NOTE FROM THE CHAIRMAN

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1 NOTE FROM THE CHAIRMAN In This Issue Dear Esteemed Clients, Associates & Friends, As the world economy continues to languish in generally widespread slow growth, economists now estimate that the USA, as the world s largest economy, may never again have the ability to grow at a faster pace than around 2.2%. Meanwhile, China s economy, the world s second largest, has also continued to experience faltering growth as it adjusts to being more consumer-based. So far this year, the GDP growth rate has dropped to 7.4% from last year s 7.7%. However, other indicators suggest that China s economy has stabilized and may even be turning around toward increased growth. Manufacturing production levels are up, and while imports and exports are sluggish, consumer spending continues to increase at high rates in both urban and rural areas. Though modest, Foreign Direct Investment (FDI) into China is making a comeback, during the first half already off to a good start at making up for last years growth losses. Outbound FDI is also growing, with equity investments overseas amounting to nearly 2/3 of the inbound FDI. If we include the value of overseas contracted projects, inbound and outbound FDI are roughly equivalent. For those of us in the international accounting and business advisory community, this two-way highway of investment provides many opportunities, as well as challenges, in helping our clients through increasingly complicated cross border transactions. In this edition of our newsletter, there is no discussion of China taxation changes. While the VAT reforms are ongoing and minor changes or clarifications are introduced, this year so far brings no major tax updates. We therefore begin with a discussion of policies that are now being implemented in the Shanghai Free Trade Zone, and follow this article with an explanation of some policies that have been adapted from the Free Trade Zone for rollout to the rest of the country. All of these changes will positively impact foreign invested entities in China, and will continue to do so as the new policies are amended and improved. This is a space that foreign companies should not ignore. China will continue to refine the FTZ to get it as close to the international markets and this pace will not stop. Early entrant will benefit tremendously when this is fully developed. Also of interest in this issue is an explanation of how the State Counsel intends to develop China s capital markets systems. The intent is to broaden access, as well as to diversify product offerings, in a competitive, fully functional, and multilevel capital market. Enjoy reading this issue and as always, our teams are standing by to assist clients doing business in China. CHINA FOREIGN INVESTMENT UPDATES Shanghai Free Trade Zone Mainland China Policy Changes on Foreign Investment Countrywide FOREX Rule Changes China s State Counsel Promoting Capital Markets CHINA ECONOMIC News General Economic Indicators Import and Export Growth Continue to Slip Inbound Foreign Direct Investment (FDI) Henry Tan, Chairman Outbound Foreign Direct Investment (FDI) Listening, Thinking, Growing, Asia.

2 CHINA FOREIGN INVESTMENT UPDATES Shanghai Free Trade Zone In keeping with goals to further open up and support development of the Shanghai Free Trade Zone (FTZ), the Shanghai Municipal Government, the People s Bank of China, the State Administration of Foreign Exchange and the Shanghai Customs Bureau have released a number of new policies and measures in the last several months. These include implementation rules on foreign exchange, customs supervisory rules, implementation rules for account-based settlement and capital usage, and a revised negative list of foreign investment in the FTZ. It was also recently announced that an additional thirty-one new measures have been approved by the State Counsel, further opening up investment in the services, manufacturing, mining and construction industries. We provide a brief review of these advancements below. Foreign Exchange Policies In February of this year, the Shanghai branch of the State Administration of Foreign Exchange ( SAFE ) issued Shanghai Huifa [2014] No. 26, the Circular on Issuing Implementing Rules for Foreign Exchange Control to Support the Construction of the China (Shanghai) Pilot Free Trade Zone. The measures describe relaxed and/or simplified SAFE administration of FOREX within the FTZ, which is intended to help Foreign Invested Enterprises ( FIEs ) manage their cross-border trading and investments. Key regulatory changes are related to freer convertibility of FOREX, cash pooling, international trade settlement, and provision of overseas loans. Foreign Currency Registered Capital Conversion The rules related to conversion of foreign currency registered capital into RMB have been relaxed. Whereas FIEs could previously only convert amounts needed to make specific transaction payments, the new rules allow unlimited conversion according to the will of the FIE, with the RMB funds placed into a special deposit account. This shall provide FIEs flexibility and potential cost savings as related to exchange rate volatility. However, as mandated by pre-existing rules, the converted funds may only be used for allowed purposes, which include business related expenses, payment of security deposits, repayments of used-up RMB loans, and payments for current account or approved capital account transactions. Investment