Chinese FDI: new developments in regulation and approval

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In line with the State Council’s requirements for further simplifying policies and delegating authority, the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE) have been busy issuing regulations in 2014 that further simplify the oversight of Chinese (non-financial) foreign direct investment (FDI).

熊进 Xiong Jin
熊进 Xiong Jin

The Administrative Measures for the Approval and Recordal of Offshore Investment Projects, implemented from 8 May 2014, establish the new administrative mechanism that makes recordal primary and approval secondary. Under the new mechanism, the development and reform commissions’ approval and recordal authority is as set out in the first table.

With respect to an offshore investment project carried out by a Chinese enterprise through its offshore enterprise or establishment (i.e. a reinvestment project), only when the cross-border provision of credit support – such as the provision of financing or security by a domestic company – is involved is it necessary to carry out approval or recordal procedures.

机关

Regulator

权限

Authority

适用范围

Scope of application

时限

Time limit

国家发改委

NDRC

核准

Approval

中方投资额 10亿美元;或

涉及敏感国家和地区或敏感行业

Investment of Chinese party US$1 billion; or

sensitive country or region, or sensitive industry involved

受理后20个

工作日

Within 20 working days after acceptance

备案

Recordal

中方投资额 3 – 10亿美元;或

中央企业投资项目

Investment of Chinese party from US$300 million to US$1 billion; or

Investment project of an enterprise under the central government

受理后7个

工作日

Within seven working days after acceptance

省级发改委

Provincial-level development and reform commission

备案

Recordal

中方投资额 < 3亿美元

Investment of Chinese party < US$300 million

参照国家

发改委

Same as for the NDRC

However, the new mechanism still retains the following system that has consistently been the subject of criticism: with respect to an offshore bid or acquisition project in which the investment by the Chinese party is greater than US$300 million, before the commencement of substantive work, the Chinese enterprise is still required to submit a project information report to the NDRC in order to secure a project confirmation letter.

The MOFCOM-amended Administrative Measures for Offshore Investment, implemented from 6 October 2014, likewise adopt the administrative mechanism that makes recordal primary and approval secondary, and implement the negative list administration model for the first time, while no longer taking into consideration the amount involved in an offshore investment. Under the new regulations, the commerce authorities’ approval and recordal authority is set out in the second table.

机关

Regulator

权限

Authority

适用范围

Scope of application

时限

Time limit

商务部

MOFCOM

核准

Approval

涉及敏感国家和地区或敏感行业(无论中方投资额多大)

Sensitive country or region, or sensitive industry involved (regardless of the amount of the Chinese party’s investment)

受理后5个工作日

Within five working days after acceptance

备案

Recordal

中央企业投资项目

Investment project of an enterprise under the central government

受理后3个工作日

Within three working days after acceptance

省级商务委

Provincial-level commerce commission

备案

Recordal

地方企业投资项目

Investment project of a local enterprise

受理后3个工作日

Within three working days after acceptance

The new regulations place restrictions only on four types of investment, those that “jeopardise national sovereignty or security, or the public good, or violate the laws or regulations of China; harm the relationship between China and the relevant country (region); violate an international treaty or agreement to which China has acceded, or is a party; or involve the export of products or technologies, the export of which is prohibited by China” –i.e. they implement administration thereof by way of the Negative List.

The new regulations also no longer require the prior completion of approval/recordal procedures with the reform and development authority before applying for approval or recordal to the commerce authority; this signifies that it should be possible to carry out the two procedures in parallel, speeding up the approval procedure for offshore investments.

The SAFE, as one horse of the troika responsible for oversight of offshore investment from China, has also implemented, this year, a significant reform in respect of the system for the cross-border provision of security. Pursuant to the Provisions for Exchange Control in Connection with the Cross-Border Provision of Security, implemented from 1 June 2014, cross-border security provided in a form other than “domestic security for a foreign loan” or “foreign security for a domestic loan”, which require recordal/registration with the SAFE after the execution of the security contract – such registration or failure to register not affecting the legal validity of the cross-border security – does not require approval or registration. The new regulations also abolish the restriction under the old regulation on a connected relationship by way of equity existing between the security provider and the secured party – except in such special cases as an offshore offering of debt – as well as the requirement in respect of the asset-to-liability ratio of the secured party. Other than the foregoing, the SAFE has not made further reforms to other regulations relating to offshore investment.

With a view to making the market environment more favourable for enterprise mergers and restructurings, the State Council issued opinions in March 2014 requiring the “abolition of prior reviews of listed company acquisition reports and the strengthening of after-the-matter accountability. Abolition of the approval of the material asset purchases, sales and exchanges of listed companies (unless a backdoor listing is constituted). Abolition of the approval of certain circumstances for exemptions from the obligation of making a takeover offer for a listed company.”

With a view to implementing the requirements of the State Council, the China Securities Regulatory Commission published the Administrative Measures for Material Asset Restructurings of Listed Companies (Draft for Comment) and the Decision on Amending the Administrative Measures for Listed Company Takeovers (Draft for Comment) in July 2014. Pursuant to the Securities Law, the drafts for comment have retained approval for the acquisitions of listed companies affected with offerings of new shares. Accordingly, more substantive reforms involving listed company mergers and restructurings still require the amendment of other complementary regulations (including the Securities Law) before they can be realised. In recent times, offshore investment transactions by listed companies in China have been extremely active, and the above-mentioned reforms will certainly give a further push to this trend.

The general trend in the reform of the regulatory mechanism in China for offshore investment has been to continuously simplify policy and delegate authority, and the relevant reforms will undoubtedly be a major spur to overseas investment from China. However, certain obstacles still remain under the approval/recordal mechanism, including: the large number of approval authorities; the relatively large amount of time still required for approval; project approvals by the reform and development authorities maintaining amount limits and the possibility of denial of approval still existing; and there still remain significant restrictions on offshore investment by listed companies and state-owned enterprises. Accordingly, there is still room for further reform.

Notwithstanding the fact that the implementation of the new regulations has begun, it would seem from our recent practice experience that the regulatory authorities are continuing “out of habit” to follow the original practice of carrying out substantive reviews of projects. It would appear that the new mechanism will still require a certain “breaking in” period. Accordingly, Chinese enterprises still need to fully take into account relevant factors in their offshore transaction arrangements.

Xiong Jin is a partner at King & Wood Mallesons in Beijing. His contact tel: +86 10 5878 5158; Email: xiongjin@cn.kwm.com