CIL Group Ltd

14 April 2011

China’s top planning and reform authority, the National Development and Reform Commission (NDRC), has released a new policy making it easier for Chinese enterprises to undertake offshore investments. NDRC has delegating more of its central approval powers to counterparts at the provincial level (including their equivalents in the autonomous regions, plan-designated cities, and centrally administered cities)(“Provincial NDRCs”) and to the 125 or so centrally-administered state-owned enterprises (“CASOEs”).

It is a requirement of China’s regulatory regime that  outward investments by Chinese investors (state-owned and private alike) must be approved (verified) by certain Chinese regulatory authorities which include, amongst others, the NDRC [1].  In practice, the approval granted by the NDRC (including the Provincial NDRCs), which is generally known as the “project approval”, is considered to be the most important regulatory approval and generally dictates whether  offshore investment can go ahead.

The new policy allows outbound investment to be approved by the Provincial NDRCs if such investment is less than USD 300 million (for resources assets) or USD 100 million (for non-resources assets), unless the investment is categorised as a “special project”.  In particular, CASOEs, which have taken a lion share of China’s outbound investment, are delegated with the same powers as those Provincial NDRCs -- that means that they are only required to make an after the event filing in to the NDRC for prescribed investments. There is no need for the CASOEs to seek prior approvals.

The new policy, entitled as the “Notice of the NDRC on Properly Handling the Delegation of Approval Authority over Outbound Investment Projects to Lower-level Authorities, Fa Gai Wai Zi [2011] No.235” (《国家发展改革委员会关于做好境外投资项目下放核准权限工作的通知》，发改外资【2011】235号)(“Notice”), was released by the NDRC on 24 February 2011 and took immediate effect.

The NDRC approval regime in a nutshell

The NDRC outbound approval (verification) regime that has most recently applied was initially established as part of the reform by the State Council in 2004.  [2].  It applies to outbound investment by all types of Chinese legal persons (state-owned or otherwise), including the offshore entities controlled by such Chinese legal persons.

The regime essentially divides Chinese outbound investment into the following four key categories, with each category corresponding to different approval levels generally dictated by the amount of a proposed investment:

• Resources type of projects (Type 1)
• Projects (other than resources projects) involving substantial amount of foreign exchange (Type 2)
• Projects invested by the CASOEs (Type 3)
• Investments in Taiwan and countries which China does not have diplomatic relations (Type 4)

There are essentially three tiers of approval levels, being: the State Council, the NDRC and the Provincial NDRCs.  The boundary drawn between the jurisdiction of the State Council and that of the NDRC was somewhat less than clear (this was particularly the case in respect of Type 4), in which case the NDRC, after their preliminary review, generally acts as a conduit to pass those investment proposals on to the State Council for final sign off.  The Provincial NDRCs are not allowed to further delegate their approval powers.

CASOEs have been given the same level of approval powers as the Provincial NDRCs since the inception of the old regime.

Old regime v New regime - the comparisons

The new rules introduced by the Notice do not propose to change the regulatory framework of the old regime.  Instead, it has substantially increased the monetary thresholds prescribed for each category of investment, except for Type 4.  The table below sets out the comparisons between the old regime and the new regime in respect of those monetary changes introduced by the Notice.

Project approval by State Council / NDRC - investment type and approval level

Type 4 category -- now becomes “special projects”

Under the old regime, investment falling within Type 4 category, irrespective of the size of the investment, must be either approved by the NDRC, or by the State Council after it is first reviewed by the NDRC, as a result of the sensitiveness perceived to associate with such investment (eg, investment in Taiwan).

The new regime introduced by the Notice has substantially broadened the original scope of Type 4 category, which now encompasses certain “special projects”, being those investments:

• in countries which China does not have diplomatic relations, or which are subject to international sanctions;
• in countries which are in war or riots; and
• involving basic telecommunication operation, cross-border water resource utilisation, large-scale land development, key power grid, news and media.

Consistent with the old regime, investment proposals concerning any of those special projects must be submitted by the relevant Provincial NDRCs or the relevant CASOEs (as the case maybe) to the NDRC for approval.  Depending on the NDRC’s discretion, such proposals may need to be submitted to the State Council for final approval after the NDRC’s preliminary review.

The new regime excludes Investment into Taiwan from Type 4 category.  Such investment is now regulated separately under a new policy released in 2010 [3], which in substance, is not dissimilar to the approval regime applicable to Type 4 category (as elaborated in the earlier paragraph).

Verification considerations

The Notice stresses that when verifying outbound investment proposals, the Provincial NDRCs should only examine and consider those prescribed “key external elements” when deciding whether a particular investment proposal is approved (verified), leaving the Chinese investors to make their own judgment on those commercial considerations.

According to the existing regulation [4], those key external elements include:

• compliance with Chinese law and industrial policy;
• meeting sustainable development requirements, benefiting the development of strategic resources and industrial restructuring, or facilitating technology, products and labour export, etc;
• compliance with Chinese capital item and foreign debt administration rules; and
• investors possessing proper financial capability.

