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Outbound Investments By Chinese Investors Asking Permission for Going Global

Further information If you would like further information on any aspect of outbound investments by Chinese investors please contact a person mentioned below or the person with whom you usually deal. Contact Thomas Man T + 8610 6582 9566 E [email protected] Robert Lewis T + 8610 6582 9500 E [email protected] Andrew McGinty T +8621 6138 1625 E [email protected] Sebastien Jette T +8621 6138 1610 E [email protected] Ke Chen T + 8610 6582 9599 E [email protected]

June 2009

This note is written as a general guide only. It should not be relied upon as a substitute for specific legal advice.





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Outbound Investments By Chinese Investors Asking Permission for Going Global

INTRODUCTION Despite having privileged access to a domestic market with a growing middle class roughly the size of the population of Europe, Chinese investors are increasingly looking to expand into markets outside of the People's Republic of China (the "PRC" or "China"). There is no single reason why Chinese investors are seeking to invest overseas: securing natural resources to feed China's hungry economy remains a major theme, but acquiring brands and distribution networks, technologies or technical know-how, or mastering modern management principles now all form part of the mix. In the past, due to the Chinese government's concerns about keeping foreign currency in China and preventing the unsupervised transfer of state-owned assets overseas, outbound investments by Chinese investors were tightly controlled. As with many things Chinese, the legal regime applicable to outbound investments has been gradually liberalised since the introduction of the "open door" policies in 1978; this process has followed three main phases, poetically described as "Testing the Waters" (1979-1991), "Finding the Stepping Stones" (1991-2002) and "A Bridge is Built" (2002 to present). The single most dramatic change occurred with China's accession to the World Trade Organisation ("WTO") in 2001 and the ensuing announcement of the "Going Global" () policy directed at encouraging Chinese companies to invest overseas. The rationale of the Going Global policy was primarily easing the strain on currency appreciation and containing inflationary pressures resulting from China's trade surplus and the rapid growth of its foreign exchange reserves. China has taken various measures to implement the Going Global policy: it introduced the "qualified domestic institutional investor" (QDII) scheme in 2006 and established a sovereign investment fund, the China Investment Corporation (CIC), the following year; it also substantially relaxed its rules on overseas investments, making outbound investments available to a wider range of Chinese investors. These last measures had appreciable effects. According to the China Outbound Investment Statistics Report (the "OFDI Report"), jointly issued in 2007 by the PRC Ministry of Commerce ("MOFCOM") and the PRC National Bureau of Statistics, outbound foreign direct investments ("OFDI") originating from China reached 26.51 billion United States Dollars ("USD") in 2007, representing a 25.3% increase from the previous year and bringing the mainland's total overseas investment to USD117.91 billion. The OFDI Report also stated that approximately 7,000 mainland

enterprises had established 10,000 companies in 173 countries or regions. Most investments were made in the commercial services (21.2%), transportation and warehousing (15.4%), mining industry (15.3%), manufacturing industries (8%), and financial sectors (6.3%), with real estate constituting a smaller proportion (3.4%). In terms of geographical distribution, approximately sixtynine percent (69%) of the investments were made in Hong Kong, the Cayman Islands and the British Virgin Islands, with Hong Kong accounting for the largest percentage of fifty-two percent (52%). Obviously, these jurisdictions were, in many cases, not the final investment destinations. The OFDI Report also showed that, whilst state-owned enterprises ("SOEs") have traditionally constituted the majority of Chinese enterprises investing overseas, their proportion dropped last year to 19.7%, thus marking a surge in overseas investments by the private sector. It is highly likely that the real numbers are significantly higher, as many private investors will not have gone through the official approval channels and will have deployed the wellworn "shelf company" route, without appearing in government statistics. The current economic crisis has generated opportunities for Chinese investors to participate in the international merger and acquisition market. Recent statistics indicate that the energy, mining and utilities sectors are still the dominant target for Chinese companies investing abroad, in terms of both transaction value (98.8%) and volume (54.5%). As a result, the mineral rich continent of Australasia remains the most popular destination for Chinese outbound mergers and acquisitions comprising 97% of transaction value and 54.5% of volume.





As the present outbound investment regulatory scheme is still in the process of perfection and development, Chinese investors face many challenges in obtaining administrative approvals for outbound investments. In a typical case, a Chinese investor must seek and obtain the registration/verification and approval of three government bodies (or their respective local branches), namely: (i) the State Administration of Foreign Exchange ("SAFE"), responsible for the administration of foreign exchange sourcing, conversion and remittance; the National Development and Reform Commission ("NDRC"), the former central planning authority now responsible for designing, regulating and coordinating China's economic development and industrial policy; and

If all goes smoothly, the whole process can take several months, but even this may be optimistic for a private Chinese company without an extensive network of government connections. Of course, the process will be substantially smoother for domestic companies seen as potential globally competitive "national champions" and SOEs with strong government backgrounds. Other government authorities may also be involved in the approval process, depending on the nature of the industry concerned, and jurisdictional overlaps are frequent between different authorities. For example, financial institutions such as banks, securities companies and insurance companies are subject to separate sets of rules, and are under the supervision of different regulatory authorities. We discuss below in detail the requirements and practical or legal issues in relation to each step of this typical approval process. For reasons of brevity, specific rules applicable to specific industries such as financial institutions will not be discussed in this note.


(iii) MOFCOM. First, Chinese investors must apply to the local branch of SAFE and obtain an "Examination Opinion" (a sort of preapproval) to verify that they actually own the foreign exchange funds which they propose to invest abroad or to convert funds in RMB into foreign exchange. Above certain monetary thresholds based on size of the investment, which may vary from place to place in China, the approval of central SAFE in Beijing is also required. Secondly, Chinese investors must obtain verification and approval from the local branch of NDRC and, for projects in resources development or using large amounts of foreign exchange, the further verification and approval of central NDRC in Beijing. Where the investment exceeds certain thresholds, approval from the State Council is also required. Thirdly, they must obtain approval from provincial-level MOFCOM and, for investments in certain countries or industries, from central MOFCOM in Beijing. Where a proposed outbound investment involves stateowned assets, Chinese investors must also obtain the verification and approval of the State-owned Assets Supervision and Administration Commission ("SASAC"), the government body charged with protecting and increasing the value of state-owned assets. Finally, once these approvals have been obtained, Chinese investors must go back to register with SAFE to remit the foreign exchange funds outside of China.







