On 10 April 2014, the National Development and Reform Commission (the “NDRC”) of the People’s Republic of China (the “PRC”) officially promulgated the Measures for the Administration of Approval and Filing of Outbound Investment Projects (the “New Measures”), which will come into effect on 8 May 2014. The New Measures will replace the Tentative Measures for the Administration of Examination and Approval of Outbound Investment Projects issued in 2004 (the “Old Measures”).
Consistent with the principles laid out by the PRC State Council in late 2013 in the List of Investment Projects Subject to Governmental Approval (2013 version), the New Measures streamline and simplify the regulatory and approval process for Chinese outbound investments, and delegate significant regulatory power to the provincial level NDRC. That reflects the intention of the State to encourage and facilitate investments made by Chinese entities in foreign jurisdictions. The implications of the New Measures, however, go beyond deregulation in China’s continuing “going global” efforts.
Applicability of the New Measures and definition of “outbound investment”
Same as the Old Measures, the New Measures apply to outbound investment projects (including by way of establishment, merger or acquisition, equity participation, capital increase and reinvestment) carried out by all types of legal persons within the territory of the PRC (the "investors").
Outbound investments made by natural persons or other non-legal person entities (such as partnerships) in the PRC will be governed by separate measures to be drawn up by referencing to the New Measures.
Approval or filing requirements for an outbound investment through an offshore entity controlled by a PRC legal person have now been eliminated, unless the investment involves the PRC parent providing financing or guarantee to the offshore entity. This should be a welcome change for Chinese investors intending to make outbound investments through offshore structures, as long as the Chinese parent entities do not provide financing or guarantee to the offshore structure. However, most outbound investments adopting offshore structures in practice still involve financing or guarantee provided by the Chinese parent entities and, therefore, still require approval by or filing with central or provincial level NDRC.
Approval and filing requirements
- Approval and filing thresholds. Under the Old Measures, the approval of the NDRC at various levels was mandatory for all outbound investments. The New Measures replace these approval requirements with a filing process, except where (i) the investment amount exceeds USD1 billion or (ii) the project is in a sensitive country, region or sector. In both cases, the NDRC approval remains mandatory. Where the investment amount exceeds USD2 billion and the project is in a sensitive country, region or sector, the NDRC must submit its opinion to the State Council for final approval. In cases where the NDRC approval is not required, the application can now be filed with the NDRC at central or provincial level, depending on the nature of the Chinese investor (a central state-owned enterprise (“SOE”)1 or any other type of entity) and the total investment amount of the project. The Old Measures had separate approval requirements for natural resources-based outbound investments (central NDRC approval is required if the investment amount is USD300 million or more) or non-natural resources-based investments (central NDRC approval is required if the investment amount is USD100 million or more). Such distinction no longer exists under the New Measures.
- Investment amount. The investment amount means the total amount of the Chinese investments made in an outbound investment project. The forms of investment include cash, negotiable instrument, tangible asset, intellectual property, technology, equity interest, debt or guarantee. The New Measures make it clear that the amount of outbound lending or guarantee will be counted towards the total investment amount in an outbound investment project.
- Sensitivity. “Sensitive countries or regions” is defined to include countries which have no diplomatic ties with the PRC or are subject to international sanctions, together with other countries or regions in war or turmoil or otherwise deemed sensitive by the NDRC. The definition of “sensitive sectors” covers the operation of telecommunication infrastructure business, the development and use of cross-border water resources, large-scale land development, power transmission grids and networks and mass media, as well as other sectors deemed sensitive by the NDRC. As both definitions are non-exhaustive, the NDRC therefore retains certain discretion in its interpretation of the meaning of “sensitivity”.
The table below illustrates the approval and filing requirements of the NDRC:
Click here to view table.
Information notification requirement. If an outbound investment project with the investment amount of USD300 million or more is carried out through a bidding or acquisition process, the investor is required to submit an information notification to the NDRC and obtain a confirmation from the NDRC before proceeding to execute any binding agreement, making any binding offer or submitting any formal bidding documents. After receiving the information notification from the investor, the NDRC is required to issue a confirmation letter within 7 working days if it considers such project to be consistent with the national policies for overseas investments.
