19 January 2018

An Update of China’s Control over Outbound Investments

China’s National Development and Reform Commission released the Administration Measures for Outbound Investments of Enterprises on 26 December 2017. This legislation further streamlined the approval/filing process for outbound investments, increased the transparency of the regulatory regime, and extended the regulatory authority to control outbound investments more closely.



On 26 December 2017, China’s National Development and Reform Commission (NDRC) released the Administration Measures for Outbound Investments of Enterprises (the New Rules), which will take effect on 1 March 2018 and replace the current NDRC Administration Measures for Approval and Filing of Outbound Investments (the Existing Regulations).


This legislation is another major step by the Chinese government to reframe its control over outbound investment (ODI). The implementation of the New Rules will simplify the approval and filing procedures for Chinese investors, and will also augment the regulatory framework and extend the NDRC’s regulatory authority to control ODI more closely.




The abolition of the “road-pass” regime (xiao lu tiao): Under the Existing Regulations, if the investment amount of an ODI reaches or exceeds USD300 million, the Chinese investor must obtain a confirmation letter from NDRC before entering into a binding agreement or submitting a binding offer. This requirement has been removed under the New Rules. This is likely to enhance the competitiveness of Chinese investors, particularly in where transactions are structured as competitive auctions.


The abolition of the State Council’s approval for certain investments: Under the Existing Regulations, the State Council’s approval is required if an ODI is to be made in certain countries or the ODI is in a sensitive industry and the investment amount reaches or exceeds USD2 billion. This requirement has also been removed under the New Rules. Since there is no time limit for the State Council to grant approval under the Existing Regulations, the removal of this requirement will result in an increase in deal certainty for transactions that would otherwise be subject to the approval of the State Council under the Existing Regulations.


Extension of the validity period for the approval/filing: Under the Existing Regulations, the validity period of an NDRC approval/filing is one year (with the exception of construction projects). The validity period has now been extended to two years for all ODI projects. It is also worth recognising that under the Existing Regulations, an investor may only apply to extend the validity period of an NDRC approval/ filing only if ODI approval or filing procedures with other regulatory authorities are not completed within the validity period of the NDRC approval/filing. There is no such restriction or condition under the New Rules and this may enable greater flexibility and ease for PRC investors to structure transactions that may have holdback, instalment payment, put/call option or farm-in arrangements.


Narrowed scope of sensitive industries along with increased flexibility for the NDRC: Under the Existing Regulations, sensitive industries include basic telecommunication operations, development and utilisation of cross-border water resources, large-scale land development, electric mains, power grids and news media. The New Rules have removed basic telecommunication operations, large-scale land development, electric mains and power grids from sensitive industries, and included research, production and maintenance of weapons. The New Rules also provide that sensitive industries may include other industries where restrictions are necessary pursuant to relevant laws, regulations and policies, and that the NDRC may release a catalogue of sensitive industries (which we expect the NDRC will update from time to time). This mechanism gives the NDRC far more flexibility to respond to market developments and trends when monitoring and controlling ODI activities. It is not clear when the NDRC will release the first edition of the ODI catalogue. It is likely that additional sectors that have been the subject of commentary over the past 18 months such as real estate, hotels, film studios, entertainment and sports clubs, and which are listed as restricted sectors by the NDRC and other regulatory authorities, will be included in the first edition of the ODI catalogue.


Timeline for obtaining NDRC approval or filing notice: Under the Existing Regulations, investors are required to obtain the approval or complete the filing prior to signing of any definitive and legally binding documents, or otherwise specify in the relevant signed documents that they will only come into effect upon the receipt of NDRC’s approval or filing certificate. In practice, the prevailing view is that the NDRC will usually accept the receipt of NDRC approval or the issuance of a filing certificate as a condition precedent to closing of the transaction. The New Rules adopt a new approach, requiring that investors obtain NDRC approval or the receipt of a filing certificate prior to the “implementation of a project”. Under the New Rules, the term “implementation of a project” appears to approximate the concept of closing of a transaction, although this is not entirely clear in cases such as the injection of assets and equity or the provision of funding or security. If a Chinese investor intends to provide a deposit upon or after the execution of transaction documents or otherwise provide a guarantee to a Controlled Offshore Enterprise in an overseas investment by such Controlled Offshore Enterprise, the Chinese investor may be required under the New Rules to obtain NDRC approval or filing with the NDRC prior to the execution of signing of the definitive documents in some transactions. It is not clear whether a break fee arrangement tied up with receipt of the NDRC approval or filing certificate will fall within the scope of implementation of an investment.


The shortening of the time limit for external assessment: Under the Existing Regulations, the NDRC should entrust a consultancy institution (in case assessment by external consultancy is necessary) within five business days after receiving and accepting the application for the approval of an ODI project. The assessment by the relevant consultancy institution should be completed within 40 business days in principle (no time limit for extension). The time limits have been shortened to four business days and 30 business days (with extensions permitted up to 30 business days) respectively under the New Rules.




