24 April 2015

Deregulation in Chinese Outbound Direct Investment: 2014 and beyond

Towards the end of 2013, the State Council of China (“State Council”) issued 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”), which substantially reduced the verification[1]  powers of the two key regulatory bodies for Chinese outbound direct investments (“ODIs”), being the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”).

Closely following the policy spirit of the 2013 Catalogue, NDRC and MOFCOM revised their outbound regulations in tandem in mid and later 2014. In addition, the State Administration of Foreign Exchange (“SAFE”) and the China Securities Regulatory Commission (“CSRC”) have also revised relevant regulations with a view to further relaxing their control over ODIs. 

On 19 November 2014, the State Council issued the “Catalogue of Investment Projects Subject to Governmental Verifications (2014)(《政府核准的投资项目目录》(2014年本))” (“2014 Catalogue”), which further reduced the verification powers of NDRC on ODIs.

State Council/NDRC: Project Verification and Record-Filing

The “Administrative Measures for the Verification and Record-filing on ODI Projects” taking effect from 8 May 2014 (“No.9 Regulation”) established the new regime that makes record-filing (registration)  the primary administrative measure for Chinese ODI projects -- as opposed to verification, record-filing is meant to be a much simplified process without substantive review by the regulator. 

On 27 December 2014, NDRC further amended No.9 Regulation so that only ODIs involving (i) sensitive countries (regions) or industries; or (ii) exceeding US$2 billion will need State Council (through NDRC) verification.

The responsibilities of NDRC and its provincial counterparts (provincial development and reform commissions, or “DRCs”) under the amended No.9 Regulation are set out in the table below.

Regulator Authority Scope of application Time limit 
State Council/NDRC Verification  Investment amount exceeding US$2 billion; or
ODIs in sensitive countries (regions) or industries
Within 20 working days after acceptance of application
Record-filing Investment amount between US$300 million and US$2 billion; or 
Investments by centrally-administered state-owned enterprises (“CASOEs”)
Within seven working days after acceptance of application
Provincial-level DRCs
Record-filing Investment < US$300 million
To be decided by the Provincial-level DRCs referring to No.9 Regulation

Under No.9 Regulation, ODIs made by the overseas subsidiaries of Chinese domestic companies are only subject to verification or record-filing (as the case maybe) if such ODIs involve the provision of credit support (such as parent company guarantee) by such Chinese domestic companies.

Nevertheless, the controversial “road pass” regime still remains under the amended No.9 Regulation: if a Chinese investor is to participate in an overseas bidding or undertake an overseas acquisition and the investment by such Chinese investor is greater than US$300 million, then it must submit an information report (in prescribed form) to NDRC (if applicable, through the relevant DRCs) and obtain the project confirmation letter issued by NDRC before it can commence any substantive work (which is generally taken to include signing binding documentation, making binding offers and commencing foreign investment review processes in the relevant jurisdictions).

MOFCOM: Overseas Entities Establishment Verification and Record-Filing

The amended MOFCOM regulation, the “Administrative Measures for Outbound Investments”, took effect from 6 October 2014. The new regulation also makes record-filing a primary regulatory process for (most) ODIs. 

In addition, for the first time, MOFCOM has adopted the “negative list” approach for the administration of ODIs, which means that only certain types of ODIs which fall into the “negative list” are subject to the scrutiny (or substantive review) by MOFCOM and its provincial counterparts (ie, verification), while other ODIs, regardless of their size and nature of the assets, are not subject to the scrutiny by MOFCOM. The responsibilities of MOFCOM and its provincial counterparts under the new regime are set out in the table below.

Regulator Authority Scope of application Time limit
MOFCOM Verification ODIs in sensitive countries (regions) or industries
Within 20 working days after acceptance of application
Record-filing ODIs by CASOEs
Within three working days after acceptance of application
Provincial-level commerce commissions
Record-filing Investment by SOEs other than CASOEs and private invested enterprises
To be decided by the Provincial-level commerce commissions referring to the MOFCOM regulation

Only four types of ODIs are on the MOFCOM negative list, being those:

  • jeopardise national sovereignty or security, or the public interest, or violate the laws;
  • harm the relationship between China and the relevant country (region);
  • violate an international treaty or convention to which China has acceded, or is a party; or
  • involve the export of products or technologies which are prohibited.

