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What Benefits Are Offered to Australian Investors under ChAFTA? By Wayne Wang   Ni Cheng   Jolie Xu 2017-07-28

On 24 March 2017, the Ministry of Commerce of China (the “MOC”) and the Ministry for Trade, Tourism and Investment of Australia signed an agreement to commence a review of the services and investment elements of the China-Australia Free Trade Agreement (“ChAFTA”), as well as the Memorandum of Understanding between both countries on an Investment Facilitation Agreement.

 

Since ChAFTA became effective on 20 December 2015, it has not only reduced tariffs on some imported goods on a wide range between China and Australia, but also substantially lowered certain barriers on access to the market of each other, thereby promoting mutual investment in China and Australia.[1]  This article summarizes the relevant benefits offered by ChAFTA to Australian companies investing in the service sectors of China.

 

1.Principles

(1)Positive and negative list

According to ChAFTA, Australian investors may invest in certain service sectors in China according to a positive list, i.e. the Schedule of Specific Commitments on Services Trade, which is mainly based on the WTO commitments of China.  In addition, it was agreed that both parties will further negotiate so that China may provide a negative list of service sectors for Australian investment in the future.

 

(2)National treatment and Most-favored-nation treatment

China has agreed to provide national treatment and most-favored-nation treatment to Australian investors in China, but subject to the applicable non-conforming measures (i.e., exceptions) set out in ChAFTA.

 

2. Australian investment in the healthcare sector

Comparing with the PRC regulations that are generally applicable to most other foreign investors, ChAFTA has offered favorable treatments for Australian investors in the heavily regulated healthcare sector.

 

(1)Wholly Australian owned Hospitals

According to the Guiding Catalogue of Foreign Investment Industries issued by the MOC on 28 June 2017 (the “Guiding Catalogue”) and the Interim Measures for Administration of Sino-Foreign Equity and Cooperative Joint Venture Medical Institutions issued by MOC and National Health and Family Planning Commission (the “NHFPC”) on 15 May 2000, generally, foreign investment in medical institutions in China can only be made by setting up an equity or cooperative joint venture (collectively, the “JV”) with a Chinese party, while the Chinese party shall hold not less than 30% interests in the JV.    

 

The Guiding Catalogue provides that any bilateral free trade agreements (such as ChAFTA) shall prevail against the Guiding Catalogue. 

 

Under ChAFTA, China has permitted Australian hospital service providers to set up hospitals (excluding traditional Chinese medicine hospitals) in the form of wholly foreign-owned enterprises (“WFOEs”) or acquire existing hospitals of China and turn them into WFOEs in specified regions of China (i.e., 3 cities (Beijing, Shanghai and Tianjin) and 4 provinces (Jiangsu, Fujian, Guangdong and Hainan)).[2] 

 

(2)Australian Doctors

Qualified Australian doctors are permitted to provide short-term medical services in any regions of China for up to 6 months (which may be extended to 12 months) upon obtaining the relevant licenses from the NHFPC.

 

3. Australian Investment in the Shanghai Free Trade Zone

Previously, many special measures and policies in favor of foreign investors were firstly implemented in the Shanghai Free Trade Zone (the “SH FTZ”).  ChAFTA has incorporated such special measures and policies of SH FTZ (with certain amendments) and is applicable to Australian investment in the SH FTZ.  A brief summary of the relevant provisions are set out below.

 

(1) Legal services

An Australian law firm which has established a representative office in the SH FTZ is able to: 

(a) enter into contracts with a Chinese law firm in the SH FTZ and dispatch their lawyers to work at each other as legal counsels; and

 

(b) form a commercial association with a Chinese law firm in the SH FTZ,

 

which will enable such Australian law firm to provide both Australian and Chinese legal services through a commercial presence in China.

 

(2)Value-added telecom services

According to the Guiding Catalogue and Telecom Provisions, as a general rule, foreign investment in “value-added telecommunication services” (excluding e-commerce) in China can only be made in the form of a JV and the foreign owned interest shall not exceed 50%.

 

Under ChAFTA, Australian investors are permitted to set up either JVs or WFOEs in the SH FTZ to provide the following “value-added telecom services”: 

(a) information services (App store only);

(b) information storage and forwarding;

(c) call center; and

(d) domestic multi-party phone call.

 

(3)Construction services

According to the Regulations on Foreign Invested Construction Firms issued by the MOC and Ministry of Housing and Urban-Rural Development on 27 September 2002, foreign invested construction firms may only contract to build the following projects in China:

(a) projects funded with foreign investment and/or foreign donation only;

 

(b) projects funded by international financial institutions or awarded by an international bidding process according to the terms of a loan;

 

(c) sino-foreign projects with 50% or more of foreign investment;

 

(d) sino-foreign projects with less than 50% of foreign investment which cannot be independently undertaken by Chinese construction firms due to technical difficulties, as approved by a competent construction authority at provincial level; or

 

(e) domestic-invested projects which cannot be independently undertaken by Chinese construction firms due to technical difficulties and therefore permitted to be jointly contracted with sino-foreign construction enterprises, as approved by a competent construction authority at provincial level.

