Four key Chinese authorities, i.e. the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the People’s Bank of China (PBOC) and the Ministry of Foreign Affairs (MFA), jointly issued the Notice on Further Guiding and Regulating the Directions of Outbound Investment (Guidelines) on 4 August 2017. The Guidelines clarify the regulatory approach to governing Chinese outbound investment.


In light of China’s Go-Out and One Belt One Road policies, the scale of outbound investment by Chinese companies has enlarged over the years. However, the regulators have identified some serious problems with certain outbound investment.

With a view to regulating “irrational” and “non-genuine” investments and stabilizing the devaluation of the Renminbi, the regulators have taken various measures to increase scrutiny on outbound transactions and capital outflow since the end of 2016. Our previous e-bulletin China Tightens Control on Capital Outflow summarises these measures. Before the Guidelines, due to lack of any formal unified legislation, the scrutiny measures caused a considerable slowdown in the relevant regulatory approval and filing processes, resulting in uncertainty around Chinese outbound investments.

Highlights of Key Provisions in the Guidelines

The Guidelines officially introduce a negative list approach for the regulation of outbound investment and classify outbound investment into three categories: encouraged, restricted and prohibited.

I. Encouraged outbound investments

China encourages entities which are capable and qualified to actively and prudently carry out outbound investments. These encouraged projects echo the Chinese government’s goal to promote the One Belt One Road strategy; deepen cooperation in international production capacity; promote the transfer of quality domestic production capacity, equipment, and applicable technologies overseas; enhance China’s technology R&D, production, and manufacturing capacity; help resolve the country’s energy shortage problems and promote industrial upgrade.

The category of encouraged investments includes:

(i) outbound investment that promotes infrastructure construction in countries and regions along the One Belt One Road initiative;

(ii) outbound investment that facilitates the export of China’s quality production capacity, equipment and technical standards;

(iii) cooperation with overseas high-tech and advanced manufacturing enterprises and establishment of overseas R&D centres;

(iv) exploration and development of oil, gas and mineral resources on the basis of a prudent assessment of economic benefit;

(v) cooperation in agriculture;

(vi) investment in trade, culture, logistics and other service sectors, which will be promoted in an orderly manner; and

(vii) establishment of branches and service networks overseas by qualified financial institutions.

II. Restricted outbound investments

Domestic companies are restricted from carrying out any outbound investments which are not in line with the State’s peaceful foreign development policy, mutual benefit and win-win strategy or macro-management policy.

The category of restricted investments includes:

(i) investment in sensitive countries or regions that have no diplomatic relations with China; are in a state of war or chaos; or have restrictions imposed in bilateral or multilateral agreements or conventions with China;

(ii) investment in real estate, hotels, cinemas, entertainment and sports clubs;

(iii) equity investment funds or investment platforms that do not invest in any real business;

(iv) investment carried out using outdated manufacturing equipment that falls short of the required technical standards in the destination country; and

(v) investment that does not meet the standards of the destination country on environmental protection, energy consumption and safety.

III. Prohibited outbound investments

Domestic companies are prohibited from conducting the following outbound investments:

(i) projects involving the export of core military technologies and products without approval of the Chinese government;

(ii) projects involving the use of technologies, crafts or products that are prohibited for export;

(iii) investment in gambling or pornography;

(iv) investment prohibited by international treaties to which China is a party; and

(v) other investment that harms or may harm State interests or State safety.

IV. Protective measures

The Guidelines also set out the protective measures to be adopted by relevant authorities to guide and regulate outbound investment. The noteworthy measures include:

(i) three stages of regulation and supervision on outbound investment:

a. before the investment, regulators should conduct authenticity and compliance reviews of the proposed investment;

b. during the investment, regulators should guide the Chinese investors to enhance the supervision and management of their overseas investments and supervise the Chinese investors through an information sharing mechanism to be established among different departments of the government; and

c. as an after-event punitive measure, an outbound investment blacklist regime will be established in order to facilitate joint sanctions on illegal investment conduct.

(ii) different treatment for the three types of outbound investments:

a. for encouraged investments, the government will provide favourable services or treatment to the Chinese investors in terms of tax, foreign exchange, insurance, customs, and information etc.;

b. for restricted investments, the government will guide the Chinese investors to carry out investments in a prudent way and will provide timely guidance and alerts;

c. for prohibited investments, strict and effective control measures will be imposed to prevent any investments in these areas.

(iii) improved service levels and enhanced protective measures. For example, the Guidelines:

a. require the government to provide services to enterprises to help them establish compliance review systems, control systems and decision making systems, and to help them understand the laws and practices in the host country;

b. encourage the development of professional services, such as legal, accounting, tax, valuation, investment consulting, and risk assessment, etc., in support of domestic companies’ outbound investment; and

c. require enhanced guidance and supervision of investments in high-risk countries and regions.