The first step before investing overseas is to register with SAFE to obtain an "Examination Opinion on the Sources of Foreign Exchange" () to ensure that the domestic funds proposed to be invested overseas are actually owned by the Chinese investor. SAFE may also approve the conversion of funds in RMB into foreign exchange. SAFE recently launched a new electronic platform for all outbound investment matters. Starting from 1 January 2009, all foreign exchange procedures including approvals, verifications, registrations and record filings relating to outbound investment projects must be processed through this platform and investors will obtain an Integrated Circuit Card Foreign Exchange Registration Certificate ("SAFE IC Card") to replace the old paper certificate. All approvals and records relating to outbound investments will be recorded on the investor's SAFE IC Card. This mirrors the development of a similar platform for foreign exchange transactions for foreign-invested enterprises ("FIEs") in China. Since 2003, SAFE has only examined the sources of foreign exchange funds which are held within China, i.e. it no longer examines the sources of foreign exchange funds obtained from sources outside China. This may make it more attractive for a Chinese investor to obtain foreign



exchange funding through an existing affiliate or an offshore holding parent company. Examination by SAFE is not required for investments inkind, funds for foreign aid projects and strategic investments approved by the State Council. 2.1 Jurisdiction


certificate on the source of foreign exchange funds, which shall include: in the case of self-owned (domestic) foreign exchange funds: the approval document for the opening of the relevant foreign exchange bank account and the most recent bank statement on the balance of such account; in the case of a domestic commercial foreign exchange loan: a letter of intent for the loan executed by the applicant and the lending domestic bank; or


Registration with SAFE is required for all "overseas investments", which are defined as the establishment of overseas enterprises or the purchase and holding of shares abroad for the purpose of engaging in production and business activities. It is notable the way in which the definition points to a manufacturing or services-based target company for overseas investments by Chinese companies, and appears to exclude portfolio investments in shares. Chinese investors must submit their application to the relevant local branch of SAFE in the relevant province, autonomous region or municipality under direct central government administration (these are all at the same hierarchical level within the Chinese administrative system). These local branches of SAFE had jurisdiction to issue the Examination Opinion where the amount of foreign exchange invested by the Chinese party was less than USD3 million in twenty-four (24) pilot cities before 19 May 2005, when this threshold was increased to USD10 million across the country. Above these thresholds, after conducting a preliminary examination, the local branches of SAFE, except with and within otherwise delegated authority from their higher level counterparts, must forward the application to central SAFE in Beijing for final examination. 2.2 Application Materials


(iii) in the case of a domestic policy-oriented foreign exchange loan, including foreign exchange loan from the Foreign Aid Joint Venture Foundation ( ) or from the Foreign Trade Development Foundation (): the approval document from the relevant authority to use the policy-oriented 1 funds in question. Chinese investors must also submit additional documents where their outbound investment project involves the acquisition of overseas assets or equity interests, including a statement on the assets or equity interests to be purchased, the purchase agreement and the evaluation report of a "specialised intermediary agency" (understood as referring to a financial advisory firm) on the target of the acquisition. 2.3 Factors to Consider

The purpose of SAFE's examination is essentially to ensure that the domestic foreign exchange funds are owned by the prospective investor. Although SAFE


The following application materials must be submitted to local SAFE: (a) (b) (c) standard application form; feasibility study for the overseas investment project; photocopy of the business licence issued by the State Administration for Industry and Commerce ("SAIC") after completion of the annual inspection of the investor enterprise; balance sheet and profit and loss statement of the investor enterprise for the previous year audited by a firm of registered accountants; and


SAFE Simplification Circular, Article 2. The Foreign Aid Joint Venture Foundation is a fund established under the Measures for the Administration of the Foreign Aid Joint Venture Foundation, issued by MOFCOM and the Ministry of Finance and effective 7 July 1998 and the Implementing Rules of the Measures for the Administration of the Foreign Aid Joint Venture Foundation, issued by MOFCOM and the Ministry of Finance and effective 2 April 1999. The Foreign Aid Joint Venture Foundation is co-managed by MOFCOM, the Ministry of Finance and the local embassy or consulate; it provides foreign aid for two types of overseas projects, namely (i) overseas projects in which the Chinese investor uses Chinese equipment or technology and uses natural resources from the target country; and (ii) small or medium-scale manufacturing joint venture projects. The Foreign Trade Development Foundation is a fund subject to, inter alia, the Measures on the Administration of the Foreign Trade Development Foundation by the Central Government, issued by the China Import and Export Bank and effective 29 November 2000 and the Circular on Strengthening the Work of the Central Government Foreign Trade Development, issued by MOFCOM in 2006. Approvals for foreign exchange loans from the Foreign Trade Development Foundation must be obtained from the China Import and Export Bank, MOFCOM and the Ministry of Finance.



requires the submission of a feasibility study in relation to the proposed outbound investment project, SAFE is not supposed to take into account any economic or commercial factors at this stage of the approval process. We note that foreign exchange controls in relation to outbound investments have been significantly liberalised since the stringent restrictions imposed in the 1990s. In addition to the fact that SAFE no longer examines the sources of foreign exchange funds held offshore, SAFE has also stopped examining the "investment risks" relating to the target country for the investment, and it has repealed the obligation for Chinese investors to repatriate the profits derived from their overseas investment within six (6) months of the end of the local financial year, as well as the related obligation to provide a guarantee deposit equal to five percent (5%) of the amount of funds in foreign exchange to be remitted overseas. Again, this is part of a wider reform of China's foreign exchange controls where Chinese enterprises are no longer required to repatriate all their foreign exchange earnings. 2.4 Timeframe