 

According to ChAFTA, construction firms established by Australian investors in the SH FTZ in the form of WFOEs are allowed to undertake sino-foreign construction projects in Shanghai and exempted from the aforementioned requirement on foreign investment ratio.

 

When an Australian architectural and urban planning firm (except general urban planning) established in China applies for higher-level qualifications in the construction business, their track record in both China and Australia will be recognized by the competent authority of China, which may enable such firm to undertake a wider range of construction projects in China.

 

(4)Transportation services

Key provisions under ChAFTA include: 

(a) qualified maritime services suppliers of Australia are allowed to establish WFOEs in the SH FTZ;

 

(b) qualified maritime services suppliers of Australia are allowed to establish JV shipping companies in the SH FTZ and hold a majority of interests in the JVs;

 

(c) the chairman of the board of directors and the general manager of an international shipping JV established in the SH FTZ may be appointed by the Chinese and Australian parties jointly through consultation; and

 

(d) ships owned or bareboat-chartered by an international shipping JV established in the SH FTZ may be registered in accordance with the international ship registration system of SH FTZ.

 

4. Australian investment in other relevant sectors

In recent years, China has opened up other relevant sectors to foreign investors (including Australian investors).  Generally, these policies apply to all foreign investment (including Australian investment) in any regions of China.  ChAFTA has incorporated such policies.

 

(1)Financial Services

Australian banks are permitted to establish wholly foreign-owned banks or sino-foreign banks and open up branches in China. 

 

Australian investors are permitted to establish securities companies or securities investment management companies in China in the form of JVs with foreign owned interests in the JVs up to 49%.

 

(2)Aged care

Australian aged care services providers are permitted to establish wholly foreign-owned aged care centers in China.

 

(3)Tourism and travel agency

Australian investors are permitted to establish wholly foreign-owned travel agencies in China, although such travel agencies may not provide outbound travel agency services for Chinese residents. 

 

Australian investors are also permitted to construct, renovate and operate wholly foreign-owned hotels and restaurants in China.

 

(4)Energy

Australian service providers may exploit oil and gas and provide technical consulting and field maintenance and support services in coal bed methane and shale gas extraction in China by establishing JVs with Chinese partners.

 

Upon receiving approval from the competent authority of China, Australian service suppliers may provide services for comprehensive utilization of mineral resources in the central and western regions of China.

 

5.Conclusion and recommendation

It is generally believed that the bilateral trade between China and Australia are booming under ChAFTA.  In 2016, more than 85% of the bilateral goods trade has benefited from tariff reductions under ChAFTA.[3]

 

However, in the other hand, we believe that there is still much room for further promotion of bilateral investment between the two countries. 

 

For instance, apart from the SH FTZ, China has approved 10 other free trade zones (i.e., the relevant free trade zones in Guangdong, Tianjin, Fujian, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan and Shaanxi) during 2015-2016.  The benefits offered to Australian investment in the SH FTZ should be further extended to the other free trade zones of China.  

 

It also remains to be seen as to when will China issue the “negative list of service sectors for Australian investment” and whether there will be any amendments to ChAFTA following bilateral negotiation and review of ChAFTA.

 

The Australian business community should be aware of the aforementioned benefits under ChAFTA for Australian investment in certain sectors or regions of China.  For instance, ChAFTA offers a great opportunity for Australian medical service providers to set up hospitals in 7 regions of China in the form of WFOEs.  This may be of interest to Australian medical service providers wanting to enter the China market or Chinese investors wanting to acquire Australian hospitals and “return” to China to provide high end medical services. 

 

Note:

[1] See China-Australia Free Trade Agreement (ChAFTA): Opportunities for Increased Cross Border Investment Between China and Australia, https://abf.events/china-china-australia-free-trade-agreement-chafta-opportunities-for-increased-cross-border-investment-between-china-and-australia/.

 

[2] Another exception to the general rule in the Guiding Catalogue is that medical service providers from Hong Kong, Macao and Taiwan may establish wholly owned hospitals in large or medium size cities of mainland China under the relevant bilateral arrangements.

 

[3] See Feng Guo, ChAFTA Allows Australia to Climb Over the Great Economic Wall, http://thebigsmoke.com.au/2015/09/07/chafta-allows-australia-climb-great-economic-wall/.

 

 

This article is only for the purpose of communication, does not constitute a formal legal opinion, and also may not be relied on for any business decisions or any legal actions.