restriction

Not long after officials from MIIT and NDRC expressed their opinions, the China Automotive Industry Association, China Automotive Engineering Research Institute and Chinese Automotive Technology & Research Centre raised their objections to the loosening of this restriction together with four automobile groups – FAW, Dongfeng, BAIC and Chang’an. This is not surprising, and shows that the loosening process is becoming more of an issue.

Of course, we cannot predict exactly what kind of impact this white list, to be applied in free trade zones, will have on the automobile industry, but what we can see is that now the Chinese government has designated four major free trade zones as the pilot areas and loosened the shareholding ratio restriction on motorcycle joint ventures in free trade zones. Considering the fact that China promised to loosen the shareholding ratio restriction in the auto industry when joining the WTO, all these actions are pushing China towards loosening the restriction on the shareholding ratio of automobile enterprises too.

For local brands, loosening this restriction may not be good news, but quite a few executives from local auto makers also indicate to the media that it will not be the end of the world either.


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