The next step is to seek verification and approval () by NDRC or its local branch. Chinese investors are prohibited from executing any documents with final legal binding force before obtaining NDRC's verification and approval, and neither SAFE nor the customs or tax departments are permitted to carry out the procedures required in relation to any outbound investment in the absence of verification and approval by NDRC. Depending on the strategic importance of the investment project, verification and approval at the highest level for investment projects, i.e. by the State Council, may also be required, as explained below. 3.1 (a) Jurisdiction NDRC

All administrative examinations by local SAFE must be completed within twenty (20) business days of the application (or thirty (30) business days where necessary and with the approval of the person-in-charge at local SAFE). This rule, contained in a general circular issued in 2004, implicitly amended the rule under the SAFE 1989 Procedures that SAFE must make its decision in writing within thirty (30) days of the submission of the application materials by the Chinese investor. Where the amount of foreign exchange invested by the Chinese party reaches or exceeds the threshold mentioned above, local SAFE must complete its preliminary examination within twenty (20) business days and forward the application to central SAFE; central SAFE must also issue its final decision within twenty (20) business days of the reception of the application. 2.5 Proposal on Further Liberalisation

verification and approval by NDRC is required for a large number of "outbound investment projects", defined as projects whereby the Chinese investor acquires, either directly or through its overseas subsidiaries, ownership rights in, or rights to operate and manage and other rights and interests in an overseas venture. This includes the establishment of new enterprises, as well as mergers and acquisitions, share purchases, increases in capital and reinvestment projects. Chinese investors must submit an application to the local 2 branch of NDRC in the locality where they are registered. Local NDRC will make the decision whether or not to ratify the investment project, unless the project falls under one of the following categories, in which case local NDRC must forward the application to central NDRC in Beijing for final verification and approval: (i) resources development projects (e.g., projects to explore and exploit resources such as crude oil and mines), where the Chinese party's investment is equal to USD30 million or more; projects which are not for resources development, where the Chinese party's investment involves using foreign exchange of USD10 million or more; or

Tentative Measures for the Administration of the Verification and Approval of Outbound Investment Projects, issued by NDRC and effective 9 October 2004 (the "NDRC Measures"), Article 8. We note that Chinese investors may not bypass the process and submit their application directly to central NDRC. Only groups of enterprises subject to separate state plans () and enterprises under the administration of the central government are allowed to submit their application directly to central NDRC.

It is anticipated that procedures for SAFE examination of the source of foreign exchange will be further liberalised. In the Consultation Paper on the Foreign Exchange Administrative Measures on Direct Overseas Investment by Domestic Enterprises, reform is proposed to merge this procedure into the foreign exchange registration scheme as discussed in section 7 below. If implemented, this reform will further streamline the approval process.






investment projects in Taiwan or in countries with no diplomatic relations with China, regardless of the scale of the project.


Enterprises under direct central government administration only have to "record file" () with central NDRC (and MOFCOM) where the amount of their investment is below these thresholds. Local governments are authorised to prescribe a different approval process. To date, a number of local governments have issued implementing rules, and generally these rules do not depart from the NDRC Measures. (b) State Council

where the contribution is made in the form of either securities, material objects, intellectual property, technology, shareholding rights or creditor's rights: an evaluation report of the amount of contribution prepared by a qualified accountancy firm or an asset appraisal institution; for tendering, mergers or joint ventures: a letter of intent or framework agreement executed by the Chinese investor and the foreign party; and for overseas bids or acquisitions: the confirmation letter from NDRC as discussed in section 3.2. Local level NDRCs may have different or additional requirements in terms of required documents. For example, the Beijing Municipality NDRC also requires confirmation documents issued by SASAC where state-owned assets are involved. Factors to Consider




Central NDRC must report to the State Council for the verification and approval of resources development projects where the proposed investment of the Chinese investor is equal to USD200 million or more, and for the verification and approval of other projects where the proposed investment of the Chinese investor involves using foreign exchange of USD50 million or more. 3.2 Project Information Report


NDRC will consider at least two sets of factors when examining overseas investment projects for verification and approval. First, NDRC will consider the general factors listed in the NDRC Measures, i.e.: (i) compliance with the laws and regulations of the state and the applicable industry policies; absence of harm to the sovereignty, security and public interest of the state; compliance with the norms of international laws; compliance with the requirements of sustainable development of the economy and society; benefits brought to the development of strategic resources required for developing the national economy; compliance with the requirements of the state for the adjustment of the industry structure, promoting the export of competitive technology, products, equipment and labour services; and absorbing advanced foreign technology; compliance with state regulations on capital accounts and foreign loans; and investment capacity of the Chinese investor.

Before starting overseas bidding or formal commercial negotiations in relation to overseas tendering or acquisitions, the investor must submit a written information report to the NDRC, specifying the basic information of the investor, the background of the investment project, the location of the investment, the general purpose of the project, the proposed investment scale, the construction scale and the working schedule. The NDRC will issue a confirmation letter within seven (7) days after receiving the written information report. 3.3 Application Materials


The application submitted to local NDRC must contain the following materials: (a) (b) the project application report; resolution of the board of directors or any other relevant resolution for the capital contribution; documents evidencing the condition of the assets and the management and creditworthiness of the Chinese party and the foreign partner; letter of intent issued by a bank for financing the project;





Secondly, a large number of outbound investment projects are classified under the Circular on the Issue of the Overseas Investment Industry Guidance Policy, effective 5



