Guidance Opinion to Further Direct and Regulate Outbound Investment, Guo Ban Fa [2017] No. 74. Introduction. Highlights. 21 August 2017.
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1 21 August 2017 China's State Council Clarifies Policy Considerations of Outbound Investment Regulation. New categories of encouraged, restricted and prohibited investments created. Contents Guidance Opinion to Further Direct and Regulate Outbound Investment, Guo Ban Fa [2017] No. 74 Introduction On 18 August 2017, the State Council released an opinion (or policy statement) on the direction and regulation of outbound investment. Developed by the NDRC, MOFCOM, PBOC and MOFA, the new opinion provides, publicises and codifies a set of principles which the government authorities are to follow in regulating and scrutinising future outbound investments by Chinese enterprises. Its terms should be carefully considered by all parties to Chinese outbound investment transactions and their advisers. Introduction... 1 Highlights... 1 General approach... 2 The three-fold classification... 2 Encouraged investments... 2 Restricted investments.. 3 Prohibited investments.. 4 Next steps... 4 Overall assessment... 4 Reference... 6 In this alert, we first highlight the key points and take-aways of the State Council s opinion, followed by a more detailed review. Highlights > The opinion continues to encourage productive outbound investment except where it needs in the eyes of the Chinese government to be restricted and controlled. It provides a classification of outbound investments into encouraged, restricted and prohibited investments. > The Chinese government will facilitate encouraged investments that implement the One Belt One Road strategy and help China develop its competitiveness. Specific examples include high-tech, advanced manufacturing, agribusiness, resources and services sector investments. > Restricted investments will be more tightly controlled, including investments in real estate, hotels, cineplexes, entertainment industries and sports clubs, and investments with no underlying business or that are in breach of host country regulations or standards or otherwise China's State Council Clarifies Policy Considerations of Outbound Investment Regulation 1
2 politically sensitive. In some cases, these investments will require approvals rather than filings. > Prohibited investments include exports of prohibited technology, gaming, pornography and other investments that endanger national interest and national security. > The NDRC and other regulatory authorities are to update their rules and policies to reflect the State Council s opinion document. The government will put in place additional checks, reviews and audits and gather more information on risks and political climate in the host countries. General approach The opinion indicates that the Chinese government will continue to support outbound investment made in accordance with commercial principles and international norms. The current filing-based model for clearance of outbound investment is to be preserved, with a hint of further deregulation and streamlining the regulatory process to come. Productive outbound investment continues to be encouraged, except where it needs in the eyes of the Chinese government to be restricted and controlled. There is also welcome emphasis on the need for outbound investment to be win-win and built on co-operation with local governments and benefiting the local community. Acquirors are called to consider the political climate of the host nation as it may relate to the outbound investment. This is a timely call, given recent initiatives or attempts by developed economy governments to restrict foreign acquisitions in their home markets (some of which may be directed at acquirors from specific nations, including China) 1. However, the opinion also clearly indicates that Chinese government authorities are expected to play a greater role in facilitating outbound investments that they deem desirable (including improving the administration of tax, foreign exchange, insurance, customs and information in this regard), whilst exercising strict scrutiny and control over outbound investments deemed to be risky from a local market or national policy perspective. The three-fold classification The opinion categorises certain outbound investments into encouraged, restricted and prohibited investments. Encouraged investments Outbound investments by select Chinese enterprises that further China s One Belt One Road policy, contribute to Chinese industry, facilitate deeper international co-operation, grow Chinese advanced equipment and export of Chinese technology, enhance Chinese R&D and production capability and help China overcome its resources shortage and upgrade its industries are to be encouraged. 1 For a detailed discussion, see Linklaters report Getting over the line: clearing regulatory hurdles to outbound M&A. China's State Council Clarifies Policy Considerations of Outbound Investment Regulation 2
3 The opinion outlines six strategic initiatives to promote these encouraged outbound investments: > strongly supporting infrastructure investment to aid the development of the Belt and Road and join up the surrounding infrastructure; > supporting stable investment aimed at exporting the capacity of China s competitive industries, quality equipment and technical standards; > strengthening investment collaboration between Chinese enterprises and high-tech and advanced manufacturing enterprises in overseas markets, and supporting the establishment by Chinese enterprises of overseas R&D centres; > exploring and developing overseas oil and gas, mineral and other resources on the basis of sound economic assessment; > promoting international agri-business co-operation including investments in farming, forestry, livestock and fishing and related secondary industries; and > developing services sector investments including business and trade services, culture and logistics, and supporting qualified financial institutions in establishing