In the strong spirit of reform as enshrined in those key policy documents promulgated at the close of the Third Plenary Session of the Eighteenth Congress of the Communist Party of China’s Central Committee, the State Council promulgated on the 2th December 2013, the “Catalogue of Investment Projects Subject to Governmental Verifications (2013)(《政府核准的投资项目目录(2013年本)》)” (“2013 Catalogue”) (1), with a view to promoting the “reduction and decentralization, to the greatest extent possible, of verification powers to truly implement the investment decision-making power of enterprises”.

This is the first revision made to the predecessor of such catalogue released by the State Council in 2004, the pillar policy which established the very verification regime which has been in force since then. The 2013 Catalogue mostly covers investments which require governmental verifications (as opposed to a simple process of filing for records) -- broadly speaking, there are three types of them:

  1. projects subject to government verifications in 11 major sectors, including agricultural water conservancy, energy, transportation, information industry, raw materials, machinery manufacture, light industry, high and new technology, urban construction, other social undertakings and finance;
  2. foreign invested projects; and
  3. overseas investments by Chinese enterprises.

The significance of those changes is that for investments (projects) not listed in the “verification” category (or “核准” in Chinese, which in substance, is no different from “approval” in China’s context whereby the investors must obtain them before being able to execute a concerned investment), they only require (post transaction) filing for records.

This article discusses the significant changes likely to be introduced by the 2013 Catalogue to the current regulatory regimes, which we believe will have profound ramifications to the future trends of Chinese outward investments.

  1. Overview

Generally speaking, Chinese investors must seek verifications from three key regulatory bodies for their outbound investments(2), including:

  • the National Development and Reform Commission (NDRC),
  • the Ministry of Commerce of PRC (MOFCOM), and
  • the State Administration of Foreign Exchange (SAFE).

NDRC verification is considered to be the most important approval and essential to obtaining other approvals.

Factors such as investor identity, investment amount, invested industry and destination country dictate the applicable verification levels of those regulatory bodies.

The 2013 Catalogue excites the market, as it proposes to remove a substantial amount of investments from the verification jurisdictions of NDRC and MOFCOM, as further elaborated by the “old vs. new” comparisons below.

  1. The current NDRC regime

The outbound investment project verification regime administered by NDRC (which is essentially the legacy of the planned economy) has two broad aspects: the “preliminary review” regime and the (final) “project verification” regime.

Preliminary review regime

Under NDRC’s “preliminary review” regime, Chinese investors proposing to make an investment over USD 100 million through competitive biddings or acquisitions must submit a “project information report” to the regulator before undertaking “substantive work” on such investment. Substantive work is generally taken to include signing binding documentation, making binding offers and commencing foreign investment review processes in the relevant jurisdiction. NDRC will then issue a confirmation letter (commonly known as “road pass” on the market) if the proposed investment is approved in principle.

This preliminary approval regime is designed to manage project risk and avoid Chinese investors from competing against one another for the same assets, at the ultimate cost to the Chinese state. For these reasons, whilst not expressly stated by NDRC, the market’s perception is that NDRC will only issue one road pass at a time for any given deal.

Project verification regime

Whilst a “road pass” is contingent, all China outbound investments must first be approved by NDRC before the investor can be assured that they can go ahead with such investment.

“Special Project” must be verified by NDRC or by the State Council (following NDRC’s initial review), which generally include: investment in countries without diplomatic relationship, investment in countries under international sanction, investment in countries and regions that are embroiled in ongoing war or riots, and outbound investment on basic telecommunication operations, cross-border water resource development and utilization, large-scale land development, key power grid, news and media, and other sensitive industries.

Importantly, NDRC verification regime distinguishes resources projects(3) and non-resources projects: investments over USD 300 million on the former and over USD 100 million on the latter must be verified by NDRC. The rest of the investments shall then be approved by NDRC’s provincial counterparts.

As an exception, centrally-administered state-owned enterprises (“CASOEs”) are given the same verification power as NDRC’s provincial counterparts are. They are only required to make a filing to NDRC for investments which are less than USD300 million (resources projects) or less than USD100 million (non-resources projects). As such filing certificate is required for the MOFCOM verification and the SAFE registration purpose, our experience tells that it is not materially different from a verification process.

  1. The new NDRC regime under 2013 Catalogue

The focus of the 2013 Catalogue is to distinguish “special projects” from “general projects”:

For special projects (namely, those projects to be invested in “sensitive countries and regions” or “sensitive industries” – as further explained below), or projects over USD 1 billion, they must be verified by the “organ of the State Council charged with investment portfolio” (or “国务院投资主管部门” in Chinese, which is generally understood as the equivalent reference to NDRC at the central level); and

Save for those investments, all other investments by the CASOEs and provincial enterprises (SOEs or otherwise) at or over USD 300 million (up to USD 1 billion) are only subject to the after-the-event filing to the “organ of the State Council charged with investment portfolio” for records.