July 2006 (the "NDRC Guidance Documents") as "encouraged" () or "prohibited" (). Those sectors that are not expressly listed in the NDRC Guidance Documents are deemed, by default, to fall into the category of "permitted" () outbound investments. Encouraged projects must be given priority during the process of examination and approval, and they also enjoy certain benefits such as in terms of macro-regulation and control, multilateral/bilateral economic and trade policies, taxation and foreign exchange, customs, credit facilities and insurance. (i) Encouraged Projects There are two ways to determine whether a project is classified as encouraged. First, based on the NDRC Policy, projects which fulfil one of the following criteria will be deemed to be encouraged: (1) projects which allow the acquisition of resources or raw materials that are in short supply in the PRC and are urgently needed for domestic economic development; projects which can boost the export of domestic products, equipment, technology or labour services where the PRC has a comparative advantage; or projects which can greatly enhance the PRC's capacity for technological research and development, or make use of the world's leading technology, advanced management skills or professional experience.


projects prohibited under the laws of the target countries or regions, or under international treaties to which the PRC is a party or a participant; or other circumstances stipulated administrative regulations. by law or


The NDRC Catalogue also specifically prohibits a small number of specified overseas investment projects (either techniques unique to China or morally reprehensible trades), namely: (1) breeding or planting of precious and valuable breeds that are rare and unique to the PRC (including valuable genes from crop and plant cultivation, animal husbandry and the aquatic products industry); processing of green teas and special teas (famous teas, fermented black teas, etc.) using traditional Chinese methods; technology for preparing processed traditional Chinese medical herbs and production of readymade traditional Chinese medical products using secret recipes; the gambling and lottery industries operating horse-racetracks for purposes); and The sexual services industry. (including gambling







Second, the NDRC Catalogue contains a list of specific types of projects which automatically fall into the "encouraged" category, such as timber harvesting, transport and cultivation, exploration and exploitation of oil and gas, manufacturing of paper and pulp and research on advanced new technologies and products, amongst many others. (ii) Prohibited Projects

These projects appear to mirror some of the projects in the "prohibited" category under the inbound investment guidance counterpart, the Guidance Catalogue for Foreign Investment Industries, the last version of which came into force on 1 January 2007. The NDRC Guidance Documents should be one of the first documents to be consulted when ascertaining the feasibility of any outbound investment project. It is also essential to understand the approval criteria that it contains when preparing the application materials. 3.5 Timeframe

Conversely, the NDRC Policy prohibits projects which fall under one of the following general categories: (1) (2) (3) projects which threaten national security and harm the public interest of the PRC; projects which use techniques or prohibited for export from the PRC; projects prohibited under PRC laws; technologies

Local NDRC must make a decision on whether or not to ratify within twenty (20) days of accepting the application. In this respect, if local NDRC considers that the application materials are incomplete or inconsistent with the statutory requirements, it must notify the applicant within five (5) days of receiving the application materials, failing which the application materials will be deemed accepted on which the materials were submitted to local NDRC. The twenty day



period may be extended for an additional ten (10) days 3 upon the approval of the person-in-charge at local NDRC. At the central level, NDRC must make a decision in writing within twenty (20) working days of the acceptance of the application materials from local NDRC. This period may be extended by an additional ten (10) working days with the approval of the person-in-charge at NDRC. Where necessary, central NDRC may, within five (5) working days of the acceptance of the application materials from local NDRC, appoint a qualified consulting enterprise to submit a report on the key issues involved in relation to the proposed investment project.



The MOFCOM Measures provided for jurisdiction of MOFCOM approval and its documentation requirements based on a re-categorization of outbound investment projects as follows: Type I - Projects subject to approval by MOFCOM · · · Overseas investments in countries without diplomatic relationships with China; Overseas investments in specific countries/regions to be identified by MOFCOM; Overseas investments by Chinese parties amounting to USD100 million or more; Overseas investments involving interests of multiple countries/regions; and Establishment 4 Company . of overseas Special Purpose






After obtaining NDRC's verification and approval, Chinese investors must apply to MOFCOM to obtain a "Certificate for an Overseas Investment by a Chinese Enterprise" ( ). MOFCOM has recently reshuffled the approval regime with the issuance of the Overseas Investment Administration Measures on 16 March 2009 which became effective on 1 May 2009 (the "MOFCOM Measures"). The MOFCOM Measures significantly simplified the approval of outbound investment by MOFCOM and its provincial-level counterparts and clarified the interlay between the MOFCOM process with other governmental authorities (such as NDRC) by recognizing the verification and approval requirements by other governmental authorities. While keeping certain major and sensitive projects within its own jurisdiction, MOFCOM delegated to its provincial-level counterparts the approval authority in relation to most projects undertaken by local enterprises. Additionally, the approval of smaller projects has now been reduced to a much simplified online filing procedure. At the same time, MOFCOM also elevated the approval of Special Purpose Company (see Section 4.1 below for further information) to its sole jurisdiction.

Type II - Projects subject to approval by MOFCOM's provincial-level counterparts · · · Overseas investments amounting to USD10 million or more but less than USD100 million; Overseas investments in energy or minerals; and Overseas investments involving solicitation of funds from domestic investors.

Type III - Other projects that do not otherwise fall within either Type I or Type II · Central MOFCOM's approval is required for overseas investment projects by China's centrally state-owned enterprises ("CSOEs") in relation to the establishment of overseas non-financial enterprises or the acquisition of ownership rights, management rights or other rights in overseas non-financial enterprises by way of greenfield investments or mergers or acquisitions Provincial-level MOFCOM counterparts approval is required for overseas investment projects by nonCSOEs.



People's Republic of China Administrative Licensing Law, effective 1 July 2004 ("Administrative Licensing Law"), Article 42. The timeframe for the examination by local NDRC is not expressly prescribed in the NDRC Measures: Article 6 only prescribes the specific timeframe for the issuance of the record filing certificate for enterprises under the administration of the central government, which is seven (7) business days after the acceptance of the application materials. In such case, it is necessary to refer to the general default rules for the approval of administrative licences contained in the Administrative Licensing Law.


