In August 2012, China’s National Development and Reform Commission (NDRC) published, for public review and comments, drafts of two regulations concerning NDRC’s verification and approval of inbound and outbound investment projects. The draft regulations, if adopted, will supersede NDRC’s current regulations governing the subject matters, which were promulgated in 2004 and subsequently supplemented by various NDRC notices. The review period will end on September 15, 2012.

Major Changes

The major changes proposed in the Draft Administrative Measures for the Verification and Approval of Foreign Investment Projects are as follows:

Scope of Application:

  • The NDRC’s proposed regulation will apply expressly to investments made by foreign-invested enterprises (FIEs) in China. Currently, such projects generally do not require NDRC approval.
  • Foreign investment projects in the form of a foreign-invested partnership (FIP), a corporate form that was formally recognized and permitted only two years ago, will also be subject to NDRC regulation.
  • A provision clarifies that the NDRC regulation applies to foreign investments using Chinese currency (RMB). This provision appears intended to address a recent development—foreign investors have started to use RMB to make investments in China.

Approval Authority:

  • Very large foreign investment projects, i.e., projects with an investment amount of US$500 million or more that fall in the “encouraged” or “permitted” category, and projects with an investment amount of US$100 million or more that fall in the “restricted” category, may be approved by NDRC and will no longer require approval from the State Council.
  • Foreign investment projects in the “encouraged” or “permitted” category with an investment amount below US$300 million can be approved at the local level. Currently, the practice varies across different provinces in China. In some provinces, the approval authority with respect to such projects has been delegated to the local level, whereas in others, such projects (especially those with an investment amount of US$100 million or more) are reviewed and approved by NDRC’s provincial branches.
  • The proposed changes discussed above would help to simplify the approval hierarchies. In summary, for foreign investment projects in the “encouraged” or “permitted” category, NDRC approval is required if the investment amount is US$300 million or more, whereas projects below this threshold can be approved by NDRC’s local counterparts; for foreign investment projects in the “restricted” category, NDRC approval is required if the investment amount is US$50 million or more, whereas projects below this threshold can be approved by NDRC’s provincial branches.
  • Foreign investment projects in the financial sector or regulated by other authorities are not subject to NDRC regulation. In particular, under the current practice, foreign investments in the financial industry are regulated by banking, insurance or securities regulators (as applicable), rather than by NDRC or its local/provincial counterparts. The new regulation will essentially confirm this division of regulatory authority.

Standard of Review:

  • With limited exceptions, the project application must include analyses of the potential impact of a proposed project on the economy, policy and planning, society and industry. Also, energy conservation and environmental protection will be important considerations in NDRC’s review of a project.
  • NDRC should solicit public opinions in reviewing projects that may have a material impact on public interest.

The major changes proposed in the Draft Administrative Measures for the Verification and Approval of Overseas Investment Projects are as follows:

Scope of Application:

  • The measures clarify that NDRC regulation will apply not only to direct investments made by a Chinese entity outside of China, but also to indirect investments made by a Chinese entity by means of providing financings or guarantees to or for the benefit of its offshore affiliates.
  • The deletion of the word “reinvestment” suggests that a reinvestment made by an offshore affiliate of a Chinese entity will no longer be regulated by NDRC, so long as the Chinese entity does not provide financings (e.g., capital contributions, loans) or guarantees to or for the benefit of the offshore affiliate.

Approval Authority:

  • As in the current regulations, the cut-off thresholds for determining central vs. local level approval are generally US$300 million for resource development projects and US$100 million for other projects. However, the draft regulation includes a special treatment of so-called “transportation infrastructures,” defined as ports, airports, railways, public roads, subways, light rails, etc. Even though these are not resource development projects by definition, the cut-off threshold for resource development projects will apply. Since the investment amount of this type of projects tends to be large, NDRC apparently believes that it makes more sense to apply the higher threshold.

Sales of Overseas Projects:

  • Transfers of overseas investment projects that were approved by NDRC or the State Council will have to be reported to NDRC within 10 business days after the completion of the transaction. No such reporting requirement exists in the current regulations.

Observations

In the context of overseeing foreign investments in China, NDRC’s draft regulation would enhance NDRC’s regulatory authority by clarifying further what constitutes a “foreign investment.” Thus, an investment by an FIE, in the form of an FIP or by a foreign investor using RMB would be considered as “foreign investment.” Furthermore, the proposed changes regarding approval authority and hierarchies decentralize the approval process to a certain extent, and delineate more clearly the role and authority between NDRC and other regulatory authorities. Finally, the draft regulation shows that NDRC is placing greater emphasis on social, economic and environmental concerns.

NDRC’s draft regulation regarding Chinese investments outside of China would enhance NDRC’s oversight of such projects by covering indirect outflow of Chinese capital through loans or guarantees. Moreover, the proposed changes in the cut-off amounts for determining central vs. local level approval in the context of “transportation infrastructures” projects demonstrate NDRC’s continued efforts to set up reasonable thresholds by taking into consideration the typical size of relevant projects.