The Monkey went, the Rooster is here: a recap of key policy changes in 2016

The Year of the Monkey (2016) came to an end, but the policies introduced during its 12-month span are likely to have an impact for years to come. Below are some of the highlights:

• 13th Five-Year Plan (2016-2020) – China’s Five-Year Plans are general policy and economic guidelines to give direction to China’s economic and social development. 2016 was the first year of the 13th Five-Year Plan, which sets a target of “maintaining medium-high growth.” President Xi Jinping said that annual GDP growth of 6.5% would be required for China to “build a moderately prosperous society” by 2020. The Plan proposes that “innovation, coordination, the environment, opening up and sharing” will fulfill its economic goals for the coming years. The focus is to seek growth through economic transformation, optimising industrial structure, improving the environment and enhancing quality and efficiency.
• VAT Reform – As of 1 May 2016, VAT reform was fully implemented nationwide and extended to the construction, real estate, financial and services sectors. The VAT reform replaced the previous Business Tax (BT) model and represents one of the biggest changes to China’s tax system in more than two decades. The move to VAT has eliminated many of the double tax issues encountered by businesses and has helped to remove distortions to supply chains.
• Capital Account liberalisation and loosening of Restrictions on Investment in Asset Management – On 15 June 2016, the State Administration of Foreign Exchange (SAFE) introduced a major reform to allow up to 100% convertibility of companies’ foreign exchange to RMB. Both Chinese and foreign companies should benefit from the capital account liberalization, although we expect some, if not many, controls on outflows to remain. Benefits include increased competition in the financial services sector and increased overseas investment opportunities for Chinese companies.
• Unified Business Certificate – In order to lessen the administrative burdens on companies, the old business licence, organisation code certificate and tax registration certificate have been combined into one certificate – the new “Unified Business License” – which can be obtained from the local Administration of Industry and Commerce (AIC). Previously, companies were obliged to apply for a business licence from the AIC, a tax registration certificate from the tax authorities and an organization code certificate from the technical supervision authority.
• Abolition of the Foreign Investment Catalogue – The Foreign Investment Catalogue set out the sectors of the economy in which foreign investment was encouraged, while restricting or prohibiting investment in many others. China announced it was to be replaced by two national “negative lists” – one covering both domestic and foreign investors and another list with additional limits on foreign investment. The negative lists delineate sectors of the economy where certain Chinese agencies would continue to require investors to secure approval from those agencies for investment projects. Investments in unlisted sectors would no longer require approval by those agencies; however, China would maintain separate approval, licensing and screening processes conducted by other agencies. China is now piloting the foreign investment negative list in the Shanghai, Tianjin, Guangdong, and Fujian Free Trade Zones (FTZs).
• Reform of China’s Foreign Invested Enterprise (FIE) laws – As of 1 October 2016, approval from the Ministry of Commerce (MOFCOM) or its local counterparts is no longer required to establish or make changes to an FIE. Instead, companies now simply follow an online registration process, provided that the industry in which the FIE operates is not on the Negative List (discussed previously). The laws now also require that the controlling person or persons of the FIE is identified. The actual controlling person is defined as either the person (or persons) who: has 50% ownership in the foreign investor that will establish the FIE in China; or controls the foreign investor through means other than ownership (e.g. control over the decision making).
• New rules for Accounting Record Keeping – Since January 2016, China’s Ministry of Finance (MOF), in coordination with the National Archives Bureau, has increased the time period for which a company must maintain accounting records to up to 30 years, depending on the document.
• Work Permit Pilot Programme – The two previous types of work permit – the employment licence for foreigners from the Ministry of Human Resources and Social Security or the foreign expert work permit from the State Administration of Foreign Experts Affairs (SAFEA) – are to be unified into a single type of work permit. Under the new pilot programme, a points system is introduced to classify all foreign workers into three distinct categories: A (top talent), B (professional talent), and C (unskilled workers or those working the service industry). While a “green channel” for applying for a work visa will be opened to those A-graded individuals, the government will apply limits to the B and C categories. A report published by SAFEA uses the catchphrase “Encourage the High End, Limit the Ordinary, Restrict the Low End” (鼓励高端、控制一般、限制低端) in reference to the new policy.

China is a rapidly developing and changing market. Policy changes occur frequently and have a varying degree of impact on foreign companies operating or doing business in China. However, 2016 was remarkable for the number and scope of policies that were enacted or changed let's see what the year of the rooster will bring.