On August 18, 2017, the General Office of China's State Council published Opinions on Further Guiding and Regulating Outbound Investment (the "Opinion"). The Opinion was jointly issued by the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the People's Bank of China, and the Ministry of Foreign Affairs.

Main Provisions

The Opinions is the first official document from the Chinese government specifying that outbound investment made by Chinese investors shall be guided and regulated on the basis of "encouraging development and a negative list". The Opinion classifies outbound direct investments into three categories: encouraged, restricted, and prohibited investments, each subject to different regulatory measures, respectively.

  1. Encouraged Investments

    (a) Investments in infrastructure that are conducive to the construction of the Belt and Road Initiative and surrounding, interconnecting infrastructure.

    (b) Investments that facilitate the export of China's advantageous industrial capacity, high-quality equipment and technical standards.

    (c) Investments that strengthen the cooperation with foreign high-tech and advanced manufacturing enterprises; establishment of overseas research and development (R&D) centers.

    (d) Investments in the exploration and development of overseas oil, gas, mineral, and other energy resource based on a careful assessment of economic benefits.

    (e) Investments in agriculture, forestry, animal husbandry, side-line production, and fishery; investments that expand overseas agricultural cooperation.

    (f) Investments in service sectors such as commerce, culture, and logistics; establishment of offshore branches and service networks by qualified financial institutions.

    The Opinion indicates that the Chinese government will facilitate "competent and qualified" domestic enterprises to steadily implement ODI. The Opinion does not specify the definition of "competent and qualified" enterprises. Based on current regulatory policies to tighten supervision and regulation on overseas investments, and recent examples of cutbacks in high-profile ODI, it can be expected that the Chinese government may impose even higher requirements on domestic businesses' capability to conduct overseas investment.

  2. Restricted Investments ODI projects which conflict with China's diplomatic principle of peaceful development, mutually beneficial strategy of opening up, and macro-regulation policy are classified as restricted investments in the Opinion, including the following: (a) Investments in countries and regions that have no diplomatic relations with China, are currently at war or in chaos, or are restricted under the bilateral or multi-bilateral treaties or agreements to which China is a party. (b) Investments in real estate, hotels, film theatres, the entertainment sector, and sports clubs. (c) Establishment of equity investment funds or investment platforms without an underlying operating business. (d) Investments using outdated or obsolete manufacturing equipment which does not comply with technical standards in the target's jurisdiction (e) Investments which fail to meet environmental protection, energy efficiency, or safety standards in the target's jurisdiction. The first three categories of investment above are subject to ODI regulators' approval (primary ODI regulators include NDRC, MOFCOM, and the State Administration of Foreign Exchange). Compared with the record-filing system (i.e. filing a notification), the approval procedure normally takes more time, requires additional documents, and involves enhanced scrutiny. Furthermore, the Opinion requires that Chinese enterprise shall prudently participate in restricted investments, and the regulators can provide necessary guidance and warnings to any restricted investment based on its facts and circumstances.
  3. Prohibited Investments The Opinion prohibits Chinese enterprises from participating in any ODI that impair or may impair the national interests or security of China, including transactions listed below: (a) Investments that involve the export of core military technologies and products without the Chinese government's approval. (b) Investments that involve the technologies, techniques or products that are banned for export from China. (c) Investments in gambling or sex industries. (d) Investments that are prohibited by international treaties to which China is a party. Chinese regulators will take practical and effective measures to strictly regulate and control the prohibited transactions above.

In addition to the above categories, the Opinion also indicates that the government of China will further improve the administration scheme on ODI, strengthen scrutiny on the authenticity and compliance of ODI transactions to prevent unauthentic or fraudulent investment. An outbound investment blacklist, as well as an inter-department information exchange system, will be established by relevant regulators to perform joint compliance and punishment functions on ODI that violate laws and regulations.

Brief Comments

Since the end of 2016, China's outbound investment regulatory environment has been significantly changed. In order to guide outbound investments made by domestic enterprises and to protect China's interests and security (in particular financial security), the Chinese government started to tighten its controls on ODI transactions. However, these new restrictions were mainly implemented through government officials' informal guidance on a case-by-case basis, which in practice raised a number of questions and uncertainties. The Opinion was issued to reaffirm and further clarify the current ODI regulatory policies and practices since late 2016.

Although the Opinion contains broad language and does not cover all concerns and challenges raised in China's outbound investments, it draws a clear map of China's approach to regulating ODI transactions under the current political and economic climate.

For Chinese investors, the direction of overseas investment is clear. While the encouraged transactions made by qualified investors may enjoy preferential government support regarding taxation, foreign exchange, insurance, customs, and information sharing, the restricted ODI projects may be subject to even stricter scrutiny by Chinese regulators.

For host countries, especially those sellers in cross-border transactions involving Chinese enterprises, more concerns need to be raised on the Chinese buyer's ability to obtain the necessary approvals from Chinese regulators. Cross-border deals which fall into the restricted category, especially those subject to approval procedures under the Opinion, would face increased scrutiny from the Chinese government and have a higher risk of not meeting the requisite closing condition thus delaying closing. According to MOFCOM, no additional outbound investment was made in real estate, sports, and the entertainment sector in the first three quarters of 2017.

On October 18, 2017, President Xi issued a report during the 19th National Congress of the Communist Party of China, that put perusing the Belt and Road Initiative as a clear priority, and giving equal emphasis to "bringing in" and "going global", echoing the message in the Opinion about achieving a win-win situation between Chinese ODI and host countries. The Opinion, together with President Xi's message at the 19th National Congress, give a clear indication of China's stance on ODI for the foreseeable future.