FIEs may transfer RMB funds to their invested enterprises based on the actual scale of their investments. While evidence of RMB use does not have to be submitted at the time of conversion, banks must still monitor payments to ensure no disallowed usage, such as investment in securities, issuance of RMB entrusted loans, repayment of inter-company loans, repayment of RMB loans transferred to third parties, or purchase of real estate that is not for self-use. Centralized Management of Foreign Currency Under the new FTZ rules, qualified companies in the FTZ can now apply for centralized foreign currency management for group companies inside and outside of China. The headquarters of a multinational group would generally be qualified, as long as the company has had no violations within three years and has a foreign currency management system in place with internal controls. (Continued on page 3) Listening, Thinking, Growing, Asia. 2

3 A qualified company will now be allowed to open a primary account for international foreign exchange, allowing for free overseas transfer of funds, given that such transfers are within the foreign debt quota and external lending quota. The rules also allow for a free exchange of funds between the international and domestic foreign currency accounts, requiring only record filing rather than approvals. Under pre-existing rules, foreign currency payments and receipts had to be treated separately on a transaction-by-transaction basis, and all related transaction documentation had to be presented to the bank for settlement. The procedures often disrupt efficient cash flow and cause delays. The new rules allow for a qualified company to centralize current account payments and receipts for its group companies and to settle payments on a net basis. However, the documentation requirement has not been entirely done away with. When performing a net settlement, the FIE must still provide the relevant transaction documentation. Overseas Lending Under the new rules, FIEs within the FTZ may now lend an amount of up to 50% (rather than 30%) of the value of the shareholder s equity to its offshore parent company or other offshore group company. This of course allows an FIE in the FTZ to directly remit spare cash in a form other than as a dividend distribution, thus potentially reducing funding costs within the group while also deferring Chinese withholding tax. Additionally, companies in the FTZ will no longer need administrative approval from SAFE when providing loan guarantees. There shall also be no restrictions on the proportion of net assets between the guarantor and the guarantee, the equity status of the guarantor and the guarantee, or the guarantee s profitability status. Free Trade Account Management in the FTZ In May of 2014, the Shanghai Head Office of the People s Bank of China released implementation rules related to trial operation of free trade split accounting business in the FTZ. As one of the financial service innovations introduced by the People s Bank last year when issuing its initial opinions on providing financial support to the Shanghai FTZ, free trade split accounting will allow financial institutions in the FTZ to create free trade split account units ( FTUs ), through which individuals and enterprises in the FTZ, and certain foreign entities, may open Free Trade Accounts ( FTAs ) for carrying out their financing and investment activities. Previously (and currently for entities outside the FTZ), different accounts are used for different types of funds and different types of payments or receipts. Under the FTA system, financial institutions can arrange for cross-border remittance using the FTAs after receiving collection and payment instructions from enterprises established in the FTZ, which should greatly improve the capital turnover rate and payment efficiency for entities in the FTZ. FTUs Shanghai financial institutions will set up their FTUs by first creating special free trade account management systems and internal risk control systems. Then, after performing self-evaluations, financial institutions shall file for approval from the Shanghai People s Bank of China. And once approved, financial institutions must practice the free trade account business and verify the flow of capital using the three principles, understanding the business, understanding the clients and conducting due diligence. FTAs Free trade accounts may be opened and used by registered establishments in the FTZ; representative offices in the FTZ; entities established in foreign countries; Chinese and foreign workers who have been working in the FTZ for more than one year. Once an FTA is opened, the account may be used for the following transactions. 1) Transfer of capital between FTAs and foreign accounts, and amongst non-residents accounts held outside the FTZ. 2) Transfer of capital between the FTAs and non-ftas of domestic entities; a. Shall be conducted in RMB, and treated as cross-border transactions. 3) The transfer of capital in RMB between FTA and non-fta settlement accounts of the same company for purposes of a. Current account transactions; b. Repayment of RMB loans from Shanghai banking institutions with durations of more than 6 months; c. New investments, mergers and acquisitions, capital increase, and industrial sector-oriented investments; d. Other cross-border transactions as stipulated by the Shanghai People s Bank of China. (Continued on page 4) Listening, Thinking, Growing, Asia. 3

