On January 7, 2009, the Ministry of Commerce (“MOC”) published the draft of Management Measures for Overseas Investment on its website (“Draft Measures”), and its final version shall replace and invalidate the Provisions on the Examination and Approval of Investment to Run Enterprises Abroad (“Provisions”) and Notice on Printing and Promulgating the ‘Provisions on Particulars to be Ratified for Inland Enterprises to Invest in Hong Kong or Macao Special Administrative Region to Establish New Enterprises’ (“Notice”), the two current key provisions dealing with oversea investment.

The Draft Measures set forth the procedures and documents required for application with relevant government authority when making overseas investments by a Chinese enterprise.

Qualifications

In order to be qualified to make overseas investment, according to the Draft Measures, a Chinese enterprise must show its engagement in public services and adherence to public management. Article 8 of Draft Measure further went on and carved out four acts which, if exhibited by a Chinese enterprise, would disqualify it from making overseas investment, and they are as follows:

(1) acts will harm the sovereignty, security and social public welfares of both China and host countries;

(2) acts will breach domestic and overseas laws, regulations and policies;

(3) acts shall result in a China government’s breach of obligations contained in international agreements it concluded; and

(4) acts relating to import and export of technologies and goods which are prohibited by China government.

According to the Draft Measures, the threshold for a company to illustrate its qualification for making overseas investment is lowered given its broader definition of elements relating to public services. As such, one would naturally focus upon the four forbidden acts mentioned above, which in essence, could be the only hurdle preventing a Chinese enterprise from making overseas. In another word, so long as an Chinese enterprise does not exhibit any of the 4 forbidden acts, it should be qualified for making overseas investment under the Draft Measures.

Approval Process

The Draft Measures sets forth approval authorities at different levels and application procedures for overseas investment by a Chinese enterprise, depending upon the ultimate overseas investment amount.

According to Article 6 of the Draft Measures, a Chinese enterprise shall receive approval with the MOC when the investment is made:

(1) in countries or regions with no diplomatic relations with China;

(2) in countries with a high level of security risk;

(3) with 100 million USD and/or above from the Chinese side;

(4) in cross-border infrastructure constructions; and

(5) involving the establishment of overseas special purpose corporation.

For this process, a Chinese enterprise should first file an application with the competent provincial department of commerce, and upon the its approval, the application will then be turned to MOC for final determination per stipulations under Article 12 of the Draft Measures.

Pursuant to Article 7 of the Draft Measures, a local enterprise shall receive approval with the competent provincial department of commerce when the investment is made:

(1) with its total amount between 10 million and 100 million USD from the Chinese side;

(2) in energy and mining sectors;

(3) on overseas wholesale complexes;

(4) on overseas real estate development.

For this process, a local enterprise shall first file an application with the local department of commerce, and upon its approval, the application will be turned over to its provincial counterpart for final determination per stipulations under Article 13 of the Draft Measures.

Under the old regulations governing overseas investment, whether the approval is made by MOC or provincial department of commerce depends upon whether the enterprise is owned by the central government. The flaw with the old regulations lies in the fact that many non-central government controlled enterprises are able to obtain approvals from provincial department of commerce despite the large size of the investment. (Typically, the approval of local department of commerce would be easier to obtain than that of MOC).

The Draft Measure abolishes this old requirement and puts investment amount, invested countries, and investment scope as the approval standards. This clearly shows that the P.R.C. government now fully recognizes the upcoming power of the non-government owned domestic enterprises, and is taking a giant step toward full control of overseas investment of Chinese enterprises.

Document Requirement and Term of Approval

Article 11 of the Draft Measures sets forth the necessary documents required for an Chinese enterprise when making application for overseas investment. What is more important is that, under the Draft Measures, the document requirement is the same for application with MOC and local department of commerce.

For acceptance, it takes 5 working days for the authority to decide whether the application is qualified to be submitted for approval at the next level. Once the application is submitted to the next level, that authority will have fifteen working days to reach a decision.

It should be noted that according to Article 16, for two or more enterprises who jointly invest on establishing overseas enterprise, the largest shareholder of joint companies shall burden the application of overseas investment after obtaining a written agreement of the other(s).

Conclusion.

This Draft Measures clarify the qualification and approval authority for Chinese enterprise to make overseas investment. It allows the Chinese government to take greater control of its overseas investment, and at the same time, makes easier for the Chinese enterprise to comply with. The Draft Measures demonstrates a bright attitude of Chinese government to promote overseas development and illustrates China’s confidence to build a smooth legal atmosphere for both Chinese enterprises to invest overseas in a tough economy situation.