In response to the rapid decline in China’s foreign exchange reserves in 2016, the People’s Bank of China (“PBOC”), along with the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) imposed tightened restrictions on outbound investments and capital outflow beginning in November 2016. Those government departments jointly issued an announcement indicating that the Chinese governments would strictly restrict certain types of outbound investments, but no regulations were publicly available.

On August 18, 2017, the State Council formally promulgated the Guidelines on Further Guiding and Normalizing the Directions of Outbound Investments (关于进一步引导和规范境外投资方向指导意见的通知; the “Guidelines”) formulated by the NDRC, the MOFCOM, the PBOC and the Ministry of Foreign Affairs. The State Council’s website also published the text of a media interview with a senior official at NDRC (the “Q&A”) as an interpretation of the Guidelines.

In summary, the Guidelines not only codify the previous restrictions on certain types of outbound investments, they also make explicit China’s continued encouragement of Chinese enterprises’ “Going Global” activities that are in line with China’s state development strategies.

Under current rules,[1] an outbound investment is subject to record-filing (备案) with the NDRC and MOFCOM (or their respective provincial counterparts), so long as such investments do not fall into any sensitive countries (regions) or sensitive industrial sectors that are subject to the examination and approval (核准) of the NDRC and MOFCOM. The Guidelines reaffirm the current “approval and filing regime” under the Current Outbound Investment Measures, and they further divide outbound investments into the “encouraged,” “restricted” and “prohibited” categories.

  • Encouraged: Outbound investments that (a) facilitate implementation of China’s “One Belt, One Road” initiative; (b) enhance China’s technical standards; (c) set up research and development centers with overseas high-tech enterprises; (d) undertake oil and gas and mining exploration and exploitation; or (e) benefit China’s agriculture, forestry, animal husbandry, side-line production and fishing sectors.
  • Restricted: Outbound investments (a) in any sensitive country and region; (b) in the real estate, hotels, cinemas, entertainment and sports clubs sectors; (c) that establish equity investment funds without specific industrial projects thereunder; (d) with obsolete manufacturing equipment; or (e) in violation of the host country’s environment, energy efficiency and security standards.
  • Prohibited: Outbound investments in relation to (a) China’s military core technology and products; (b) export-banned technologies, crafts, products; (c) gambling and pornography sectors; or (d) projects endangering national security or national interest.

The Guidelines indicate that the relevant government authorities may adopt facilitating measures to support encouraged outbound investments from tax, foreign exchange, insurance and customs perspectives, while restricted sector projects will be subject to strict scrutiny and “guidance” by relevant government departments.

To control recent “irrational” investments in sectors identified in items (b) and (c) under the restricted category, those outbound investments will no longer be subject to “record-filing” under the current regime, but rather “examination and approval” – that is, pre-approval – by the relevant government departments. Based on our understanding of the Guidelines and the Q&A, unlike the announcement issued last November, the Guidelines do not appear to be temporary and may remain in force for an extended period of time.

While the Guidelines issued by the State Council in effect have amended the Current Outbound Investment Regulations issued by the NDRC and MOFCOM, they only lay down certain high‑level principles and rules. Based on the Q&A, in order to better implement the Guidelines, the NDRC is working on revising the existing outbound investment measures it issued and concurrently pushing forward the legislation of “Outbound Investment Regulations” (境外投资条例). We expect that the other government departments, including MOFCOM, will also amend and/or issue their own rules in the coming months in order to furnish more detailed guidance on outbound investments under the Guidelines.