Registration and filing requirements

To better monitor investment in Type 4 category, the Notice has formalised the existing filing requirements for those projects which are within the authority of the Provincial NDRCs/CASOEs (ie, projects between USD 30 million - USD 300 million (resources) and projects between USD 10 million - USD 100 million (non-resources)).  As explained below, CASOEs are actually given more liberty than the Provincial NDRCs.

Provincial NDRCs must register those projects with the NDRC before verification. The NDRC will issue a Significant Local Outbound Investment Project Verification Registration Certificate within 5 working days once they are provided with necessary documents.  The certificate is required for further subsequent outbound regulatory approvals.

CASOEs are only required to complete and file a Outbound Investment Project Filing Proof (which is in the form prescribed by the NDRC) to the NDRC after their investment decisions are made.  The NDRC will return the stamped document within 7 working days.

Changes to the “preliminary review” regime

The NDRC introduced a new "preliminary review" process in 2009, imposing certain “project information reporting” obligations upon Chinese investors before they are allowed to embark on the transaction process for significant Chinese outbound investments (ie, projects of more than USD 30 million (resources) or USD 10 million (non-resources), which must be verified by the NDRC or the State Council under the old regime).

The Notice has increased those thresholds to one single amount of USD 100 million and more.

Comments

Since the launch of its “Going Out” or “Going Global”  over a decade ago, China has actively promoted and supported foreign investment by Chinese entities. That policy has just been endorsed by China’s top legislature - the National People’s Congress - when it signed off in March China’s 12th Five-Year Plan (2011-2015)..

According to recent media reports, the NDRC is currently working with the other key outbound regulator -- the Ministry of Commerce (MOFCOM) on a key outbound investment regulation, which is likely to have a name around “Offshore Investment Promotion Regulation”.  Appreciating the issues associated with the current piece-meal (and outdated) regulatory regime for outward investment, the new regulation aims to consolidate the existing regulation pieces into a simple one.  According to a key official from the NDRC who has been involved in the drafting process, a key policy objective of the new regulation is to further substantially delegate approval powers.  To give it more teeth, it has been proposed that the new regulation should be promulgated by the State Council, and be uplifted to a law to be promulgated by the People’s Congress.  This policy direction was echoed by the minister of the MOFCOM, who spoke to the media that during China’s 12th Five-Year Plan, the MOFCOM will “give more weight to ‘going out’ strategy”.

It is  important to note that Chinese government is also taking a more selective and discerning approach when screening outbound investment proposals.  There has been increased reports on the significant losses suffered by Chinese CASOEs from their offshore investments, such as the RMB 1.4 billion loss announced by China Railway Construction Corporation for their Saudi Arabia projects, and the potentially significant loss as a result of the recent collective withdrawals from Libya by Chinese CASOEs (who were forced to suspend their unfinished construction projects with more than RMB 41 billion in contract value).  Clearly, the broadened scope of Type 4 category is the first response by Chinese government to this worrying issue, aiming to better reign on the potential risks posed by Chinese outbound investment (particularly by CASOEs) which already stands at more than RMB 4 trillion as of 2009.  Chinese government no doubt has shown clear intention to exert more control over certain investments which are considered to be risky or sensitive.

Footnotes

[1] These authorities generally refer to NDRC (including the State Council which in certain cases make the ultimate decision), MOFCOM (Ministry of Commerce), SAFE (State Administration of Foreign Exchange), and SASAC (State-owned Assets Administration & Supervision Commission - only required if the Chinese investors are state-owned enterprises), and their respective provincial counterparts.  The approval levels are dictated by the investment size and the nature and locality of the targeted assets.  Separate approvals may be required from certain ministerial level regulatory commissions (such as, the China Banking Regulatory Commission and the China Insurance Regulatory Commission) for certain offshore acquisitions.

[2] The regime was first introduced by the “Decision by the State Council on Investment System Reform, Guo Fa [2004] No.20 (《国务院关于投资体制改革的决定》，国发【2004】第20号)”, promulgated by the Sate Council on 16 July 2004.  The more detailed rules were further introduced in the “Provisional Measures on the Administration of Outbound Investment Projects Verification (《境外投资项目核准暂行管理办法》)”, promulgated by the NDRC on 9 October 2004.

[3] Notice Concerning the Administration Measures on Investment into Taiwan by Mainland Enterprises, Fa Gai Wai Zi [2010] No.2661 (《关于印发<大陆企业赴台湾地区投资管理办法>的通知》（发改外资【2010】2661号), jointly promulgated by the NDRC, MOFCOM and the Taiwan Affairs Office of the State Council.

[4] Provisional Measures on the Administration of Outbound Investment Projects Verification (《境外投资项目核准暂行管理办法》), promulgated by the NDRC on 9 October 2004.