4 Looking to the Future Indeed the creation of the free trade account regimen may help enterprises to gain flexibility and improve cash flow. Yet currently, these new rules apply only to the use of RMB in free trade account settlements. The program shall be monitored for a period of six months, after which time the FTA settlement practices may be extended to include foreign currencies. These new rules are opening the door to other developmental goals provided at the outset of the FTZ, including residents and non-residents having the ability to invest in domestic and foreign stocks and securities; ability of foreign parent companies of FTZ entities to issue RMB bonds; provide for investment in foreign stocks and financial derivatives by entities in the FTZ, and so on. It is expected that rules governing such activities will be released by the relevant government agencies throughout the remainder of the year. FTZ Customs Rules Foreign exchange and monetary policies are not the only areas of progress toward FTZ goals. In an ongoing effort to support increased foreign trade in the FTZ, Shanghai Customs authorities are currently implementing 14 new customs supervisory rules. Based on simplified procedures and international standards, the rules are expected to improve efficiency in customs clearance, and should thus have a beneficial impact on import/export business within the FTZ. Customs Rules Highlights 1) Declaration After Entry Qualified importers will no longer have to declare goods before bringing them into the FTZ, but goods must be declared within 14 days. Expected to reduce time involved in customs clearance. 2) Self-Managed Transportation in FTZ Enterprises in the FTZ will no longer be required to use customssupervised transport, but now may use their own vehicles for transportation. Expected to lower logistics costs. 3) Work Orders for Processing Trade Processing/manufacturing companies that use ERP systems can base write-off on daily work orders that are sent automatically. Expected to bring customs supervision into harmony with production needs. 4) Exhibition of Bonded Goods Companies with sufficient guarantees, such as deposits or bank guarantees, may hold exhibitions and related transactions with bonded goods inside or outside the FTZ. Tax settlement and collective declaration for domestic sales made during exhibition periods may be carried out. 5) Maintenance Services Qualified FTZ companies may conduct high technology, high value-added and pollution-free maintenance activities for domestic and overseas customers. Customs shall use computer-based bonded processing supervision. 6) Transfer of Bonded Futures Goods For any goods permitted by the Shanghai Futures Exchange, FTZ companies are now allowed to physically settle futures of physical goods under bonded supervision. 7) Financial Lease Business Qualified FTZ companies may now provide guarantee letters as security, and customs will levy applicable duty and VAT based on rental installments for a given period. Expected cost savings. 8) Collective Goods Declaration Importers/exporters may declare several batches of goods on one declaration form, making a collective declaration within a prescribed period. Expected benefits from reduced cost and a higher efficiency clearance process. 9) Simplified Documentation In addition to having canceled the requirement for verification of clearance forms during first-line importation, now cancels requirement to attach evidentiary certificates or other documents to first and second-line import/export declarations forms where no tax duty is applicable. 10) Unified FTZ Records All areas of the FTZ shall use standardized formats for lists of declaration factors, reducing documentation differences for companies and promoting complete integration of the FTZ. 11) Selective Domestic Sales Companies in the FTZ may produce and/or process goods for sale in the Chinese market through a second line. Customs duty can thus be paid selectively based on the actual use of imported materials used in processing. Expected that more foreign companies will set up processing operations in the FTZ and expand domestic sales. 12) Centralized Tax Payment Given that companies provide sufficient guarantees, customs will allow centralized duty payment in a prescribed period for goods already released, and customs supervision will shift from real-time checks to follow-up audits. (Continued on page 5) Listening, Thinking, Growing, Asia. 4

5 13) Supervisory Network For Bonded Goods Logistics For companies using a warehouse management system (WMS), the updated procedures will allow for monitoring of import, export, transfer and storage of goods on a real time, dynamic basis so as to improve efficiency of logistics. 