The definition of "Special Purpose Company" is similar to that under the Provisions on the Acquisition of Domestic Enterprises by Foreign Investors jointly promulgated by six Ministries with effect from 8 September 2006, i.e., an overseas company that is directly or indirectly controlled by a domestic company in China for the purpose of overseas listing of the equity interests actually owned in such Domestic Company. Please note that natural persons are excluded here.



In contrast to the position with respect to NDRC verification and approval, it appears that MOFCOM approval is not required for reinvestment projects. In such case, the Chinese investor or the Chinese-invested overseas enterprises will only have to file the reinvestment online for record with MOFCOM or its provincial-level counterparts, whichever is the original approval authority, within one (1) month of completing legal procedures relating to the transaction. As noted above, MOFCOM does not exercise jurisdiction over outbound investments involving financial institutions (such as banks, securities companies and insurance companies). These are subject to a separate system involving obtaining the approval of their own industryspecific regulatory authority, either the China Banking Regulatory Commission ("CBRC") for banks and financial institutions, the China Securities Regulatory Commission ("CSRC") for securities houses or fund managers, or the China Insurance Regulatory Commission ("CIRC") for insurance and reinsurance companies. As mentioned above, the specific rules governing such approvals will not 5 be discussed further here. Where a project is under MOFCOM's jurisdiction, with the exception of CSOEs, the Chinese investors must submit application materials to the provincial-level counterparts of MOFCOM in its place of registration. CSOEs must directly apply to central MOFCOM. In general, upon receipt of the application materials, MOFCOM or its provincial-level counterparts must solicit the opinion of the Chinese embassy or consulate in the target country or region, and will then make a decision whether or not to approve the application. In all cases, after obtaining the approval of provincial-level or central MOFCOM, the Chinese investor must register with the Chinese embassy or consulate in the target country or region and report required operational and statistics information of the overseas investment to its original approval authority, namely, the provincial-level or central MOFCOM.


Chinese investors wishing to invest in Hong Kong and Macao are subject to the same requirements under the MOFCOM Measures. 4.2 Application Materials

Chinese investors are currently required to submit the following application materials to provincial-level MOFCOM or MOFCOM in relation to Type I and Type II overseas investment projects: (a) Application letter (providing information on the name, registered capital, total amount of investment, business scope, term of operation, statement of sources of fund required, specifics of the investment project and shareholding structure of the overseas enterprise as well as analysis of the investment environment, etc.); A copy of the business licence of the Chinese investor; Overseas target company's articles of association and related contracts; Verification and approval / record-filing documents from relevant PRC authorities (e.g., NDRC); (In the event of an acquisition) Preliminary Report Form of Overseas Acquisition; and Any additional documents required by the authorities in charge.

(b) (c) (d) (e) (f)

The restated documentary requirements under the MOFCOM Measures recognized the necessity of prior verification and approval by "other regulatory authorities", which clearly refers to the NDRC verification and approval. This is helpful in clarifying the relationship between the NDRC and MOFCOM procedures in relation to verification and approval and approval of an outbound investment project. Approval of projects of Type III has been reduced to a simple online filing procedure under which the provinciallevel MOFCOM (for local enterprises) or MOFCOM (for CSOEs) is required to process the application within three (3) working days of receipt of the application. 4.3 Factors to Consider

We note that the specific rules governing the approvals of outbound investments by financial institutions are likely to change in the near future. It has been reported in the press recently that the Ministry of Finance ("MoF"), together with the central bank, the People's Bank of China ("PBOC"), CBRC, CSRC and CIRC, is currently drafting a new set of rules governing overseas acquisitions by financial institutions ( ). The assumption must be that these rules will encompass China's reaction to the heavy losses suffered by CIC and others when investing in overseas financial institutions due to the impact of the global financial crisis. However, these draft rules are not yet finalised and different categories of financial institutions are currently governed by different sets of rules.

According to the MOFCOM Measures, MOFCOM and its provincial-level counterparts will not approve any outbound investment which falls within any of the following categories:



(a) (b) (c) (d) (e)

it threatens the sovereignty, security or public interest of the Chinese state; it violates laws, regulations or policies of the state; it is likely to cause the Chinese government to violate an international treaty to which it is a party; it involves technologies or goods which are prohibited for export from the PRC. it is made in a target country where the political situation is unstable and presents serious safety issues; it violates the laws, regulations or customs of the target country; or it is made for the propose of committing a crossborder crime.

MOFCOM and the Ministry of Foreign Affairs and effective 8 July 2004, as last supplemented with effect from 31 January 2007 (the "MOFCOM Catalogue"). The MOFCOM Catalogue contains a list, sorted by industry type and countries, of outbound investment projects which are encouraged. Companies making investments listed in the MOFCOM Catalogue would benefit from the government's preferential policies in terms of foreign exchange, capital, taxation, customs and immigration, etc. Currently one hundred and twenty-seven (127) countries are listed in the updated MOFCOM Catalogue. Similar detailed guidance is provided in relation to each of the seven factors enumerated in the MOFCOM Regulations. It is interesting to note that, in an effort to liberalise the approval process, MOFCOM will no longer examine the economic or technical feasibility of the outbound investment project, which is the sole responsibility of the Chinese investors. 4.4 Timeframe

(f) (g)

In the absence of these circumstances, MOFCOM will examine the following seven (7) factors to determine whether or not to approve a given outbound investment project: (a) (b) (c) the investment environment of the target country; the security situation within the target country; the political and economic relationships between China and the target country; China's policies on overseas investments; the reasonable distribution of Chinese investments in different countries; the performance of China's international treaties; and obligations under

On receipt of the application materials, provincial-level or central MOFCOM may first solicit the views of the economic and commercial counsellor at the Chinese embassy or consulate in the target country or region and the latter must reply within ten (10) working days of receiving such a request. For projects within its approval jurisdiction, provincial-level MOFCOM is required to issue a decision within fifteen (15) working days of accepting a complete set of application materials from the applicant. The provincial-level MOFCOM is required to deliver its acceptance opinion with five (5) working days of receipt of an application. For projects within the approval jurisdiction of central MOFCOM, provincial-level MOFCOM is required to issue a preliminary opinion within ten (10) working days (exclusive of time for solicitation (if any) of counsellor's views) of receipt of a complete set of application materials. If local MOFCOM recommends the approval of the project, it will submit the materials to central MOFCOM and central MOFCOM is required to approve or reject the application within fifteen (15) working days from receipt (again, exclusive of the time for solicitation (if any) of counsellor's views). As mentioned above, projects undertaken by CSOEs need not go through any provincial-level MOFCOM for MOFCOM's examination and approval. After obtaining NDRC verification and approval and MOFCOM verification and examination approvals, Chinese

(d) (e)



the protection of the legitimate interests of Chinese companies.