The revised MOFCOM regulation does not require that Chinese investors complete verification or record-filing process with NDRC (or its provincial counterparts) before applying for verification or record-filing with MOFCOM (or its provincial counterparts). It appears that Chinese investors can now undertake the NDRC and MOFCOM application procedures in parallel, which can substantially reduce the time otherwise required for completing the two processes in tandem.

SAFE: Reform on ODI foreign exchange registration verification

Until recently, the local counterparts of SAFE are responsible for verification of foreign exchange registration for ODIs, a process which must be completed before funds in foreign currency can be remitted to the foreign recipients. It could take up to 20 business days before the registration can be completed.

On 28 February 2015, SAFE issued a notice to delegate the verification authority to qualified commercial banks. The notice will take effect on and from 1 June 2015. It is anticipated that such delegation would substantially reduce the time required before funds can be paid out of China in future ODIs. We also anticipate that the banks are likely to take a more cautious approach at early stage of this new process though.

SAFE: Reform on Cross-Border Guarantee Regime

In 2014, SAFE has substantially amended its regulation “Provisions on the Administration of Foreign Exchange for Cross-Border Security” which govern the administration of cross-border securities. Pursuant to the amended regulations, which took effect from 1 June 2014, only cross-border securities provided in the form of securities provided by domestic guarantors for foreign creditors (“Neibaowaidai”) or securities provided by foreign guarantors for domestic creditors (“Waibaoneidai”) are required to be registered with SAFE. Cross-border securities provided in other forms are not required to be registered. In both cases, failure to register will not affect the legal validity of such contracts. The new regulation has also removed the requirements on the equity nexus between the guarantor and the debtor for most types of cross-border securities (with only a few special types of securities, such as securities provided for the purpose of overseas bond issuing, still subject to such requirement).   The requirement for the debtor to meet a certain   equity/debt ratio has also been removed. 

CSRC: ODIs by Chinese Listed Companies

To boost mergers & acquisitions and restructuring activities, in March 2014, the State Council issued opinions announcing new policies to be implemented to “eliminate prior reviews of listed company acquisition reports and enhance post-transaction accountability; eliminate the approvals required for material asset purchases, sales and swaps by or in respect of listed companies (with the exception of backdoor listing); and eliminate certain approval requirements for acquiring listed companies through takeover bids”. 

On 23 October 2014, the CSRCpublished the amended “Measures for the Administration of Material Asset Reorganization of Listed Companies” and “Measures for the Administration on Acquisition of Listed Companies”. These two amended measures abolished the need for prior reviews to ensure compliance with  the State Council’s requirements. 

It is worth noting that, pursuant to PRC Securities Law, the amended measures did not repeal the approval for acquisitions of listed companies affected with offerings of new shares. Accordingly, more substantive reforms involving listed company mergers and restructurings still require further amendments to the relevant and  prescriptive laws (including the Securities Law) before they can be realized.  Listed companies have actively participated in Chinese ODI transactions recently, and the on-going reform will certainly give a further push to this trend.


It is encouraging to see Chinese government continue to reform and deregulate its ODI regulatory regimes. 

Notwithstanding, certain obstacles still remain under the new regimes, including: unnecessary involvement of multiple regulators; time-consuming and unpredictable process; preference to keep the market-distorting “road pass” regime; and complex and lengthy approval requirements imposed on ODIs conducted by listed companies and SOEs. It is therefore imperative for the Chinese government to continue further deregulation reform.

Even under the more relaxed new ODI regulatory regimes, on our experience, some regulators still get used to the old “approval mentality” by carrying out substantive review on ODI projects notwithstanding only record-filing is required. It seems that a “transitional period” is still required before the regulators get comfortable with those new regimes.  Till then, Chinese ODI investors must factor those challenges into their overseas transactions.

[1] Verification is in substance no different from “approval” in China’s regulatory context whereby the concerned Chinese regulators have discretions on if certain investment can go ahead.

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