Introduction
On 18 August 2017, the State Council released the "Guiding Opinions on Further Guiding and Regulating the Direction of Overseas Investment (Guo Ban Fa [2017] No. 74)" (the "Guiding Opinions"), with the joint approval of 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).
As with the foreign direct investments in China (FDI), the Guiding Opinions have categorized Chinese overseas direct investments (ODI) as "encouraged", "restricted" and "prohibited" based upon the previous "negative list" and catalog for overseas direct investment.
The new opinions are very important because they provide and codify a set of principles which will be the fundamental guideline in governmental regulation and supervision of Chinese ODI and thus, for foreign enterprises, investors and governments, they are a clear guide to the future trends and targets of the major Chinese companies.
Regulatory framework of the negative list and existing approval and filing system for overseas direct investment
On September 6, 2014, MOFCOM released the revised Measures for Foreign Investment Management (MOFCOM Order [2014] No. 3) (the "Measures"), in order to define the dominant position of the enterprises in foreign investments and promote the facilitation of overseas investments.
Taking effect on October 6, 2014, the Measures repealed the Administrative Measures for Overseas Investment that MOFCOM had promulgated in 2009, in accordance with a November 2013 decision to reform the regulatory approval process in order to promote greater outbound investment. In December 2013, the State Council promulgated the Catalog of Investment Projects Subject to Government Verification and Approval (the "Catalog").
The revised Measures specified the detailed requirements for those projects included in the Catalog, providing provisions aimed at simplifying the processing of applications, and delegate some powers to lower administrative bodies.
For example, the Measures canceled approval requirements of making certain amounts of overseas investment and making overseas investment for special purpose. The approval time for central state-owned enterprises is "within" 20 working days and that for local enterprises within 30 working days.
In accordance with the Catalog, the Measures changed the model of approval by the MOFCOM and provincial commercial departments into a model of "feature a filing system supplemented with approval", reduced the range of approval to the maximize extent and upscale the facilitation of overseas investment.
In addition, the Measures narrowed the time limit of approval of starting business and investment overseas. Enterprises that need to file for overseas investment can acquire filing within three workdays as long as they submit "real and complete materials in conformity with legal forms".
The Measures also repealed the regulation that obliges enterprises to seek advice from domestic relevant chambers of commerce and associations when exploring and developing mineral resources overseas so as to further simplify procedures.
Lastly, the Measures made commercial departments at the provincial level responsible for record management of starting business overseas and print and issue certificates by themselves, instead of by the Ministry of Commerce as in the past.
The Measures provided for the first time a "negative list system" for the administration of overseas direct investment, ruling that a Chinese overseas direct investment is negative listed and subject to approval where it involves "sensitive countries and regions" such as countries that have not established diplomatic relations with China or countries that are sanctioned by United Nations, and "sensitive industries" such as industries related to products and technology restricted from export by the PRC government or industries that impact the interests of a country or a region.
On December 27, 2014, through the "Approval Measures" (NDRC Order [2014] No. 9) the NDRC clarified the definition of sensitive industry and added to the Catalog and the Measures more industries such as basic telecoms operations, cross-border water resource exploration and utilization, large-scale real property development, transmission lines, power grids, news media.
The negative list
The negative list has been then completed in late November 2016 with the "Joint Statement" jointly issued by NDRC, MOFCOM, PBOC and SAFE, which, based upon the "filing-based approval plus negative list" system for overseas direct investment supervision, stipulated the following overseas direct investment projects are prohibited in principle:
Overseas direct investments of USD 10 billion or more
The purchase or development by State-owned enterprises of large-sized real estate located outside China with Chinese investment exceeding USD 1billion
M&A and investment transactions with investment amounts of USD 1billion or more while the target business is not among the domestic investor’s main business
Foreign direct investment by partnerships
Overseas direct investment to acquire or subscribe less than 10% shares of an offshore public-listed company
Overseas direct investment in an offshore entity whose assets value is substantially larger than the domestic investor
Domestic capital participating in privatization transactions related to the delisting of China based offshore public-listed company
Overseas direct investment by recently-established entities.
Guiding Opinions Features
The Guide Opinions complete the regulatory framework as described above, but at same time clearly outline the future ongoing legislation on Chinese ODI by setting principles which will be the fundamental guideline in governmental regulation and supervision.
These principles are:
Regarding the regulatory process, the Opinions continue to stipulate a filing system as the principal means of regulating overseas direct investment, and change to an "encouraged development plus negative list" standard to determine whether to require examination or filing for projects
The negative list has been refined by re-categorizing "investments subject to approval" and "investments subject to filing" under the Administrative Measures and Approval Measures
Enterprises undertaking encouraged investments will receive more preferential treatment with respect to tax, foreign exchange, insurance, customs and information
The regulatory departments will supervise enterprises that undertake restricted investments so as to encourage them to act in a prudent manner, and shall provide guidance and advice to them based upon actual circumstances
The regulatory departments will take effective measures to strictly control prohibited investments.
The threefold classification
The Guiding Opinions categorized Chinese overseas direct investments as "encouraged", "restricted" and "prohibited".
Compared to the Administrative Measures and the Approval Measures, the Guiding Opinions expand the scope of encouraged overseas direct investment projects, and specify that the government will support overseas direct investments in this category.
The scope of restricted overseas direct investments are expanded to include four new types of overseas direct investments which previously were generally restricted as overseas investments in “sensitive countries and regions” and “sensitive industries.”
The Guiding Opinions clearly stipulate that overseas direct investments in real estate, hotels, theaters, entertainment and sports clubs, and the establishment of overseas investment platforms are subject to prior examination and approval requirement.
Encouraged Investments
Overseas infrastructure investment that will facilitate the construction of the “Belt and Road” and connect surrounding infrastructure
Overseas investment that will facilitate the export of superior production capacity, high quality equipment and technical standards
Overseas direct investment that will help to strengthen cooperation with overseas high-tech enterprises and advanced manufacturing enterprises (such as the establishment of R&D centers)
Participation in offshore energy resource exploration and development, such as oil and gas, minerals, etc.
Mutually beneficial investment cooperation in the areas of farming, forestry, animal husbandry, fisheries, etc.
Overseas direct investment in services sectors such as business trade, culture and logistics
Qualified financial institutions to establish branches and service networks abroad.
Restricted Investments
Overseas development investments in sensitive countries and regions that have not established diplomatic relations with China, or are unstable due to conflict or subject to investment restrictions in accordance with multilateral treaties or agreements concluded by China
Overseas direct investments in real estate, hotels, theaters, entertainment industry, sports clubs
Establishment of equity investment funds or investment platforms offshore without engaging in any specific operations
Overseas direct development investments that utilize outdated production equipment that does not meet the national technical standards required in the country of the investment target
Overseas direct investments that do not meet the local standards of the investment target with respective to environment protection, energy consumption and safety.
Prohibited Investments
Overseas direct investment involving the export of core military technology and products without government approval
Overseas direct investment involving the use of technology, know-how or products that are prohibited for export by the PRC government
Overseas direct investment in the gambling or pornography industries
Overseas direct investments that are prohibited by international treaties concluded or acceded to by China
Other overseas direct investments that will or may endanger national interests or national security.
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