Nanda Lau, Karen Ip and Patrick Han, Herbert Smith Freehills LLP, summarise the key institutional changes proposed in China’s government restructure plan, and provide observations on how these changes are likely to impact foreign investors and multinationals doing business in China.
China’s recently announced government restructure is the largest of its kind since China’s open door policy began in the late 1970s. The restructuring will result in the reduction of eight central-level ministries and seven vice-ministerial agencies. The plan is part of a broader redesign of the Communist Party of China to deepen the reform of the party and state institutions.
The restructure will remove duplications of responsibilities between existing ministries and agencies and remove institutional obstacles hindering intra-government collaboration. The reforms are also designed to strengthen market supervision, social management, public service and environmental protection.
Market supervision and anti-monopoly
A new State Administration for Market Supervision (SAMS) will be established, combining the existing responsibilities of the State Administration for Industry and Commerce (SAIC), General Administration of Quality Supervision, Inspection and Quarantine and China Food and Drug Administration (CFDA).
SAMS will be the key regulator in supervising market order, covering a wide number of business areas including business registration, market regulation, product safety, food safety, quality inspection, certification and accreditation.
Notably, the new administration will also regulate all anti-monopoly matters. Currently, the Anti-monopoly Bureau of the Ministry of Commerce is responsible for merger control filings, while the National Development and Reform Commission (NDRC) and SAIC are responsible for price-related monopolistic behaviour and non-price related monopolistic behaviour respectively.
While the Anti-monopoly Bureau is likely to remain independent after merging with SAMS, the antitrust departments of NDRC and SAIC will be consolidated to eliminate any overlap of investigatory power. A new State Intellectual Property Office (SIPO) will be established under SAMS to formulate China’s intellectual property protection system and the registration of trademarks, patents and geographic indicators. With SIPO being an affiliate of SAMS, it is hoped that the office will have greater resources to handle administrative cases relating to intellectual property and enforcing intellectual property rights.
The creation of SAMS is China’s latest effort to reform market regulators at the central government level. Historically, the regulation of market activities has involved different government bodies with scattered regulatory functions. This has proved inefficient and resulted in complicated compliance requirements for companies. We expect that integrating the various market supervision agencies will consolidate law enforcement resources and facilitate intra-government communication and collaboration. This will hopefully lead to simplified administrative procedures, consistent enforcement standards and lower compliance costs.
Pharmaceuticals and healthcare
There will be three new regulatory authorities in the pharmaceutical and healthcare sector – the State Drug Administration, the State Administration for Medical Security Insurance (SAMI) and the National Health Commission.
The State Drug Administration will be established under SAMS to replace the pharmaceutical-related regulatory power of CFDA. At the local level, there will also be provincial drug administrations but no separate agency will be created further down the bureaucratic pyramid. This means that, at the city/county level, the relevant regulatory functions will sit directly within the local branches of SAMS. It remains to be seen how SAMS will regulate drugs and health products requiring higher professional or specialist capabilities.
Regulation of various types of medical insurance for urban and rural residences will be consolidated under SAMI. More importantly, SAMI will be responsible for supervising the bidding process for drug and medical supply procurement and regulating drug and medical services pricing.
Establishing a single and integrated administration under SAMI demonstrates China’s commitment to reorganising, at the central government level, its weak and fragmented healthcare governance structure. The current structure has hindered the reform of drug procurement, medical insurance and medical service providers.
The National Health and Family Planning Commission will be transformed into the National Health Commission. According to the reform plan, the new commission will be responsible for, among other things, the supervision of hospitals and other medical services and policy formulation for drugs, medical treatment and elderly care. The new commission will also take over the regulation of occupational safety and health from the State Administration of Work Safety.
The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be combined under a new commission, while the China Securities Regulatory Commission will remain unchanged.
The People’s Bank of China (PBOC), China’s central bank, will be responsible for drafting key regulations and prudential oversight in the financial industries. These reforms, together with the establishment of the Financial Stability and Development Committee (FSDC) in November 2017, will change the financial regulatory framework from ‘one bank plus three commissions’ to ‘one committee, one bank and two commissions’, moving closer to the ‘Twin Peaks’ regulatory model (see ‘What is the Twin Peaks model?’) adopted by many developed economies.
In the future, FSDC and PBOC are likely to focus more on prudential regulation, while the two commissions focus on specific conduct and financial products. When the streamlined regulatory framework is in place, it is expected that coordination and information sharing between different regulators will improve. We anticipate that the reforms will also speed up progress on wealth product regulations and measures to combat shadow financing and other risks that could threaten the stability of China’s financial system.
State and local taxation bureaus will be integrated under the State Administration of Taxation, making it the chief regulator with support from local governments.
Under China’s 24-year-old tax system, tax revenues are shared between state (central) and local governments. On an operational level, all types of taxes are classified into ‘state tax’ and ‘local tax’ and two bureaucratic systems collect tax separately.
The dual systems have created significant administrative burdens on companies who must comply with the dual tax filing, collection and inspection requirements. In 2015, China started to improve collaboration between state and local tax administrations with the adoption of a new electronic system to standardise tax compliance procedures and eliminate duplicate filing. Integration of the state and local taxation bureaus is a further step to break institutional barriers within the tax administration system. Under the reform plan, companies are expected to spend less time and energy on tax-related matters in their day-to-day operations.
Entertainment and media
A new State Film Bureau will be established to take over the responsibilities of the film arm of the State Administration of Press, Publication, Radio, Film and Television. The State Film Bureau, together with the General Administration of Press and Publication, will be administered directly by the Publicity Department of the Party, indicating the Party’s desire to exert tighter control over news, film and media content. Last year, China published a host of new regulations in an attempt to strengthen the supervision and censorship of internet content.
Reforms in other areas
Under the reform plan, various other ministries are to be consolidated or streamlined to remove overlapping responsibilities and enhance law enforcement. The Ministry of Environmental Protection, for example, will be ‘upgraded’ to a new Ministry of Ecological Environment with expanded jurisdiction covering environmental protection–related responsibilities previously held by six other ministries or agencies. Likewise, the new Ministry of Natural Resources will combine the functions of eight existing regulators to coordinate the use and improve the protection of natural resources.
This huge effort to modernise China’s governance structure and create one that is better structured, more efficient and service-orientated is welcome. Whether it will succeed, however, depends on how it is implemented in practice.
The roll-out of the overall reform plan is just a starting point, with more to be announced and implemented in the coming years. The new ministries and agencies need to detail their functions, personnel and internal structures at an operational level. Existing laws and regulations need to be amended to ensure consistency with the new governance structure.
These are challenging tasks given the scope and depth of the changes and the reform will require careful planning, effective communication and extensive coordination among the different agencies. Consequently, while one of the long-term targets of the reform is to improve efficiency of the government, companies doing business in China need to be prepared for possible prolonged approval or filing processes in certain sectors due to uncertainties brought about by these reforms during the transitional period.
We advise that companies follow these developments closely to understand possible changes to the regulatory requirements and factor this in to their strategic planning and daily operations.
Nanda Lau, Karen Ip and Patrick Han
Herbert Smith Freehills LLP
Copyright: Herbert Smith Freehills LLP