New restrictions on outflow of capital?

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China’s foreign exchange reserves experienced a rapid, short-term drop during the second half of 2016. Several causes are suspected to have contributed to the drop, including people selling renminbi to avoid depreciation from the falling renminbi exchange rate and Chinese enterprises increasing their overseas M&A activities. The central government is particularly concerned with the role played by irrational investment trends and other unusual conduct from Chinese enterprises going global.

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To date, no unified, formal regulatory documents have been issued to guard against cross-border capital flow risks and maintain stability in the foreign exchange market. Nonetheless, since November 2016 regulators such as the People’s Bank of China (PBOC), the State Administration of Foreign Exchange (SAFE), the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) have repeatedly and publicly expressed their requirement for steps to be taken to guard against overseas investment risks. In practice, regulators have quietly started experimenting with regulatory measures to control large outward remittances of foreign exchange.

Authorities reaffirm commitment to examine the authenticity and compliance of overseas investments. At a press conference on 28 November 2016, leading officials of the NDRC, MOFCOM, the PBOC and SAFE answered questions on current overseas investment trends and overseas investment policies. They noted that China would keep the current recordal system as the main method for administering overseas investment, and would simplify overseas investment on the one hand while guarding against overseas investment risk on the other.

At a press conference on 6 December 2016, leading officials from the same four authorities explained that China supports authentic and compliant overseas investment from capable and qualified Chinese enterprises. The officials also noted that the government is paying close attention to:

  • Irrational overseas investment trends emerging in areas such as real estate, hotels, cinemas, the entertainment industry, sports clubs, etc; and
  • Potential overseas investment risks posed by large overseas investments outside the investors’ main line of business, overseas investments by limited partnerships, overseas investments by small parent companies with large subsidiaries, overseas investments by enterprises established hastily or rushing to go global, etc.

MOFCOM strengthens authentication of overseas investments by requiring the submission of additional documentation during the filing and approval process. On 2 December 2016, MOFCOM’s Department of Outward Investment and Economic Co-operation published a notice on its website with the stated aim of improving the examination of the authenticity of direct overseas investments – other than
finance-related investments – by Chinese enterprises.

According to the notice, in addition to submitting documents as required under current regulations – namely an Overseas Investment Filing Form or an Overseas Investment Application Form and a photocopy of the investor’s business licence – a Chinese investor, when submitting an overseas investment filing or approval request, should also submit the following documents:

  • The articles of association (or the contract or agreement) relating to the enterprise to be established, or relevant to the M&A activities to be carried out with the overseas investment;
  • The Chinese investor’s relevant board resolution or capital contribution resolution;
  • The Chinese investor’s most recent audited financial statements;
  • A description of the preparations made for the investment, including the due diligence investigation, feasibility study, description of the source of the funds to be invested, an analytical evaluation of the investment environment, etc.; and
  • An undertaking as to the authenticity of the overseas investment.

If the overseas investment involves a merger or acquisition, the investor should additionally submit an online Report Form on Preparations for an Overseas Merger or Acquisition.

NDRC strengthens authentication of overseas investments by revising the format of the overseas investment information report. On 5 December 2016, the general office of the NDRC published on its website a notice titled Notice of the General Office of the National Development and Reform Commission on Revision of the Submission Format of the Information Report on Overseas Acquisition or Bidding Projects. The notice revised the reporting requirements for overseas acquisitions and bidding projects.

First, the investor must submit the following additional investor information: main line of business, date and place of incorporation, return on equity ratio, etc.; and second, while continuing to submit the memoranda of intent and internal approval documents, the investor should also submit its business licence, its audited financial statements and the investment project’s due diligence report.

PBOC issues new rules. To deal with the large outflow of renminbi, the PBOC issued the Notice on Further Clarification of Issues Concerning Overseas Renminbi Lending by Enterprises in China, dated 29 November 2016. The notice addresses the policies and processes of overseas renminbi lending by domestic enterprises.

Also, by order [2016] No. 3 dated 28 December 2016, the PBOC issued a revised version of the Measures for Administration of the Reporting by Financial Institutions of Large Transactions and Suspicious Transactions, to be implemented from 1 July 2017. The measures:

  1. Establish “reasonable suspicion” as the standard for when the handling banks are required to report suspicious transactions; and
  2. Lower the large transaction reporting threshold for renminbi cash transactions from RMB200,000 to RMB50,000, or the foreign currency equivalent of US$10,000, and establish the reporting threshold for cross-border transactions denominated in renminbi as RMB200,000 or the foreign currency equivalent of US$10,000.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at: [email protected]