Examples of transactions under FTZ cross-border investment system

By Leo Wang, Monica Gao, Llinks Law Offices
Copy link

In the General Plan for the China (Shanghai) Pilot Free Trade Zone, it is expressly proposed that liberalisation of the investment sector be broadened to support the carrying out of various forms of offshore investment by various types of investment entities in the zone. Additionally, the recordal system (without approval) should be mainly used to administrate the establishment of enterprises for offshore investment purposes.

The establishment of offshore equity investment companies in the free trade zone (FTZ) is encouraged, and qualified investors are supported in establishing an offshore private equity fund of funds. The Shanghai government has also issued certain complementary regulations on offshore investments by enterprises established in the FTZ. However, there has been a dearth of actual transactions under the new system.

王利民 Leo Wang 通力律师事务所 合伙人 Partner Llinks Law Offices
Leo Wang
Llinks Law Offices

In February 2014, Hony Capital invested RMB186 million (US$30 million) abroad, through the FTZ cross-border investment platform, to acquire PPTV in conjunction with Suning Appliance. This was the first example of an investment abroad by a private equity fund in the FTZ.

NDRC approval

Offshore investments by enterprises located outside of the zone require the approval of the National Development and Reform Commission (NDRC) and the approval of the commerce authorities for establishing an enterprise or for investment abroad. These investments are also subject to the oversight of the People’s Bank of China and the State Administration of Foreign Exchange (SAFE) in respect of the transfer of funds from the enterprise’s account and offshore financing in renminbi and foreign currencies, respectively. Regardless, all of the above-mentioned systems have experienced breakthroughs in the FTZ.

高云 Monica Gao 通力律师事务所 高级律师 Senior Lawyer Llinks Law Offices
Monica Gao
Senior Lawyer
Llinks Law Offices
  1. Offshore investment projects primarily subject to recordal. The Administrative Measures of the Zone for the Recordal of Offshore Investment Projects specify that the FTZ management committee subjects any general offshore investment projects of local enterprises registered in the FTZ, which also fall within the purview of the Shanghai government, to administration by the recordal system. Projects above the limit remain subject to the approval of the NDRC. Except for the recordal system, regulations are retained for special project approval, information reporting systems, and the local system for the registration of material offshore investment projects.
  2. Investment in and establishment of enterprises abroad, primarily subject to recordal. The Administrative Measures of the Zone for the Recordal of the Investment in and Establishment of Enterprises Abroad specify that the offshore investments of enterprises registered in the FTZ that fall within the purview of the committee are subject to administration by the recordal system. Offshore investment includes the establishment of non-financial enterprises abroad by new establishment, merger, acquisition, etc., as well as the securing of ownership, control, right to operate and manage, or other such rights and interests of, or in, existing non-financial enterprises. Offshore investments involving jurisdictions with which China does not have diplomatic relations, offshore investments in certain jurisdictions, offshore investments involving the interests of multiple jurisdictions, the establishment of offshore special purpose vehicles, energy and mining-type offshore investments, offshore investments that require the solicitation of investors in China, etc., all require the approval of the appropriate commerce authority.
  3. Simplification of foreign exchange conversion procedure. In December 2013, the People’s Bank of China (PBOC) issued the Opinions on Financially Supporting the Establishment of the China (Shanghai) Pilot Free Trade Zone, which specify that cross-border direct investment from the FTZ may, in accordance with relevant regulations of Shanghai, be exempt from advance approval. In such circumstances, cross-border receipts, payments and currency exchanges involved can be carried out directly with banks.

    At the end of February 2014, the SAFE Shanghai branch issued the Rules for Exchange Control Support for the Establishment of the Zone, and in the attached Rules of the Zone for Foreign Exchange Registration in Connection with Direct Investment, it is specified that banks can carry out offshore investment registration for capital contributions made in cash. The scope of registration is the amount of the registered capital specified in the offshore investment approval or recordal document issued, although in special circumstances and for special purpose vehicles the same must be carried out with the SAFE office.

Hony Capital designed a recordal and foreign exchange conversion operational route for the cross-border investment in the PPTV project. In addition to basing it on the features of a private equity investment fund, Hony Capital established two entities in the FTZ, a fund management company and a fund company – as the investment entity for cross-border investment from the FTZ – and the remaining operations were primarily securing the relevant recordal for the cross-border investment project and applying to the SAFE office for foreign exchange conversion.

According to the description given by Hony Capital, the recordal authority mainly concerned itself with technical issues and did not pay particular attention to the internal transaction structure and relevant terms of the PPTV project investment.

Hony Capital’s successful investment in PPTV indicates that the competent authorities of the FTZ have, in respect of the cross-border investment transactions of enterprises, entered the stage of actual operations. With emphasis on their reviews as concentrated on technical aspects, the time required for administrative approval of cross-border investment transactions of enterprises has been greatly reduced and transaction efficiency greatly enhanced. The structure of controlling a domestic company through a variable interest entity is also of positive reference value in respect of the competent authorities’ stance toward similar acquisition transactions in future.

However, the number of actual cases available for reference at the moment remains limited, with certain details still awaiting clarification. One example shows the detailed operational rules for supporting cross-border financing for offshore investments from the FTZ proposed in the PBOC opinions, the domestic and foreign tax burdens that may be involved in the transactions, etc. Accordingly, while keeping an eye on transaction efficiency, parties to a transaction need to prudently conduct their own fact finding on other factors that could have an impact on their plan.



邮编: 200120

19/F, ONE LUJIAZUI, 68 Yin Cheng Road Middle

Shanghai 200120, China

电话 Tel: +86 21 3135 8666

传真 Fax: +86 21 3135 8600

电子信箱 E-mail:




Copy link