13 March 2018

Refining the NDRC rules on Chinese outbound investments

This article was written by Jonathan Grant, Kaiding Wang, Intan Eow and Boer Ma.

In China’s push to create an open yet orderly economy, the National Development and Reform Commission (NDRC) has issued new rules on Chinese outbound investments, effective from 1 March 2018.

In an attempt to refine the rules following the Chinese government’s tightening of capital controls last year which affected the majority of Chinese outbound investments, the new Administrative Measures for Enterprise Outbound Investment (Regulation No.11) provide for clearer and more streamlined regulation of Chinese outbound investments, but also place more scrutiny on investments that may be contrary to China’s economic policies.

Key take outs

  • Clarifies NDRC approval, filing and reporting requirements for Chinese outbound investments:
    • all sensitive projects still require NDRC pre-completion approval (regardless of value)
    • non-sensitive projects either require pre-completion NDRC filing (for direct investments) or reporting (for indirect investments ≥USD300 million). Capturing indirect investments using offshore entities controlled by Chinese investors is a new feature of the regime
  • Removes the old ‘road pass’ regime and investors no longer need NDRC approval/filing pre-contracting (just needs to be a condition to completing an offshore investment)
  • Provides a helpful mechanism to seek NDRC guidance when in doubt about approval/filing requirements.

Regulation No.11 – Main requirements

In summary, NDRC approval (referred to as “verification”) is still required for sensitive projects regardless of the value of investment involved.

A sensitive project under Regulation No.11 means a project involving either:

  • a sensitive country or region – being one that has no diplomatic ties with China, or is subject to war, internal strife or where investment is restricted by the international treaties, or agreements China concluded or acceded to; or
  • a sensitive industry - according to Regulation No.11, sensitive industries include the following:
    • research, manufacture and repair of weaponry;
    • cross-border water resource development and utilisation;
    • news media;
    • restricted investments listed in the State Council’s August 2017 guidelines (State Council Guidelines) (see previous KWM alert China issues guidelines on overseas investments). These include:
      • investments in real estate, hotel, cinemas, entertainment and sport clubs; and
      • the formation of equity investment funds or investment platforms without specific industrial projects.

For non-sensitive projects, Regulation No.11 distinguishes between investments made by Chinese investors directly and investments made by offshore entities controlled by Chinese investors:

  • direct investments are subject to a pre-completion filing requirement - for a centrally-supervised state owned enterprise or an investment by the Chinese participant(s) of USD300 million or more, such filing is made with central NDRC. In all other cases, filing is with the relevant provincial counterpart of NDRC; and
  • indirect investments are subject to a pre-completion reporting requirement where the investment is USD300 million or more; no pre-completion filing or reporting is necessary otherwise.

Therefore, in relevant cases, transactions with Chinese bidders will still require an NDRC approval or filing condition precent, though Regulation No.11 clarifies that the NDRC approval or filing now only needs to be a condition to completion rather than a condition to the contract becoming effective.

If it is unclear whether a project is subject to NDRC approval or filing, Regulation No.11 also provides a new mechanism for bidders to consult with NDRC beforehand to clarify whether an approval or a filing applies. 

Other changes effected by Regulation No.11

  • State Council approval for sensitive projects of USD2 billion or above is no longer required
  • The requirement to submit a project information report before a bidder commences substantive work, the so-called “road pass”, has been removed. The road pass requirement was originally intended to prevent unhealthy competition. However, it actually adversely affected the timetable and deal certainty of projects involving Chinese bidders. Further, based on our recent experience, NDRC has issued multiple road passes in respect of the same target for a number of years, making the road pass requirement redundant. Regulation No.11 now eliminates the “road-pass” regime.
  • Local enterprises can now submit their application or filing to central NDRC directly without having to go through the provincial counterpart of NDRC first.
  • Regulation No.11 also clarifies the scope of its application and imposes a tighter timeframe for the regulators to respond at each stage of the review process.

Many of these changes had been foreshadowed in April 2016, as part of NDRC’s continuous regulatory reform to move gradually from an approval regime to a predominantly filing regime, and to streamline the regulatory process. The reforms were put on hold last year due to the imperative to stem capital outflows, but it is pleasing to see that the reforms have now finally been implemented with more targeted controls underpinned by considered economic policies.

For a more in-depth analysis of Regulation No.11 please see previous KWM Alert China's NDRC Issued New Outbound Investment Rules.

Practical implication for sellers

China has vowed to deepen economic reforms and further open its market – an objective clearly articulated in the 19th National Congress of the Communist Party of China.

Moving from the tighter capital controls last year which affected the majority of Chinese outbound investments, China has now refined its regulations to target questionable outbound investments, but encourage beneficial investments that could help China further develop into a leading modern economy under a more streamlined regulatory approach. As stated in the State Council Guidelines, China will continue to support investments in Belt and Road projects, high tech and advanced manufacturing capabilities, resources exploration and development and agricultural cooperation among other encouraged areas.

Sellers around the world with assets and businesses that benefit China’s real economy and which align with China’s economic policies could do well to take advantage of the more targeted oversight on Chinese outbound investments. As one of the top destinations for Chinese outbound investments, Australia in particular should take note.

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