overseas branch networks. Restricted investments Outbound investments that contravene China s diplomacy objectives, win-win development strategy or macroeconomic management are to be restricted. These include: > investments in sensitive countries and regions: - having no diplomatic relations with China; - in a state of war or turmoil; or - restricted by the terms of China s international treaties; > investments in real estate, hotels, cineplexes, entertainment industries and sports clubs; > setting up investment funds and investment platforms with no operating business in overseas jurisdictions; > deploying lagging production equipment in outbound investments that does not comply with the host jurisdiction s technical standards; and > investments in breach of host jurisdiction environmental, energy efficiency or safety standards. The opinion specifically requires regulatory approval of investments in the first three categories. This further develops the principle of the pre-existing rules which require regulatory approval for outbound investment in sensitive countries and sectors. The demands on experienced international and local advisers may increase, due to the focus on host jurisdiction compliance issues. China's State Council Clarifies Policy Considerations of Outbound Investment Regulation 3
4 In its press conference, the NDRC expressed the following concerns that may guide regulation of investments in this category: > many recent investments in the second category had been made irrationally, so more regulatory direction with a cautious approach will be adopted for these investments going forward; and > investor focus on non-real economy investments in certain sectors, such as real estate, poses a threat to domestic financial stability due to the significant outflows of capital involved. Prohibited investments The opinion prohibits the following outbound investments (largely repeating the position under the existing NDRC and MOFCOM rules): > export from China of core military industrial technology or products that have not been approved by the government; > the overseas deployment of technology, knowhow and products that are prohibited for export; > gaming and pornography; > investments prohibited by the terms of China s international treaties; and > other outbound investments that endanger or may endanger national interests and national security. Next steps The opinion provides for a series of measures Chinese outbound investors need to take to control risks, including additional reviews, checklists and information exchanges to permit only genuine outbound investment, and enhancing market intelligence and risk management. From a regulatory perspective, the NDRC indicated in its press conference that they are in the process of revising the existing outbound investment approval and filing rules to encapsulate the opinion s policies, whilst simultaneously taking forward the drafting of new outbound investment legislation. Other government departments are also expected to update their policies and take new measures to carry out the opinion s requirements. On the management of outbound investments going forward, the opinion calls for Chinese enterprises to exercise greater oversight over their controlled overseas enterprises, including decision making, financial management and apportionment of responsibility for violations. In the case of state owned enterprises, a system regulating outbound investment capital will be introduced and the current audit requirements for outbound investments will be strengthened. Overall assessment The opinion s three-fold classification incorporates several concepts that can be found in existing regulations and regulatory policy statements, and enumerates some new sector-specific concerns. Pending the introduction of China's State Council Clarifies Policy Considerations of Outbound Investment Regulation 4
5 detailed rules to formalise the opinion s principles in the outbound investment regulations, parties to Chinese outbound investment transactions should assess the regulatory risks by considering where their planned transactions fit in the context of the specific categories outlined. If an investment does not fit in any of the specifically listed sectors, it may still be necessary to demonstrate its positive effect to China s competitiveness, China s participation in global supply chains and value chains and the globalisation of China s economy, in order to ensure a smooth Chinese regulatory process. It will also be interesting to see (and the opinion is silent on) how the new approach will be reflected in the policies of financial regulators and lenders in the financing of outbound investment transactions. China's State Council Clarifies Policy Considerations of Outbound Investment Regulation 5
6 Reference Guidance Opinion to Further Develop and Regulate Outbound Investment ( 关于 进一步引导和规范境外投资方向指导意见 ), National Development and Reform Commission ( NDRC ), Ministry of Commerce ( MOFCOM ), People s Bank of China ( PBOC ) and Ministry of Foreign Affairs ( MOFA ), 18 August 2017 Contacts For further information please contact: Jian Fang Partner (+86 21) jian.fang@linklaters.com Simon Meng Partner (+86 21) simon.meng@linklaters.com Richard Gu Senior Consultant (+86 21) richard.gu@linklaters.com John Xu Partner (+86 21) john.xu@linklaters.com Colette Pan Managing Associate (+86 21) Author: Bryan Chan This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2017 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on This firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are regulated by the Law Society of England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. colette.pan@linklaters.com Linklaters LLP Linklaters LLP Shanghai Office 29th Floor Mirae Asset Tower 166 Lu Jia Zui Ring Road Shanghai People's Republic of China Telephone (+86) Facsimile (+86) Linklaters.com China's State Council Clarifies Policy Considerations of Outbound Investment Regulation 6 A /0.8/21 Aug 2017
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