14) Intelligent Permissions Management Requires customs to upgrade FTZ checkpoint facilities and simplify entry/exit procedures so as to ensure efficiency and safety. In addition to releasing the fourteen new rules listed above, Shanghai Customs is expected to continue implementing new policies throughout the second half of the year. The primary focus is the continued simplification of rules so as to improve efficiency in the management and monitoring of trading business within the FTZ. FTZ Negative List Upgrade The Shanghai Municipal Government recently released the Special Administrative Measures (Negative List) for Foreign Investment Access to the Shanghai Pilot Free Trade Zone. For business types not covered by the Negative List, foreign investment shall be treated the same as domestic investment, enjoying use of a record filing rather than approvals based system of registration. Except in cases where domestic investment projects are subject to examination and approval as provided by the State Council, the establishment of, and changes made to, foreign-invested enterprises only requires record filing. Foreign invested business types that are included in the Negative List must meet the conditions provided in the list (such as joint venture with majority share held by a domestic Chinese entity), and the foreign investment projects shall be subject to the usual examination and approval system as provided by the State Council. The updated 2014 Shanghai FTZ Negative List has 51 fewer restrictions than were listed in the original 2013 version, with 14 of these removed to improve access to foreign investment, 23 of them removed due to reclassifications, and an additional 14 removed because the same restrictions apply to domestic investment. Another 19 restrictions have been substantially relaxed, and 30 others have been clearly defined so as to remove ambiguity. Notable upgrades to openness for foreign investment include allowance of foreign investment in real estate agencies and of wholly foreign owned land development projects; removal of restrictions on foreign investment in banks and currency brokerages; removal of minimum investment requirements for foreign investment in medical institutions; removal of requirement for foreign investor qualifications for investment in the certification services industry, and removal of joint venture requirements for foreign investment in international cargo handling or marine shipping container station and yard operations. As was the case with the release of the first Negative List in 2013, investors registering companies with business scopes not on the list may do so without having to first obtain approvals. The approval process has been replaced by registration and filing so as to simplify procedures and speed up the company creation. However, since the FTZ opened last year, some foreign investors have found company registration times to be no shorter than under the standard approvals system. While no official approval step is required, authorities continue to scrutinize applications, request additional documentation, suggest higher registered capital amounts and so forth. It is anticipated that, with more time and more registrations having gone by, the inconsistencies will be eliminated and all company registrations will proceed under the streamlined process outlined in the original FTZ goals. (Continued on page 6) Listening, Thinking, Growing, Asia. 5

6 Mainland China Policy Changes on Foreign Investment Some of the policies that have been adopted for trial purposes in the Shanghai Free Trade Zone are being introduced and/or implemented throughout all of China; usually after some modification. One such policy is the simplification of approval and/or record-filing procedures for foreign invested entities opening in the country. On May 17, 2014, the National Development and Reform Commission (NDRC) promulgated NDRC Decree #12, the Measures for the Administration of Approval and Record-filing of Foreign Investment Projects. The new measures took effect on June 17, 2014, and at the same time, the previous rules under the October 2004 Interim Administrative Measures for the Examination and Approval of Foreign Investment Projects were repealed. The new measures contain significant revisions and adjustments with respect to regulatory oversight, administration and legal liabilities in order to further reform the regulatory environment for most forms of foreign investment, including Wholly Foreign Owned Enterprises, Equity Joint Ventures, Cooperative Joint Ventures and Foreign Invested Partnerships, as well as merger or acquisition of domestic companies by foreign entities. In general, foreign investment regulations are specified in the Catalogue of Guidance for Foreign Investment, as well as other sector-specific laws and regulations. The catalogue classifies foreign Invested business scopes as being either "encouraged," "restricted" or "prohibited." If a business scope is not listed at all, it is considered as "permitted" for foreign investment. Foreign investors cannot invest in "prohibited" business sectors. The "restricted" category of businesses usually requires a minimum shareholding by a domestic Chinese entity. Permitted" businesses may have certain restrictions, such as shareholding limitations. Based on the catalogue, the new measures state that certain foreign invested businesses shall require approvals as follows: 1) Any encouraged business with a total investment (or capital increase) of more than USD $300m and requiring a Chinese controlling party shall be approved by the NDRC; 2) Any encouraged business with a total investment (or capital increase) of less than USD $300m and requiring a Chinese controlling party shall be approved by the local government; 3) Any restricted business (not including real estate) with a total investment (or capital increase) of more than USD $50m shall be approved by the NDRC; 4) Any restricted real estate business, or other restricted businesses with total investments (or capital increase) of less than USD $50m, shall be approved by the provincial government. Except as otherwise noted in items 1 11 of the 2013 version of The List of Investment Projects Requiring