Further, in evaluating each of these factors, MOFCOM will take into consideration the detailed list of sub-factors enumerated in the Detailed Rules on the Examination and Approval of Overseas Investments to Operate Enterprises, effective 17 October 2005 (the "MOFCOM Detailed Rules"). For example, in relation to item (d) above (China's policy on overseas investments), MOFCOM is required to consider not only the NDRC Guidance Documents discussed above, but also the Outbound Investment Country and Industry Guidance Catalogue, jointly issued by



investors may go through the required foreign exchange, customs, entry and exit administration and taxation procedures as stipulated in the law. (b) 5. MOFCOM AND SAFE ACQUISITION REPORT PRE-MERGER


method of contribution, the amount of foreign exchange to be used, as well as the amount, purpose and source of the necessary initial expenses); business license or registration certificate of the domestic investor; documents relevant domestic investor in venture (e.g. letter framework agreement foreign parties); to the participation of the the bidding, merger or joint of intent, memorandum or executed by the Chinese and


Chinese investors and Chinese-invested overseas enterprises must also report to the central level or provincial-level MOFCOM and SAFE "after confirming their intention to participate in an overseas merger or acquisition" in which they would acquire the assets or management control rights over an overseas enterprise. For this purposes, they must complete the short standard form imposed by MOFCOM and SAFE.


letter of undertaking issued by the Chinese investor to local SAFE (stating that the initial expenses remitted abroad will only be used for the approved overseas investment projects, failing which the domestic investor shall assume the corresponding legal liability); name of the country or region to which the initial expenses will be remitted, the name of the overseas bank, the name of the owner of the beneficiary bank account and the account number; and other relevant materials required by SAFE.




When launching a tender for an international acquisition, tenderors generally request bidders to provide a security deposit or bid bond. For Chinese bidders who do not have any foreign exchange in offshore accounts, it may be very challenging to obtain the approvals described above within the time allocated for completing the bidding process. As a consequence, evidence suggests that Chinese bidders have lost various opportunities to participate in this type of project. Even in a simple acquisition transaction not involving any bidding process, Chinese investors have frequently faced difficulties in funding the preparatory stages, such as renting offices and buying facilities. In order to resolve these issues, SAFE issued rules which allow Chinese investors to remit abroad a certain amount of foreign exchange in order to pay the initial expenses relating to their outbound investment projects after submitting their application to NDRC and MOFCOM, but before obtaining the corresponding approvals. 6.1 Jurisdiction


After verifying that there are no inaccuracies in the materials submitted by the Chinese investor, local SAFE will issue a capital account foreign exchange business approval to the Chinese investor. The Chinese investor must then go through the formalities for purchasing and remitting foreign exchange at the designated local foreign exchange bank on the strength of this approval document. 6.3 Factors to Consider

Under the SAFE Initial Expenses Circular, initial expenses are only allowed for the following purposes: (a) providing a security deposit for the offshore acquisition of assets or equity interests in accordance with the laws of the place of the proposed investment project or the request of the foreign seller; providing a security deposit for a tender as required by the bidding procedures; covering the expenses necessary for conducting market research, leasing offices or equipment, hiring workers or appointing "overseas intermediary institutions" before investing overseas; and other initial expenses relating to the overseas investment.

Chinese investors must obtain the verification and approval of the local branch of SAFE. 6.2 Application Materials


(c) For remitting abroad initial expenses, Chinese investors must submit the following documents to SAFE: (a) application form (including information such as the total investment amount of the overseas investment project, the capital contributions of all parties, the




In addition, the amount of initial expenses is subject to certain limitations, i.e. it must not exceed fifteen percent (15%) of the total investment amount of the outbound investment project for which the Chinese investor applied to NDRC and MOFCOM, unless SAFE approves it in the light of the nature of the proposed investment project. 6.4 Timeframe


agreement relating to the foreign investment project, or other document evidencing the amount of funds in foreign exchange that the domestic investor must remit abroad.

All administrative examinations by local SAFE must be completed within twenty (20) business days of the application (or thirty (30) business days where necessary and with the approval of the person-in-charge at local SAFE).

Where the outbound investment involves non-cash stateowned assets, the registration form issued by SASAC and the export examination form for outbound investments of state-owned assets that constitute tangible items must also be submitted. We note that, in practice, local SAFE in different jurisdictions may have further documentary requirements, such as the articles of association or the list of names of the directors of the overseas company to be established. 7.3 Factors to Consider



After obtaining NDRC verification and approval and MOFCOM approvals, Chinese investors must go back to SAFE and obtain a Foreign Exchange Registration Certificate for Overseas Investments. Without SAFE approval, RMB cannot be converted into foreign currency and foreign exchange cannot be remitted abroad; if the investor plans to remit the approved amount of foreign exchange in several instalments, it has to obtain approval for remitting the foreign exchange each time. PRC remitting banks are responsible for supervising the implementation of this stipulation, failing which they can be subject to a fine of up to RMB100,000. SAFE approval is also needed if the Chinese investor wishes to open a bank account overseas. 7.1 Jurisdiction

At that stage, SAFE must re-examine the source of the foreign exchange funds of the Chinese investor. The law is silent on other specific factors which SAFE may consider at this stage. In practice, different SAFE branches may consider different factors, and it is strongly recommended to check with the relevant SAFE branch on a case-by-case basis. 7.4 Timeframe

All administrative examinations by local SAFE must be completed within twenty (20) business days of the application (or thirty (30) business days where necessary and with the approval of the person-in-charge at local SAFE).



