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An update on China’s control over outbound investments and remittance

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05 December 2017

On August 18, 2017, the State Council of China issued a notice forwarding the Guiding Opinions on Further Guiding and Regulating the Direction of Outbound Investments (the Guiding Opinions) as jointly drafted by the National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), People’s Bank of China (PBOC) nd Ministry of Foreign Affairs. The Guiding Opinions are the first official rules adopted after China increased its control over capital outflows in late 2016.

In 2016, the value of the RMB depreciated over 6% against the US dollar and China’s foreign exchange reserves dropped sharply. Among different types of capital outflows, China’s outbound direct investment (ODI) continued to surge, with a 53.7% increase on a year-on-year basis in 2016. Such depreciation in the value of the RMB and the continuous and extraordinary levels of capital outflows have been cause for concern in the Chinese government, and since late 2016, there has been widespread media coverage of China’s restrictions on outbound investments by Chinese companies. For instance, the State-owned Assets Supervision and Administration Commission, in line with such regulatory trends, promulgated new rules tightening outbound investments by central state-owned enterprises. While some other measures reported by the media have not been adopted in official rules, both public statements made by Chinese government officials and our experience in various transactions both suggest that such new measures have in practice been implemented.

The Guiding Opinions were issued against the backdrop of a substantial reduction in Chinese ODI. ODI out of China dropped to USD48.19 billion in the first half of 2017 (a 45.8% decrease on a year-on-year basis). Although the exact impact of the Guiding Opinions remains to be seen, they provide market players with official guidance on the chances for a given outbound transaction to gain approval from Chinese authorities.

Framework of the Guiding Opinions

 The Guiding Opinions set out lists of encouraged, restricted and prohibited outbound investment activities in guiding and regulating the direction of ODI, as described below.

(a) Encouraged outbound investments:

Infrastructure: outbound infrastructure investments that facilitate the “belt & road” construction and the interconnectivity of peripheral infrastructure.

Capacity and equipment: outbound investments that promote the export of advantaged capacity, high-quality equipment and technical standards.

High-tech and advanced manufacturing: outbound investments that strengthen cooperation with foreign high-tech and advanced manufacturing enterprises (such as establishing research & development centers abroad).

Energy and resources: participation in the exploration and development of outbound oil and gas, minerals and other energy and resources.

Agriculture: cooperation in the agriculture industry with other countries and investment cooperation in farming, forestry, livestock and finishing industries.

Services: outbound investments in business and trade, culture, logistics and other areas of services, and establishment by qualified financial institutions of branches and service networks abroad.

(b) Restricted outbound investments:

Sensitive countries and regions: outbound investments in sensitive countries and regions which have not established diplomatic ties with China, are in war, or are restricted by bilateral or multilateral treaties or agreements with China.

Specific sectors: real estate, hotels, film studios, entertainment, sports clubs, etc.

Investment platform: establishment of overseas equity investment funds or investment platforms without actual, specific industrial projects.

Environmental protection, energy consumption and safety standards: outbound investments that do not meet the environmental protection, energy consumption and safety standards of the host country.

Technical standards: outbound investments using outdated production equipment that does not meet the technical requirements of the host country.

The Guiding Opinions expressly require the first three types of restricted outbound investments listed above to be subject to the approval by the relevant authorities (as opposed to a filing requirement), which will require preparation and submission of substantial application materials and prolonged review time, while the fourth and fifth types listed above are not expressly subject to approval.

(c) Prohibited outbound investments:

– Investments involving core military technology and products.

– Investments involving export-prohibited technology, process/techniques or products.

– Investments in gambling and sex industries.

– Investments prohibited by international treaties entered into by China. 

– Investments that endanger or may endanger national interests and national safety.

Following the release of the Guiding Opinions, NDRC has been actively advancing the legislative process in relation to outbound investment approval and filing rules to reflect the Guiding Opinions. On November 3, 2017, NDRC published draft regulations entitled “Measures for Administration of Enterprises Overseas Investments”, which are open for public comment until December 3, 2017. Other government authorities are also expected to update their policies. The adoption of these implementing measures will likely provide more transparency and guidance to the execution of outbound investment transactions. We will continue to provide updates on the development of this legislative process. 

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