Process for approval and filing
- Procedures for submitting applications. Central SOEs shall submit applications to the NDRC. Entities other than central SOEs shall submit applications to the provincial NDRC, which will be passed to the NDRC if filing with or approval by the NDRC or the State Council is required. The procedures have been greatly streamlined and simplified as compared to those under the Old Measures.
- Factors to be considered. Both the filing and approval applications will be assessed substantively. Factors to be considered for granting an approval include whether the outbound investment project in question complies with national laws and regulations, sector policies, outbound investment policies, national regulations on capital investments, national security and public interest concerns and international treaty obligations, and whether the investor is capable of making the investment. Factors to be considered for granting a filing are substantially the same. Therefore, the NDRC may still, at its discretion, refuse to grant an approval or filing confirmation.
Timeframe for making the decision. If an approval is required, the NDRC is generally required to make a decision within 20 to 30 working days (excluding the time period for seeking assessment opinions from external experts) from the date on which the application for approval is accepted. If only a filing is required, the time limit for the NDRC (or its provincial counterparts) to make the decision is 7 working days after the application for filing is accepted. Given that a considerable portion of outbound investment projects will only require a filing with the NDRC, the introduction of a shortened time frame for filing should be able to speed up the overall timetable for many outbound investment projects.
Direct effects of the NDRC approvals and filing confirmations
Without the NDRC approval or NDRC (central or provincial level) filing confirmation for an outbound investment project, the PRC foreign exchange, customs, immigration and tax authorities will not give clearance to the investor. Further, banks are not allowed to lend to the investor in connection with such project.
An investor is required to have obtained the NDRC approval or NDRC (central or provincial level) filing confirmation before entering into any legally binding document in relation to an outbound investment project. Alternatively, under the New Measures, the investor can specify in an executed document that the effectiveness of the document is conditional upon the obtaining of the approval or filing confirmation to be issued by the NDRC (central or provincial level). As mentioned above, for an outbound investment project carried out through a bidding or acquisition process with the investment amount of USD300 million or more, the investor is also required to have obtained the NDRC confirmation letter for information notification before entering into any legally binding agreement, making any binding offer or submitting any formal bidding documents.
The approvals and filing confirmations will be valid for two years in the case of construction projects or one year in the case of all the other projects from the date of issuance.
Implications of the New Measures
Chinese outbound investments are expected to be made easier under the New Measures. The new law has streamlined and simplified the regulatory and approval process for Chinese outbound investments. It also significantly increases the threshold required for central NDRC approval (from USD100 million (non-natural resources-based investments) and USD300 million (natural resources-based investments) to USD1 billion) and, therefore, delegates significant regulatory power to the provincial level NDRC. That is a welcoming deregulation in China’s continuing “going global” efforts. In light of these positive regulatory changes, it will be easier and faster for a Chinese investor to clear the Chinese regulatory approval process required for an outbound investment. Sophisticated overseas sellers may now be less inclined to see the prerequisite Chinese regulatory approvals as “walk rights” for Chinese investors/buyers. The result is that Chinese investors/buyers may be able to reduce the “China premium” which overseas sellers typically demand, especially in disposals conducted through auction sales, and to improve the economic returns on their outbound investments.
The New Measures may have a positive impact on China’s overall economy which is in a challenging transition to sustainability, competitiveness, better efficiency and higher productivity. Amid reduced economic returns in certain key sectors (for example, real estate) and significant overcapacity in certain industries (for example, steel manufacturing, construction and renewable energy), excess capital is encouraged under the New Measures to be invested outside China. The increased capital outflow as a result of increased outbound activities may help mitigate the lower return and overcapacity issues in China’s domestic economy.
The resulting increase of capital outflow from China will also help reduce its excessive foreign-exchange reserves (the largest component of which are US dollar assets) and further diversify the asset classes of the State. Despite the recent volatility in its exchange rates, the renminbi is expected to stay strong. A strong currency will facilitate Chinese outbound investments, adding to the positive effects brought by the New Measures.