Approval, all other foreign invested businesses shall only be required to file with the local investment administration department, and will no longer require advanced approvals. This list items 1 11 requiring approvals includes certain business scopes related to agriculture, water conservation, energy, raw materials, automobile and ship manufacturing, aerospace, urban infrastructure, and certain social undertakings. In the case that a foreign invested business applies to increase its capital, whether approval is required or not depends only on the increased capital amount. In the case of a merger or acquisition of a domestic company by a foreign entity, the total investment for approval purposes shall be the transaction amount. Foreign invested businesses that only require record filing shall be subject to simplified documentation requirements, including a description of the business and investors, copies of business licenses (or identification) of the investing entities, and other basic documents related to the business and its structure. If an existing business is making a change, such as increasing registered capital or moving to a new location, the relevant documentation must be provided at the time of filing the change. It should be noted that, although there is no advance approval requirement, the local authority that receives the filing has seven working days to notify the filer whether or not the record filing is accepted, and if not, what additional requirements must be met by the filer. Foreign invested businesses that are subject to approvals remain subject to a much more stringent documentation requirement, to include business and investor information, resource utilization and environmental impact analysis, and an economic and social impact evaluation. The approval application for acquisition of a domestic entity by a foreign entity must be accompanied by substantial documentation describing the situation before and after the acquisition, including financing plans and equity structure. For any business or project that requires approval by the State Counsel as well as the NDRC, the list of required documents is considerably longer. While the new NDRC measures take the first steps toward simplifying registration procedures for foreign investment throughout China, the record filing process applicable to many business types continues to leave an informal approval process in place for local investment administration departments. This will no doubt create a certain amount of unpredictability and inconsistency in the process from location to location in the country. As with all reforms and new policies that are introduced countrywide, the effects of these new measures will be monitored over time, and new iterations shall be released. It is currently thought that each iteration will continue to simplify processes and documentation, as well as to continue further opening investment to foreign entities. Listening, Thinking, Growing, Asia. 6

7 Countrywide FOREX Rule Changes After early success in pilot programs that include the Shanghai Free Trade Zone, the State Administration of Foreign Exchange ( SAFE ) is rolling out several regulatory upgrades nationwide. These upgrades include relaxed Foreign Exchange ( FOREX ) control over cross border guarantees and cash pooling or centralized FOREX account management. Cross Border Guarantees On May 19, 2014, SAFE released Circular 29, the Notice on the Promulgation of Foreign Exchange Administration Rules on Cross-border Guarantees, thereby opening cross-border guarantee activities and currency convertibility under capital accounts on a countrywide basis. The rules took effect on June 1, 2014, at which time twelve previous SAFE regulations regarding cross-border guarantees were repealed. In the case of a domestic guarantee to foreign loans (Chinese guarantor for a loan between foreign parties), the new rules have removed both the guarantee amount limits and the special restrictions on net asset ratio (and affiliated relations) of the guarantor and borrower that were previously in place. Pre-approvals are no longer required. Banks can directly process the performance of the guarantee, which only needs to be registered with SAFE. In the case of a foreign guarantee to domestic loans (foreign guarantor for a loan between Chinese domestic parties), the rules state that the lenders must be domestic financial institutions and the borrowers must be non-financial institutions. Entrusted loans are excluded, and the debt may be either regular loans or lines of credit in RMB and foreign currency. In the event of performance of the guarantee, the lender can collect the debt on its own account, but is also responsible for registering any applicable foreign debt with SAFE. However, if there is foreign debt in the guarantee performance, the debt is not included in the lender s quota for foreign debt. Circular 29 further provides that domestic entities may enter into guarantee agreements, which are neither foreign guarantee to domestic loan agreements nor domestic guarantee to foreign loan agreements, without registering the agreements with SAFE. However, entities entering into these agreements must adhere to the relevant rules regarding foreign debt registration, direct investment and securities investment. In closing, now that SAFE has relaxed loan guarantee regulations and removed the need for pre-approvals, the financing delays previously experienced by cross-border borrowers and