This article was written by Andrew Fei.
On 18 August 2017, as part of the Chinese government's ongoing efforts to regulate overseas investments by Chinese companies, China's State Council published a set of investment guidelines (Guidelines) formulated by four key regulators – the National Development and Reform Commission, Ministry of Commerce, People's Bank of China and Ministry of Foreign Affairs (collectively, PRC Regulators).
The Guidelines provide the most important clarification on Chinese outbound investments since late 2016, when Chinese authorities first clamped down on so-called "irrational" or "non-genuine" investments. Market uncertainty and a decline in Chinese outbound investments followed.
Significantly, the Guidelines provide official clarity by classifying overseas investments into three main categories:
- encouraged investments;
- restricted investments; and
- prohibited investments.
The items in each category are broadly consistent with the Chinese government's public and non-public communications and actions since late 2016. They also reflect what our experience shows to be China's current economic and social policies. For example, it should not surprise market participants that Belt and Road Initiative investments are encouraged. PRC Regulators also wish to protect China's image abroad as a responsible investor.
The Guidelines are a timely and positive development, which we expect will result in Chinese outbound investments returning to the pre-2016 levels, especially in the "encouraged" category which is likely to enjoy quicker and more efficient regulatory approvals. They represent a reassuring endorsement of China's Go-Global initiative in the wake of recent uncertainty.
This article provides an overview of the key takeaways from the Guidelines.
Issues Identified by PRC Regulators
PRC Regulators observed that the current international and domestic environments are undergoing profound changes, providing opportunities for Chinese companies to invest overseas, but at the same time giving rise to many risks and challenges. In the Guidelines, PRC Regulators describe the concerns informing the categorisation of overseas investments and the policy measures determined.
- (be more careful) Some companies have not accurately understood China's Go-Global strategy and made overseas investments without careful and systematic planning, analysis and decision-making. These investments can end up experiencing operational difficulties, resulting in significant losses.
- (benefits to China) Some companies have focussed on investments that are not part of the real economy, which not only fail to contribute to China's economic development but also increase capital outflows.
- (benefits to host nation) Some companies have not paid attention to the destination's environmental protection, energy consumption, safety and other standards, leading to disputes that result in economic losses and damaging China's image.
Three Investment Categories
Encouraged Overseas Investments
"Qualified and capable" Chinese companies are encouraged to actively engage in:
- Belt and Road investments and related infrastructure and connectivity
- Investments that export China's quality production capacity, equipment and technical standards
- Investments that strengthen cooperation with overseas high-tech and advanced manufacturing companies – Chinese companies are encouraged to establish overseas R&D centres
- Prudent participation in resources exploration and development
- Expanding agricultural cooperation with foreign countries by carrying out mutually beneficial and win-win investments in agriculture, forestry, animal husbandry and fishery
- Investing in commercial, cultural, logistical and other services sectors in an orderly manner
- Qualifying financial institutions establishing branches and service networks abroad
Restricted Overseas Investments
Chinese companies are restricted in making overseas investments that are not aligned with China's national development, macroeconomic, international cooperation and foreign policies, including:
- Investments in real estate, hotels, film studios, entertainment, sports clubs etc.
- Establishing equity investment funds or investment platforms outside China without specific industrial projects
- Carrying out investments using outdated production equipment that does not meet the technical requirements of the destination country
- Investments that do not meet the environmental protection, energy consumption and safety standards of the destination country
- Investments in sensitive countries/regions with no diplomatic relations with China or that are in a state of war or chaos
- Investments that are restricted by bilateral and multilateral treaties between China and the relevant country/region
Prohibited Overseas Investments
Chinese companies are prohibited from making the following types of overseas investments:
- Investments involving exporting core military industrial technology and products without the approval of the Chinese government
- Investments involving exporting technology, crafts and products that China prohibits from being exported
- Investments in gambling and lewd industries
- Investments prohibited by international treaties to which China is party
- Other investments that endanger or may endanger China's national interests and national security
Core Overseas Investment Principles
The Guidelines outline a number of core overseas investment principles, which reinforce the reality that the Chinese government, Chinese companies themselves and market forces each play an important role in Chinese overseas investments:
- For overseas investments by Chinese companies, the market will play a decisive role in the allocation of resources and the Chinese government will also better fulfil its role. Under the government's guidance, Chinese companies will make their own decisions and accept responsibility for profits, losses and investment risks.
- The Chinese government will continue to make policy reforms for overseas investments, improve related government functions and primarily use a filing-based system for supervising overseas investments (rather than a pre-approval system).
- Chinese companies should take into account the circumstances of the investment destination and its actual needs, and focus on mutually beneficial cooperation with foreign governments and companies.
- Emphasis will be placed on risk prevention, legal compliance as well as prior, interim and post investment supervision.
The Guidelines also outline policy measures relating to Chinese overseas investments, stating that the Chinese government will adopt different policy approaches for each category of overseas investment.
Importantly, the Chinese government intends to:
- Provide more favourable and convenient tax, foreign exchange, insurance, customs and other services for encouraged overseas investments
- Support the development of relevant services such as legal, arbitration, accounting, tax, valuation, investment consulting and risk assessment
- Strengthen authenticity and compliance reviews of overseas investment to prevent non-genuine investments
- Establish a foreign investment blacklist regime and penalise illegal overseas investment activities
- Establish an overseas investment capital regime for state-owned enterprises (SOEs)
- Improve the overseas investment auditing regime for SOEs and safeguard the security of foreign state-owned assets
- Encourage Chinese companies to:
- Obtain in-depth understanding of overseas investment policies, regulations and international practices
- Improve their overseas investment decision-making, financial management, legal and regulatory compliance, risk assessment, risk management and accountability systems
- Strengthen supervision and management of their overseas subsidiaries
- Comply with laws and regulations of the investment destination
- Strengthen guidance and supervision of investments in high risk countries and regions, provide timely warnings about significant political, economic and social risks and put in place preventive measures.
More Clarity to Come
The NDRC is formulating new administrative measures relating to overseas investments. Other Chinese regulators are also developing policy measures to support and implement the Guidelines.
The Guidelines provide helpful clarification and confirmation to the market about the overall policy direction of Chinese overseas investments. The Guidelines and the implementing policies which we expect to follow, will contribute to the growingly complex legal, regulatory and policy framework governing Chinese overseas investments.
Over time, we expect to continue to see an increase in Belt and Road Initiative investments and other encouraged investments, which may benefit from more favourable policies and efficient procedures. Hopefully, Chinese companies will also place greater emphasis on cost-benefit analysis, due diligence, risk management and legal compliance in making and managing overseas investments.