Comparison of new rules regulating Chinese companies’ outbound investment

Recently the Chinese government has shown an increasing tendency to relax restrictions on, and encourage the expansion of, outbound investment by PRC enterprises. In addition to the Ministry of Commerce (MOFCOM) promulgating a new version of the Measures on the Administration of Overseas Investment (MOFCOM Measures) in September 2014, the National Development and Reform Commission (NDRC) also issued the Measures for the Administration of Approval and Record-filing on Overseas Investment Projects (NDRC Measures) on 8 April 2014, which then took effect on 8 May that year.

The last column covered new changes introduced in the MOFCOM Measures. This column focuses on the differences between the MOFCOM Measures and NDRC Measures, together with matters to be noted when completing the filing and application procedures for outbound investment projects in accordance with the MOFCOM Measures.

While the spirit and basic principles of both rules appear consistent, i.e. moving from an approval-based system to a predominantly filing-based system, certain important differences remain between the two schemes.

Sensitive regions and industries

In a draft of the MOFCOM Measures circulated for public input, the definition of “sensitive regions” was similar to that in the NDRC Measures, namely: “countries that have not established diplomatic relations with China, relevant countries subject to sanctions by the United Nations and relevant countries and regions in chaos caused by war”. However, the wording “relevant countries and regions in chaos caused by war” has been removed from the MOFCOM Measures, thereby giving NDRC authority over approving investment in unstable regions outside China.

Further, under the MOFCOM Measures, “sensitive industries” are “industries exporting products and technologies which China has restricted from export or industries which affect the interests of one or more countries (regions)”. In contrast, the NDRC Measures define sensitive industries much more broadly as “basic telecommunications operations, the development and use of cross-border water resources, large-scale land development, electricity lines and power grids, news media and other industries”.

Investment and approval authorities

The MOFCOM Measures removed the MOFCOM approval requirements for investment by Chinese enterprises not in excess of a threshold amount. However, these thresholds still remain under the NDRC Measures. Specifically, an investment of US$2.0 billion or more is subject to State Council approval, with preliminary input by NDRC. In addition, state-owned enterprises (SOEs) making outbound investments and Chinese entities making outbound investments of US$300 million or more must file with the central NDRC for the record. Any other outbound investment by non-SOE Chinese entities must be filed with their local NDRC bureau at the provincial level.

Practical application variations

MOFCOM and NDRC also differ in how they accept filing applications. In principle, NDRC accepts filing applications via its Nationwide Online Network System for Filing Overseas Investment Projects. However, NDRC also permits the submission of paper versions of filing application documents, rather than submission via its online network, out of consideration of protecting trade secrets.

In contrast, MOFCOM administers outbound investment through its Overseas Investment Administration System. After an enterprise submits a form containing a record of its outbound investment via the system, MOFCOM issues their comments via the administration system. The enterprise then revises the form in accordance with MOFCOM’s comments until it has passed the preliminary examination via the administration system.

In practice, enterprises must fill out the record form through MOFCOM’s administration system when applying to file outbound investment for the record in accordance with the MOFCOM Measures. Attention needs to be paid to the following:

• In principle, the investment route (limited to first tier overseas enterprises) must be filled out with the name of the jurisdiction where the invested enterprise is registered, instead of its translated Chinese name;
• The registered capital and the shareholding structure must be filled out in accordance with the post-investment conditions, instead of the pre-investment conditions; and
• For the purpose of foreign exchange, it is recommended that the currency and amount of contribution by the Chinese party, as well as the amount of investment composition, be denominated in the legal currency of the place of investment.

Once the form has passed preliminary examination, enterprises can print it and affix their enterprise seal. They can then submit the form to the competent MOFCOM authorities for the filing application, together with photocopies of the enterprise’s business license and other documents required.

Heed the procedural variations

As the two main authorities responsible for economic regulation, both MOFCOM and NDRC are crucial for the final approval and execution of outbound investment. However, attention also needs to be paid to the differences between the MOFCOM and NDRC measures.

Applicants need to bear in mind the different roles MOFCOM and NDRC play when navigating their respective approval processes. For example, MOFCOM’s role is to manage China’s economic relationships with other economies of the world, in particular the US, the European Union, and the other BRICS countries. NDRC, however, is chiefly responsible for monitoring the pace of China’s economic development. As such, MOFCOM approval will focus more on the impact of an investment on Sino-foreign economic relations, while NDRC’s review will be more inward-focused, with more attention paid to specific industries and the amount of investment involved.

With new rules come new procedures. While going through formalities for approval of outbound investment, enterprises need to pay attention to the new procedures in place, in addition to having an accurate understanding of the new measures in order to smoothly obtain relevant approval.

Zhang Jida and Owen Yang are partners in the Beijing office of DaHui Lawyers