The 2013 Catalogue does not clearly define what “sensitive countries and regions” or “sensitive industries” are. These references were first used in “The Measures for Verification of Overseas Investment Projects” (Discussion Draft, issued by NDRC in August 2012 for public consultation, or “2012 Measures”). We consider they should still be valid for the purposes of the 2013 Catalogue, save that the 2012 Measures provides NDRC with extra powers to what could be considered as “sensitive countries and regions” or “sensitive industries”.

Interestingly, the 2013 Catalogue is silent on the verification jurisdiction of NDRC’s provincial counterparts, although it does have a reference to “provincial governments” which is not quite clear on which organ of the provincial governments it refers to.

It is clear from the 2013 Catalogue and subsequent comments by the government spokesperson, investments are not explicitly listed in the Catalogue shall be subject to the filing for records. This means that for all the investments currently subject to the verifications at the provincial levels, investors only need to file for records going forward.

  1. The current MOFCOM regime

MOFCOM regime essentially approves the establishment of offshore business vehicles, which may be undertaken as part of the outbound investment process (meaning, with specific projects or assets to invest) or as a stand-alone process.

MOFCOM verification generally follows NDRC verification, both as a matter of Chinese law (in terms of sequence) and of market practice (as a matter of empirical experience – we have never seen a case where MOFCOM approval wasn’t given notwithstanding NDRC approval was granted).

The current verification regime administered by MOFCOM consists by a “substantive process” and a “summary process”.

Very much in line with NDRC approval levels (save for the investor identity factor), the approval levels of MOFCOM regimes are dictated by factors from investment size, investment destination and asset (industry) type:

Projects verified by MOFCOM: investments in countries without diplomatic relationship with China, or in specific country or region or involving multi-national (multi-territorial) interests; establishment of offshore special purpose vehicles (for China round-trip investment purposes); investment over USD 100 million; and

Project verified by the provincial counterparts of MOFCOM: investment over USD 10 million but less than USD 100 million; energy and mining investment; investment requiring domestic financing.

Investments less than USD 10 million (without any of the above conditions) can go through the summary process, meaning Chinese investors are only required to submit an “Outbound Investment Application Form” online, which will be reviewed by the relevant MOFCOM provincial counterpart and the verifications shall be given within three days.

  1. The new MOFCOM regime under 2013 Catalogue

Under the 2013 Catalogue, to establish offshore enterprises (save for financial enterprises) requires MOFCOM verification if such offshore enterprises are to be established in “sensitive countries/regions”, or concern “sensitive industries”.

The 2013 Catalogue does not define both concepts either. But our view is that the same references used for NDRC regime shall apply.

The rest of offshore enterprises are subject to filing for records regime. In that respect, CASOEs shall file to MOFCOM, whilst local enterprises shall file to the “provincial governments”.


Appreciating NDRC and MOFCOM have yet to release any revisionary or implementation rules, questions remain as to the alignment and harmonization of the clear tensions existing between the current regimes and the proposed new regimes:

Special projects aside, does other investment over USD 1 billion only require filing to MOFCOM for record, rather than seeking verification beforehand (in the sense that the only verification is to be sought from NDRC)?

The 2013 Catalogue is silent on the “Project Preliminary Information Report” (the road pass) regime. Does this indicate that such regime has come to an end?

It is very unusual that the 2013 Catalogue does not mention in any form, the jurisdictions of the provincial counterparts of NDRC. Does this mean investments less than USD 300 million made by provincial enterprises will now be filed to the “provincial government” for records instead?

The 2013 Catalogue does not consider the verification or filing issues concerning offshore re-investments made by offshore entities already acquired by Chinese (mainland) investors -- does this mean that NDRC/MOFCOM regime contemplated under the catalogue shall automatically apply by reference, or require no such verifications or filing (noting that NDRC currently still requires the mainland parents of such entities to seek verification for their offshore investments)?

For projects requiring filing for records, when shall the filing confirmation be obtained? As we understood, filing for records is meant to be undertaken post completion of the investment. Such interpretation means that NDRC and MOFCOM filing confirmation documents are not necessary for the purposes of completing the SAFE foreign exchange registration formalities, which is obviously very different from the current transaction practice and would appear to run against the Chinese government’s strict control on capital outflows.

In any event, the 2003 Catalogue demonstrates clearly to the market that the Chinese regulators now only have interests in monitoring Chinese outward investments in those “special projects” or otherwise over US 1 billion.

Most Chinese investors have long felt in their cross-border M&A activities that their competitiveness in the global market has been considerably restrained by China’s opaque and difficult regulatory processes. Foreign counterparts, on the other hand, generally tend to show less interest in Chinese bidders (if everything is equal) citing, amongst others, the perceived uncertainties associated with such regulatory process. Or, as a result, they otherwise would insist “sellers’ protective measures” (such as reverse break fees) be included in the transaction documents, or a “China premium” be added on top of the standard evaluations. Thanks to the new regime, Chinese investors shall be able to compete in the global capital and M&A markets with much more freedom and flexibility, and their transaction costs are likely to be reduced as a result.