(iv) establishment of a capital regime and improved auditing regime for outbound investment by State-owned enterprises.

Our Observations

I. Extended scope of outbound investments subject to approval

According to the Guidelines, the first three types of restricted outbound investments set out above are subject to NDRC and MOFCOM approvals. Previously, only investments involving “sensitive countries and regions” or “sensitive industries” required approval from NDRC and MOFCOM according to the applicable laws.1

The regulatory requirements for the following two types of outbound investments are changed from filings to approvals pursuant to the Guidelines:

(i) investment in real estate, hotels, cinemas, entertainment and sports clubs;

(ii) equity investment funds or investment platforms that do not invest in any real business.

At a press conference held on 6 December 2016, leading officials from NDRC, MOFCOM, PBOC and State Administration of Foreign Exchange (SAFE) had already stated their concerns about irrational outbound investments in real estate, hotels, cinemas, entertainment and sports clubs. However, the specific restriction on equity investment funds and investment platforms has been newly introduced by the Guidelines.

It is unclear whether a filing process (as opposed to an approval process) still applies to the last two types of restricted outbound investments relating to the local requirements of the destination country. The filing process at NDRC is in fact a simplified approval process with a shorter time limit and easier procedures. Similar to the approval process, NDRC also conducts a substantial review during the filing process and may reject a filing application pursuant to applicable laws and policies. By contrast, prior to late 2016, a MOFCOM filing was more of an examination of formality. However, based on the requirements of authenticity and compliance review, MOFCOM may also reject a filing application if it considers the information submitted is not genuine or the investment violates any applicable laws.

II. Potential contradiction between the filing system and possible qualification review

The Guidelines reconfirm the filing process as the principal approach applied to most outbound investments. However, they also provide that the government will support “capable and qualified” companies to engage in outbound investment in an orderly manner and on a proper basis. This may indicate that the regulators will enhance their review of an investor’s qualifications and financial condition. This is in line with NDRC and MOFCOM’s practice since late 2016 of requiring additional documents for the filing process, such as financial statements of the Chinese investor and a due diligence report for the outbound investment. It remains to be seen whether the regulators will set investor qualification standards which effectively turn the filing system into a substantial review and approval process.

III. The Guidelines consolidate regulatory practice but require further clarification

The Guidelines consolidate certain measures introduced by the regulators since late 2016 and introduce the negative list approach to the management of outbound investment. The Guidelines are, therefore, a welcome step to reducing the regulatory risk and uncertainty in Chinese outbound transactions. However, further clarification is still required. In particular:

(i) SAFE, as a key regulator of China’s foreign exchange control, is not a signatory to the Guidelines. Since late last year, SAFE has focused on authenticity and compliance reviews in foreign exchange registrations relating to outbound investment and outbound remittance of funds. As a result, in practice, most banks require evidence of NDRC and MOFCOM approvals/filings before any remittance of funds (either by way of capital contribution or shareholder loan to overseas subsidiaries) or entering into any guarantee agreements for overseas loans secured by domestic guarantees. It remains to be seen how SAFE will react to the Guidelines, perhaps through issuing separate regulations or adapting its practice to follow the Guidelines.

(ii) At the press conference held on 6 December 2016, concerns were also expressed about other areas, namely large outbound investments outside the Chinese investors’ main line of business; outbound investments by limited partnerships; outbound investments by newly established companies with no substantive business for the purpose of a quick investment; and outbound investments where the amount is much larger than the registered capital of the Chinese parent company. It is still unclear whether there will still be restrictions on these types of outbound investments, and if so, whether they will be treated in the same way as the restricted outbound investments under the Guidelines, or be subject to scrutiny during authenticity and compliance reviews.

Conclusions and Looking Forward

It is widely reported that the State Counsel is leading an initiative to draft new rules on outbound investments by Chinese enterprises (to replace the existing ministerial regulations respectively promulgated by the NDRC, the MOFCOM and the SAFE). The new rules are expected to be made public by the end of 2017. We believe that the Guidelines are a pre-cursor to these new rules because there remain many outstanding questions which need to be spelled out in detail.

Hopefully the Guidelines, together with the new rules, will constitute a more systematic and standardized regulatory regime governing Chinese outbound investment. As a result, it is expected that outbound investment by Chinese investors may recover gradually from the decline since late last year and market confidence will be restored. Nevertheless, in light of the high-level nature of the Guidelines, until the new rules are implemented, Chinese enterprises intending to carry out outbound investments are advised to ensure proper communication and advanced consultation with the relevant authorities due to the varying practice and interpretation being followed in different locations. Moreover, as the outbound regulatory landscape continues to develop, please keep a close eye on future developments.