The competent organ of SAFE is the same one as issued the Examination Opinion on the Sources of Foreign Exchange, as explained in Section 2 above. 7.2 Application Materials

Chinese investors must submit the following documents to SAFE for foreign exchange registration: (a) SAFE Examination Opinion on the Sources of Foreign Exchange; approval documents issued by the competent State authorities (i.e. NDRC and MOFCOM in a typical scenario); and

Where Chinese investors wish to use "state-owned assets" to establish outbound investments, they are subject to an additional layer of approval, i.e. they must "record file" ( ) with SASAC for title registration for the establishment of the project by filing an "Overseas State-Owned Assets Registration Form" (()). In this context, "overseas state-owned assets" means all types of assets belonging to the state, in enterprises and non-profit institutions established overseas with investment by Chinese domestic companies, institutions and People's Governments at all levels and government-related department.




The purpose of this procedure is to ensure that stateowned assets are not dissipated or stripped of their value. Without the Overseas State-Owned Assets Registration Form, Chinese investors can not obtain SAFE approval to remit foreign exchange abroad. Chinese investors and Chinese invested overseas enterprises are under various obligations in relation to reinvestment of state-owned assets in third countries. These detailed - and often quite confusing - rules will not be discussed here. 8.1 Jurisdiction


Application Materials

In addition to the Overseas State-Owned Assets Registration Form (and the appraisal report where in-kind state-owned assets are involved), Chinese investors must submit the following documents to SASAC in relation to the Overseas-State-Owned Assets Registration Form for the establishment of any new overseas investment projects: (a) approval documents in relation to the project's feasibility study; approval by the relevant government main authorities or the department in charge of the investor; articles of association of the company and agreements on the establishment of the company (if any); certificate on the source of the state-owned funds; and other documents required by SASAC. Factors to Consider


Chinese investors (or their overseas invested enterprises) must register with the local branch of SASAC in the relevant province, autonomous region, municipality directly under the central government or the city with its own state plan (). If there is no local SASAC branch in a given administrative region, by default the local finance department will be in charge of registrations. By way of exception, where the overseas enterprise is "related to any department of the central government", Chinese investors 6 must however register with central SASAC in Beijing. Where the state-owned assets used to make an outbound investment are in-kind assets, the Chinese investors (or their overseas invested enterprises) must first apply for assets appraisal with the SASAC authorities at the same level and appoint a qualified assets appraisal institution to assess the value of the assets in question. After the appraisal report is confirmed by local SASAC, the domestic investor (or its overseas invested enterprise) must record file for title registration with local SASAC at the same level. Where assets must go through the PRC customs, Chinese investors must also fill in the State-owned Assets Outbound Investment Export Examination Verification and Approval Form ().



(e) 8.3

In carrying out the registration of overseas state-owned assets, local SASAC must use as the main criteria whether the overseas institution controls and has safe custody over the certificate of title (or the legal certificate evidencing the ownership) of the overseas state-owned assets, as recognised under the law of the overseas jurisdiction in question. It should also be noted that an overseas enterprise that holds state-owned assets can not be established and registered overseas in the form of "unlimited liability company". 8.4 Timeframe


Overseas State-Owned Assets Registration Implementing Rules, Article 7. This includes: (i) overseas institutions whose establishment was ratified by the State Council and whose finances are directly governed by the Ministry of Finance; (ii) overseas institutions established by companies with a national scope and whose establishment was ratified by the State Council; (iii) overseas institutions whose establishment was ratified by authorised departments under the State Council and which were established by any department under the State Council or any institutions under the direct administration of the State Council or any companies, enterprises or administrative bodies under the direct administration of national social associations (); and (iv) other overseas institutions whose finances are the responsibility of the central government.

Registration with SASAC is required both prior to and after the outbound investment is made. As stated above, the first registration i.e. the project establishment registration must be completed after obtaining the approval of NDRC and MOFCOM, but before SAFE approval for remittance of investment funds. The second registration must be completed within sixty (60) days of the registration of the overseas enterprise with the authorities of the host country or region. For this registration, Chinese investors must complete another title registration form with slightly different contents. The legislation is silent on the specific time limit for SASAC to examine and issue the title registration forms. Local



SASAC must make a decision on the administrative licence within twenty (20) days of accepting the application. In this respect, if local SASAC considers that the application materials are incomplete or inconsistent with the statutory requirements, it must notify the applicant within five (5) days of receiving the application materials, failing which the application materials will be deemed accepted on which the materials were submitted to local SASAC. The twenty day time period may be extended for an additional ten (10) days upon the approval of the person-in-charge at 7 SASAC.


Reporting Investments and Operational Barriers in the Host Country or Region

Chinese investors and the offshore enterprises in which they invest must also report to MOFCOM the actual situation and issues they encounter in the host country (region) in relation to their investment, operations and trade in services. The purpose of these measures is to provide help and assistance to Chinese investors abroad. Under the Barriers Reporting System, Chinese investors, their overseas branches and the offshore enterprises in which they invest are required to report problems encountered in their overseas investments and operations at any time on the standard forms prescribed by MOFCOM, which include the following items: (a) Overall circumstances of the investment and operations of Chinese-invested overseas enterprises Investment environment obstacles and risks Barriers to investment and trade in service Measures that the host country implements, or permits to be implemented in violation of any relevant multilateral or bilateral agreements, and that will, or are likely to constitute, inequitable obstacles to, or to damage or restrict the investment and operations or trade in services by Chinese enterprises.