lenders should be non-existent. Moreover, Chinese enterprises as domestic borrowers will likely find more financing opportunities overseas, which will no doubt benefit any merger and acquisition activities they undertake. Centralized FOREX Management Resulting from success with a Beijing pilot program and the release of similar rules in the Shanghai FTZ, on April 18, 2014, SAFE issued HuiFa [2014] No. 23, the Notice Regarding the Administrative Measures on Centralized FOREX Management for MNCs (Trial Version), now allowing for freer conversion of RMB capital and centralized FOREX management by Multi-National Companies ( MNCs ) on a nationwide basis. The rules generally provide that a qualified host company in China, together with its group of onshore and offshore companies, may all participate in a centralized FOREX management system and related bank accounts. (Continued on page 8) Listening, Thinking, Growing, Asia. 7

8 Host Company Qualification Generally, a regional or national headquarters of an MNC group, or a Chinese holding company as part of a group, may apply to be a host company for centralized FOREX management. The following criteria must be met: 1) There is a genuine business need; 2) The applicant has a sound FOREX management system and internal control system in place; 3) The total FOREX cash flow of participating companies in China must have exceeded USD $100 million in the past year; 4) There has been no significant illegal or non-compliant conduct in the past three years; and 5) The applicant is classified as A-class in terms of goods trade in SAFE s supervision system. Use of FOREX Master Accounts Under these new rules, depending on the group s business needs, the host company can open a domestic FOREX master account, an overseas FOREX master account, or both, with approved banks, which also must pass certain criteria. The accounts essentially function as foreign currency pooling centers, but there are limits as to how much FOREX can flow between the accounts, as defined by the foreign debt quota and the upper limit for foreign lending. For purposes of group financing, companies within a group can combine part or all of their foreign debt quota and overseas lending limits in the centralized accounts. When funds flow from the overseas FOREX master account to the domestic FOREX master account, the funds are considered foreign debt coming into China, and are thus subject to the combined foreign debt quota. Funds flowing from the domestic to the overseas account are considered as overseas lending, in which case the amount should not exceed the overseas lending limit, which is 50% of the aggregate shareholders equity of the participating group companies. Under the rules, the overseas FOREX master account acts as an offshore account, which centralizes the FOREX funds of overseas group members, including monies borrowed from overseas group members by participating companies in China. The foreign currency deposited into the account by group companies in China shall not be considered as use of their aggregate foreign debt quota. This means there is no restriction on the transfer of FOREX among overseas accounts or other overseas FOREX master accounts, although certain SAFE registrations may be required. Conversely, the domestic FOREX master account centralizes the FOREX funds of participating group companies in China, including funds under both the capital account and the current account. This account can be used to facilitate FOREX collection by group companies in China with respect to their current account transactions. The account can also be used to settle FOREX payments on a net basis for participating group companies in China (and overseas) with their suppliers or customers. In addition, the rules allow discretionary conversion of certain FOREX funds, such as capital originated from direct investment or foreign debt, in the domestic account. Converted RMB funds will be transferred to the host company s designated RMB account and may be used for genuine business needs. Conclusion The SAFE s new rules allowing centralized FOREX management not only provide for the freer conversion of capital account funds, but also, in keeping with China s long-term goals, promote internationalization of RMB currency. For qualified companies, the rules improve flexibility in fund management, offer improved control over FOREX risk, reduce financing cost, and strengthen their global competitiveness. However, at this point, the FOREX flow threshold required of participating companies is USD $100m, thus the rules do not benefit small to medium sized global companies. As SAFE and related agencies gain experience, especially through the trials in the Shanghai FTZ where no such threshold exists, it is anticipated that the participation threshold will be relaxed. Listening, Thinking, Growing, Asia. 8

