The Chinese New Year is here, and this is the Year of the “Yang” (which means “Goat” in Chinese). 2014 was the year of the “Horse”, in which we saw a clear trend of growing outbound investments from China, and according to IVC Research Center, Chinese investors were involved in 32 investment transactions, whether directly into companies or indirectly via venture capital and private equity funds, valued at a total of $319M.
We at HFN believe that this trend is about to grow in current year. One of the reasons is that the National Development and Reform Commission (the “NDRC”), China’s Ministry of Commerce (“MOFCOM”) and State Administration of Foreign Exchange (“SAFE”) have issued new sets of rules that facilitate outbound investments by Chinese companies as well as by individuals. The Chinese government’s push to stoke overseas investment is part of an effort to slow the rise of its foreign currency reserves at home, while helping domestic companies buy assets, resources and technology overseas. According to officials at MOFCOM, China’s outbound investment will eclipse inbound investment in the next few years.
Generally speaking, an outbound investment by a Chinese company usually requires the prior approval of the MOFCOM, the NDRC and the SAFE. The new MOFCOM measures simplify the former MOFCOM approval regime for Chinese companies’ outbound investment. They improve on the current situation in several ways: Under the revised rules, most domestic firms will no longer need to seek MOFCOM approval prior to making an overseas investment, but must register the investment with regional regulators. MOFCOM approvals are required only for non-financial outbound investments in “sensitive countries and regions” (which means countries that have not established diplomatic relations with China and those sanctioned by the United Nations) and “sensitive sectors” (industries with products and technologies restrained to export by China, and those that affect the interests of more than one country (region)). The regulator also eliminated approval requirements for the formation of offshore special purpose investment vehicles. The new rules also greatly simplify approval and filing procedures and reduce the time allowed to review overseas investments.
The New SAFE instructions apply not only to Chinese enterprises, but also to Chinese residents, who often refrain from making outbound investments, as the regulations with respect to such was unclear. The new instructions improve outbound investments’ regime, by making the definition of SPV, which is the most popular way for making outbound investments, much flexible. Under the previous instructions, an SPV was defined as an offshore enterprise directly established or indirectly controlled by a Chinese resident, which uses the domestic assets of such resident for the purposes of obtaining equity financing. The new instructions broaden the definition to include not only domestic but also overseas assets of the Chinese resident, for the purposes of not only obtaining financing but also carrying out investments abroad. In addition, the new instructions allow profits realized by an SPV to remain outside of China and to be used for re-investments purposes (whereas previously, such profits had to be repatriated into China and converted into RMB).
Similar new rules were issued also by the NDRC. The new rules set a higher benchmark for verification of an outbound investment with the NDRC. According to the new rules only outbound investments involving $1 billion or more or investments which involve “sensitive” countries or sectors, would require verification with the NDRC. Outbound investments of less than $1 Billion but more than $300 million would require to be filed with the NDRC; whereas outbound investments which involve less than $300 million and are not related to sensitive countries or sectors will only need to be filed with a provincial government. The difference between the procedure of verification and filling is not completely clear, however it is obvious that the verification process would entail more information and examination. Prior to the new rules of the NDRC, the verification process applied regarding smaller amounts of investment, whether or not it involved sensitive countries or sectors.
It seems that all of these legislation changes will have a positive effect on the scope of Chinese investments in the Israeli market. 2014 was mainly about Chinese investors looking for technology. We believe that in 2015, we will see an increasing amount of large financial institutions making their way to Israel’s shores in search of investment opportunities.