In addition to imposing approval requirements, China also monitors and supervises outbound investments through a system of post-investment supervisory and ongoing reporting obligations. 9.1 Annual Inspection of Outbound Investments

(b) (c) (d)

MOFCOM and SAFE conduct a joint annual inspection of enterprises established overseas by Chinese investors (other than financial institutions). For this purpose, Chinese investors must download and complete a report form available on the websites of MOFCOM and SAFE; at the end of their inspection, SAFE and MOFCOM jointly issue an Outbound Investment Joint Annual Inspection Report ( ). The annual joint inspection must include the following items: the situation in relation to the overseas investment, compliance with applicable PRC regulations on outbound investments, and general review and comments on the relevant project by PRC commercial institutions stationed abroad. MOFCOM and SAFE also publish a joint circular at the beginning of each year to provide more details on the annual inspection for that year, including, for example, the timeline for the inspection, required application materials, procedures to be followed and the punishments for enterprises that fail to participate in the annual inspection. The Outbound Investment Joint Annual Inspection Report is needed for various subsequent registrations and procedures, including with the departments of public finance, foreign exchange, customs, taxation, foreign affairs, banking and insurance departments.


Chinese-invested overseas enterprises and Chinese investors are also welcome to provide proposals on corresponding measures for dealing with the abovementioned problems, obstacles and investment barriers. Based on the system and reports submitted, the MOFCOM will regularly publish the relevant particulars of the reports in the form of Foreign Market Access Reports or in other forms to help other potential Chinese investors minimise investment risks, on the premise that the interests and trade secrets of the relevant enterprises will be protected. 9.3 Outbound Direct Investment Statistics

All Chinese enterprises making "foreign direct investments" must submit statistical reports on their outbound direct investments, defined as the holding or the exercise of control over ten percent (10%) or more of the shares rights of an overseas enterprise, on a yearly and quarterly basis to provincial MOFCOM (or central MOFCOM in the case of enterprises under central government administration ). These statistical reports must include the basic situation of the Chinese investor and the overseas enterprise in which

Administrative Licence Law, Article 42. As mentioned above in relation to the NDRC Measures, where the specific timeframe is not defined, it is necessary to refer to the general default rules for the approval of administrative licences contained in the Administrative Licence Law.



it made a direct investment, the equity relationship between the Chinese investor and the overseas enterprise, and the distribution of profits as between them, the situation in relation to imports of commodities made through the overseas enterprise and the situation in relation to reinvestments made through tax havens.



Whilst China has been the main recipient of foreign direct investments for well over one decade, figures now show a clear surge in outbound investments originating from China. At the policy level, the Chinese government has made pragmatic moves to increase outbound investments, in an effort to make best use of China's huge foreign currency reserves (particularly to secure access to scarce mineral and other natural resources) and to increase the competitiveness of Chinese investors in the global markets. For example, the government has substantially relaxed foreign exchange controls, it has made available direct subsidies and co-investment opportunities with various government-run funds and it has entered into various bilateral investment treaties (BITs) with major trading partners such as Singapore. On the less positive side of things, however, the approval process remains complicated. This puts Chinese companies at a significant disadvantage compared to their more nimble and less heavily-regulated peers: historically foreign sellers with concerns about delays in payment were more likely to favour other buyers or to impose a "China premium" on Chinese acquirers, although in the current climate, any buyer with sufficient funds to pay for an acquisition (particularly those not needing debt-financing) is likely to be welcomed, in all but the most sensitive of industries. The only way that this issue is going to be resolved in the long term is by China allowing full convertibility of the RMB on the capital account, which does not appear to be on the political agenda for the foreseeable future. Removing or at least simplifying the complex maze of laws and approval requirements would be beneficial, as the reaction of some Chinese business people in the face of such complexity is to ignore the rules and simply set up business through offshore shelf companies, using various "unofficial" and/or illegal methods of getting RMB out of China. Whilst SAFE Circular on the Administration of Special Vehicle Company Financing and Round-trip Investments

by Domestic Residents, which required Chinese investors to register with SAFE before establishing or gaining control over an overseas special purpose vehicle for the purpose of engaging in round-tripping investment, may have thrown some light on the extent to which Chinese investors have been reinvesting in China, it remains the case that the real number of Chinese investments made overseas remains unknown, as presumably those investing outside the system will not register with the local Chinese embassy. In order for the system to work and encourage overseas entrepreneurship, it needs to be simplified, streamlined and made more user-friendly.

Should you require further information on this, please do not hesitate to contact us.

Lovells LLP and its affiliated businesses have offices in: Alicante Amsterdam Beijing Brussels Budapest* Chicago Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Madrid Milan Moscow Munich New York Paris Prague Rome Shanghai Singapore Tokyo Warsaw Zagreb*

Lovells is an international legal practice comprising Lovells LLP and its affiliated businesses. Registered with the Ministry of Justice of the People's Republic of China as a Foreign Law Firm Representative Office. Certificate No. 1-0004 (2002). Not licensed to practise Chinese law. Lovells LLP is a limited liability partnership registered in England and Wales with registered number OC323639. Registered office and principal place of business: Atlantic House, Holborn Viaduct, London EC1A 2FG. The word "partner" is used to refer to a member of Lovells LLP, or an employee or consultant with equivalent standing and qualifications. New York State Notice: Attorney Advertising Member of the Sino Global Legal Alliance with member offices in: Beijing Chengdu Chongqing Guangzhou Hangzhou Hong Kong Qingdao Shanghai Shenyang Shenzhen Tianjin Wuhan and of the Pacific Rim Advisory Council with member offices in: Argentina Australia Brazil Canada Chile China Colombia France India Indonesia Japan Korea Malaysia Mexico Netherlands New Zealand Peru Philippines Singapore Taiwan Thailand USA Venezuela © Copyright Lovells LLP 2009. All rights reserved. *Associated offices


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