This article was written by Wang Kaiding (Partner) , Huang Mengting(Senior Associate) and Tang Xinran(Associate).
In June 2018, the National Development and Reform Commission ("NDRC") released the Answers to Frequently Asked Questions Concerning Outbound Investment by Enterprises ("Answers to FAQs") on its official website, providing clarification to 61 frequently asked questions regarding the application of the new Administrative Measures for Enterprise Outbound Investment ("Regulation No. 11"). It's particularly worth noting that, the NDRC made restrictive interpretations with respect to the scope of sensitive projects.
According to the Answers to FAQs, outbound investments in sensitive industries like "real estate", "hotel" and "setting up offshore equity investment funds or investment platforms without specific underlying industrial projects" will not be categorized as sensitive projects and therefore is not subject to the NDRC's verification procedures for outbound investment, provided that "they do not involve commitment of domestic assets or interests or provision of onshore financing or guarantee and the entire capital is raised from overseas." However, if such investment involves commitment of domestic assets or interests or provision of onshore financing or guarantee, they would still fall into the category of sensitive projects which are subject to the NDRC's verification procedures.
Below is a summary of the required procedures of the NDRC for outbound investments in the aforementioned industries based on the Answers to FAQs:
| Industry | Transaction Strcuture & Financing Approach | Investment Amount by Chinese Investors | Required Procedures for Investors |
| Real estate Hotel Setting up offshore equity investment platforms without specific industrial projects |
Involving commitment of domestic assets or interests or provision of onshore financing or guarantee | Regardless of value | Verification by the NDRC |
| Not involving of domestic assets or interests or provision of onshore financing or guarantee. The entire capital is raised from overseas. | ≥USD 300 million | Submission of a"situation report for non-sensitive project with large amount"to the NDRC | |
| < USD 300 million | No pre-transaction verification, record-filing or reporting is required |
"Real estate", "hotel" and "setting up offshore equity investment funds or investment platforms without specific underlying industrial projects" as sensitive industries have drawn substantial attention since the NDRC released Regulation No. 11 and the Catalogue of Sensitive Industries for Outbound Investment 2018 ("Sensitive Catalogue"). In particular, Regulation No.11 adopts a control-based approach that includes in the verification scope all sensitive projects made by offshore entities under the control of Chinese investors, regardless of whether or not the Chinese investors provide financing or guarantee to such projects. Consequently, even if the offshore entities controlled by Chinese investors carry out the sensitive projects via a pure offshore structure and with overseas capital rather than domestic financing or guarantee, such investment will still fall into the sensitive category and is subject to the verification process by the NDRC.
In response to the concern, the NDRC made restrictive interpretations to these three sensitive industries in the Answers to FAQs, narrowing down the scope of outbound investments required for the NDRC's verification.
Meanwhile, it is to note that, the restrictive interpretations to sensitive projects only apply to these three industries, namely "real estate", "hotel" and "setting up offshore equity investment funds or investment platforms without specific underlying industrial projects", and do not include "movie theaters", "entertainment", "sports clubs" or other sensitive industries.
In addition to the aforementioned restrictive interpretations, the Answers to FAQs also includes detailed explanations and instructions for each of the sensitive industries to clarify the scope of application of sensitive projects.
1. Real Estate
The Answers to FAQs clearly defines "real estate" in the Sensitive Catalogue as the following two types of outbound investment activities: (a) "construction or acquisition of residential or commercial real estate projects and acquisition of land used for constructing residential or commercial properties overseas"; and (b) "formation or acquisition of overseas real estate companies, incremental investment into existing overseas real estate companies, investment into overseas REITs and etc."
The Answers to FAQs clearly excludes the following outbound investment activities from "real estate" investment in the Sensitive Catalogue: (a) "investment into property management and real estate agency businesses"; (b) "construction or acquisition of properties for self-use, including office premises and employee dormitories"; (c) "investment for industrial infrastructures construction and development, such as industrial parks, science and technology parks and logistics parks"; and (d) "investment by construction enterprises in exchange of a minority stake in projects with the purpose of obtaining construction contracts for such projects".
2. Setting up offshore equity investment funds or investment platforms without specific underlying industrial projects
The Answers to FAQs clearly states that "offshore equity investment funds or investment platforms without specific underlying industrial projects" excludes "equity investment funds or investment platforms which involves neither commitment of domestic assets or interest nor provision of onshore financing or guarantee and whose entire capital is raised from overseas" and "equity investment funds or investment platforms without specific underlying industrial projects formed by domestic financial institutions with the pre-approval of the competent financial regulatory authorities in China".
3. Hotel
The Answers to FAQs clearly sets out that "hotels" in the Sensitive Catalogue primarily refer to "construction or acquisition of star hotels, tourist resorts, business hotels and hotels in general" and include neither "investment in hotel management businesses holding no hotel properties" nor "investment in restaurant businesses without lodging services".
4. Entertainment, movie theaters, sports clubs, the R&D, production and maintenance of weapons, development and utilization of cross-border water resources, and news and media
The Answers to FAQs also clarifies the scopes for "entertainment", "movie theaters", "sports clubs", "R&D, production and maintenance of weapons", "development and utilization of cross-border water resources" and "news and media" mentioned in the Sensitive Catalogue as follows.
"Entertainment" refers to "construction or acquisition of overseas indoor entertainment facilities, such as dance halls, video arcades and cyber cafes", "construction or acquisition of overseas amusement parks and theme parks, etc." and "construction or acquisition of overseas lottery businesses".
"Movie theaters" refer to "construction or acquisition of overseas cinemas and cinema chains".
"Sports clubs" refer to "formation or acquisition of organizations, entities and enterprises which are engaged in the employment (or lease) of athletes to participate in sports competition, performance, training, tutoring and management.
"R&D, production and maintenance of weapons" refer to the research and development, production, repair and maintenance of weapons.
"Development and utilization of cross-border water resources" refer to the development and utilization of water resources along the rivers running through the territories of two or more countries".
"News and media" refer to "the formation or acquisition of overseas new agencies (inclusive of news websites), publishers, and radio broadcasting and television entities which report on current affairs and politics and have significance on national security".
Taking effect from 1 March 2018, Regulation No. 11 has garnered wide attention from the market and we have published an analysis article on this issue. In the Answers to FAQs, the NDRC explains sensitive industries in further details, providing better transparency to outbound investment regulation so that participants in the market can understand the regulatory direction more accurately and thoroughly.