9 China s State Counsel Promoting Capital Markets In early May of this year, China s State Counsel released an announcement, Guo Fa [2014] No. 17, which is titled, Several Opinions of the State Council on Further Promoting the Sound Development of the Capital Market ( The Opinions ). According to this document, the State Counsel recognizes that the last twenty years of capital market developments in the country have provided significant contributions to China s economic and social development. The State Counsel also recognizes that the system is still immature and in need of improvements. A well-developed capital market and multi-level capital market is deemed as necessary to ensure diversification of investment and financing channels for both companies and individuals. The Opinions thus outline a commitment to reforming the capital marketplace, as well as the goals and guiding principles by which the capital market system of China shall develop. The basic principles of the reform and development include: 1) Respect of market rules, using scientific supervision to ensure fair competition, while protecting the legitimate interests of investors; 2) Balance encouragement of market driven innovations with risk prevention; 3) Balance investor-assumed risks with investor protection through education and open disclosure of market information; and 4) Maintain a long-term view and systematically implement reforms in stepwise and targeted fashion. At the same time that the government wants to take a long-term approach to development of the markets, a primary goal is by the year 2020 to have established a fully-functional, transparent and efficient multi-level capital market system. In summary, the major goals include: 1) Reform the stock issuance system with a focus on information disclosure by issuers and intermediaries; 2) Speed development of the multi-level equity market in which securities exchanges have a self-regulating role; 3) Improve the quality of listed companies, supporting companies to improve information disclosure, operational efficiency, and capacity for generating sustainable returns for investors, as well as to improve listed company equity incentive systems and allow listed companies to carry out employee stock ownership plans using a variety of methods; 4) Encourage market oriented corporate acquisitions and reorganizations; 5) Improve the delisting system so as to ensure investor protections; 6) Develop and diversify the bond market, including enhancement of bond varieties suitable for small and medium sized companies; 7) Improve bond market credit rating systems and related information disclosure; 8) Provide for unified management of the bond registration and settlement systems so as to prevent systematic risks; 9) Provide for overall strengthening of inter-departmental coordination in the supervision of the bond market; 10) Establish and expand a diverse private offering market, allowing for issuance of shares, bonds, fund and other products, and ensure proper information disclosure and risk management; 11) Develop private investment funds and improve the regulatory standards for private equity investment funds, private assets management schemes, private collective wealth management products, collective investment trust schemes and other private investment products; 12) Develop the commodities futures market; allow use of derivatives for hedging against risk, introduce futures varieties for bulk resource products, development commodity options, commodity indexes, carbon emission permits and other trading instruments; 13) Develop the financial futures market so as to enrich the varieties of stock index futures, stock index options and stock options, as well as to gradually develop treasury bond futures, and further improve the treasury bond yield curve reflecting market supply and demand. (Continued on page 10) Listening, Thinking, Growing, Asia. 9

10 In addition to carrying out these market development goals, the State Counsel also intends to relax current restrictions on market access through development of a more open, transparent securities and futures business license process. Investment banks, fund management companies and other investment institutions shall be supported in the creation of new financial products so as to encourage the development of intermediaries. The Social Security Fund, corporate annuity funds, commercial insurance funds, overseas long-term funds and others shall also be encouraged to participate in the capital markets. Access to markets shall also be improved through the establishment of a well-managed internet-based securities and futures business environment. in the reforms shall be to provide for openness and transparency, so as to ensure a fair and competitive marketplace in which investors are reasonably protected. According to the Opinions, the State Counsel intends to open markets to facilitate cross border investment and financing of domestic entities. More overseas institutional investors shall be qualified, and investment quotas for overseas investors shall be increased. Restrictions on the holding of shares by foreign investors shall be increasingly relaxed. Meanwhile, domestic securities and futures businesses shall be encouraged to participate in overseas markets so as to improve competitiveness. With regards to administration, there shall be a push to centralize and unify the supervision of the securities and futures markets, and government supervision shall be focused toward robust risk management systems and provision of reasonable market stability. Violations of regulations and/or laws shall be severely punished. Overall, the State Counsel is committed to providing an ideal regulatory environment for reform, expansion and diversification of China s capital markets. Not only is it desired to improve the overall market infrastructure, but is also desired to improve tax policies that encourage ongoing healthy development of the capital Listening, Thinking, Growing, Asia. 10