Offshore transactions are covered by the New Rules: The Existing Regulations covers overseas investments either directly made by or otherwise funded or guaranteed by onshore Chinese enterprises, and does not capture offshore transactions solely conducted by offshore enterprises which are not funded or guaranteed by onshore Chinese enterprises (Offshore Transactions). Under the New Rules, NDRC will regulate the Offshore Transactions in the following ways:


  1. investments in sensitive countries/regions or in sensitive industries (Sensitive Investments) by overseas enterprises controlled by Chinese enterprises (Controlled Offshore Enterprises) are subject to NDRC approval;


  1. investments that are not in either sensitive countries/regions or sensitive industries (Non-sensitive Investments) by the Controlled Offshore Enterprises, the investment amount of which exceeds USD300 million, are required to be reported to the NDRC prior to implementation of the investments; and


  1. other investments by the Controlled Offshore Enterprises, though neither subject to the approval of NDRC nor required to be reported to the NDRC prior to implementation, technically are still within the regime of the New Rules and theoretically the NDRC may request the investors to submit investment related information or penalise the investors under certain circumstances (e.g., the investor conducts unfair competition activities).


The term “control” is defined under the New Rules as holding, directly or indirectly, more than half of the voting rights, or otherwise being able to direct important matters such as operation, finance, human resources or technology of the enterprise. This definition could be interpreted broadly to include veto rights on the aforementioned corporate matters which is quite usual for joint venture companies.


Financial institutions are under NDRC’s radar: The New Rules explicitly provide that the investors subject to the New Rules include both financial enterprises and non-financial enterprises. This may impact those investors which previously leveraged the channel of financial institutions (e.g., QDII) to circumvent NDRC’s supervision.


The New Rules may apply to ODI of VIE structure companies: The New Rules provides that it applies “by reference” to overseas enterprises controlled by Chinese individuals. It is not entirely clear at this stage how the New Rules will apply to these investments (e.g., who shall submit approval applications or file with NDRC, the Chinese individuals, the overseas companies or the operating companies), but many internet companies such as Alibaba, Tencent, Baidu, JD and other companies which adopted VIE structures may fall into this regime when they extend their business in overseas markets.


Scope of “investments” is widened: Under the Existing Regulations, ODI subject to NDRC supervision is defined as input of cash, securities, in-kind, IP, shares, credit rights and equity or provision of guarantee in exchange for overseas ownership, operation management right and other relevant interests. The New Rules clarified that, among other things, land ownership and land usage rights, exploration rights in relation to natural resources, ownership and management rights in relation to infrastructure, and acquisition of the management rights of offshore assets or control of offshore assets through contractual or trust arrangements are all included.


Extensive authorities of NDRC to suspend or terminate overseas investments: Under the New Rules, the NDRC is empowered to request the investors to suspend or terminate their investments and rectify the non-compliance within a specified term in the event that:


  1. the investors have taken up unfair competition activities or disturbed the order of the overseas investment market; or
  2. the investment may threaten or impair the national interest and national security.


There is no clear-cut definition of “unfair competition”, “disturb the order of the overseas investment market”, “national interest” and “national security”. It is not yet clear whether a proposed overseas investment may qualify as a result of alleged corporate espionage or predatory pricing.


Post-approval/filing supervision: Under the New Rules, investors are required to, within 20 business days after completion of an ODI project, submit a project completion report. In the event of any material adverse occurrence during the investment process, the investor is required to report within five business days after the occurrence of a material adverse event. The NDRC may also issue major event inquiry letters to investors with regard to major events that take place during the course of ODI.




It appears that the Chinese central government is now taking a more practical approach to control ODI of Chinese investors. On the one hand, the NDRC created more administrative tools to monitor and control ODI activities, filling in the loopholes of the Existing Regulations. On the one hand, the NDRC has sought to further streamline the approval/filing process and increase the transparency and clarity of the regulatory regime.


There are still a number of open items that the NDRC will need to clarify going forward, such as the exact scope of controlled offshore subsidiaries, the implementation of the New Rules to VIE structure companies. It’s also not clear whether NDRC will consider the control measures which were not set out in any regulations but previously adopted by regulatory authorities in practice (e.g., restrictions on outbound investments where the PRC buyer is a partnership, or where the target is substantially larger than the PRC buyer). However, if implementation of the New Rules can provide a more predictable outcome to ODI transaction, we expect that the New Rules will help facilitate the overseas M&A activities by Chinese companies, particularly in the sectors encouraged by the Chinese central government.


Victor Ho +86 106 535 4381
Managing Partner victor.ho@allenovery.com
Ling Li +86 106 535 4385
Partner ling.li@allenovery.com
Wayne Lee +852 2974 7168, +86 21 20367168
Partner wayne.lee@allenovery.com
Richard Qiang +86 10 65354306
Counsel richard.qiang@allenovery.com
Benjamin Crawford +86 10 65354382
Counsel benjamin.crawford@allenovery.com
Charles Pommies +32 27802936
Counsel Charles.Pommies@allenovery.com

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