11 12) Develop the commodities futures market; allow use of derivatives for hedging against risk, introduce futures varieties for bulk resource products, development commodity options, commodity indexes, carbon emission permits and other trading instruments; CHINA ECONOMIC NEWS General Economic Indicators Although China s first half GDP growth has dropped to 7.4% from the 2013 rate of 7.7%, the country s growth rate remains within the government s target limits, topping 7.5% for the second quarter. Other key indicators suggest that China s economic growth has stabilized, with the most sluggish area related to imports and employment. During the first quarter, industrial output grew by 8.7%, and thanks to June s 9.2% increase, industrial output growth for the first half is now at 8.8% and climbing. The manufacturing PMI for June was 51, up for the fourth straight month since December. Moreover, the PMI sub-index for new orders has increased to 52.8, a level not seen since October of The non-manufacturing PMI for June was 55, down slightly from May s While statistical data also indicates that business profits for the first half have risen by over 9.8% year on year, the PMI sub-index for employment remains sluggish at 48.6 for the month of June. Countrywide, consumer spending during the first half increased by 12.5%, owing to an average inflation-deducted 8.3% increase in disposal income (about USD $1,629). In the cities, disposal incomes grew by only 7.1%, giving rise to a consumer spending increase in cities of 12.2%. However, in the country s rural areas, disposable incomes grew by 9.8%, with consumer spending up by 13.9%. As an indicator of the inflation by which these income growth percentages have been adjusted, China s CPI remains at about 2.3%. Year 2014 (Q1 & Q2) GDP Growth in China 7.4 % Growth rate remains within the government s target limits, topping 7.5% for the second quarter. (Continued on page 12 ) Listening, Thinking, Growing, Asia. 11

12 Import and Export Growth Continue to Slip According to statistics recently released by the Customs Bureau, total imports and exports for China from January through June amounted to USD $2.021 trillion, up by only 1.2% over the same period last year. Imports amounted to USD $959 billion, up by only 0.9%, while exports amounted to USD $1.062 trillion, up 1.5%. In keeping with the trend of the last several years, the Foreign Invested Enterprise (FIE) contribution to the total imports and exports remains below 50%. From January through June, FIE imports accounted for 45.1% of China s total, up 5% from last year, mostly as a result of increased investment in imported equipment. FIE exports accounted for 46.8% of China s total, up only 0.6% over last year. Inbound Foreign Direct Investment (FDI) After a 2013 decrease of 8.7% in the numbers of new Foreign Invested Enterprises, as well as a sluggish first two months of this year, there now appears to be recovery. From January to June 2014, new Foreign Invested Enterprises were approved, up by 3.2% year on year. On the other hand, the actual use of foreign investment is not growing as quickly as last year. During the first half, actual use of FDI was up only 2.2%, reaching USD $63.33 billion, but is still on track toward an annual total in excess of USD $110 billion, as it has been for the last for years. As always, due to the massive amount of investment that flows through the city from other countries, Hong Kong remains in the number one position on the top ten regions investing in China, with USD $43.85b in investments. Ranked according the actual input of foreign capital, the other nine top investing countries are: Taiwan (USD $3.12b), Singapore (USD $3.09b), R.O.K. (USD $2.8b), Japan (USD $2.4b), U.S.A. (USD $1.74b), Germany (USD $930m), U.K. (USD $720m), France (USD $450m) and Holland (USD $420m). These countries accounted for 94 % of the total actual use of foreign investment in the country. Foreign investment in the service sector continues to grow as a percentage of new FDI, again accounting for more than 50% of new business licenses. The range of services represented includes leasing and business services, computer and technical services, logistics and warehousing, outsourcing and R&D. New trading companies continue to enter the market with both wholesale and retail sales activities. Due to increasing employment costs and the overall growth in China s economy, the country is no longer considered to be a top investment destination for manufacturing. However, FDI in the manufacturing sector is continuing to expand with respect to the automotive industry, specialty equipment and other similar niche markets. Outbound Foreign Direct Investment (FDI) During the first quarter of this year, Chinese investors made direct investment overseas in 1,875 enterprises and 137 countries and regions. These overseas investments amounted to USD $ 19.9 billion, 77.4% of which was equity investment and 22.6% of which was reinvested earnings. Meanwhile, turnover on China s overseas contracted projects exceeded USD $27.01 billion, up 7.2% from last year, and the value of newly-signed contracts was USD $35.15 billion, which is down 12.4% from last year s first quarter. Of the 113,000 Chinese personnel dispatched to work overseas in the first quarter, 52,000 were working on contracted projects. Although Africa is a region of focus for both investment and contracts, other major destinations of interest include much of Europe, the USA and Australia. Listening, Thinking, Growing, Asia. 12

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