China’s New Outward Investment Measures: Going Global in a Sustainable Way?
Until recently, businesses in China seeking to make investments abroad had to go through a rigorous approval process separately conducted by two ministry-level agencies or their provincial counterparts. However, for many Chinese investors, especially those in the private sector, this unpopular approval process is becoming history as China’s outward investment regime has undergone a drastic overhaul over the past year.
The previous approval process
Under the previous regime, one approval process was by conducted by the National Development and Reform Commission (NDRC), which sits under the State Council and has broad jurisdiction over fixed-asset investments. The NDRC approvals applied to all outward investment projects. For those projects involving cross-border biddings or mergers and acquisitions with a transaction amount over US$100 million, prospective investors also had to obtain a confirmation letter, in essence another form of approval, from the agency prior to entering into any binding agreements or making binding offers.
The other approval process was managed by the Ministry of Commerce (MOFCOM), whose jurisdiction covers all cross-border enterprise-formation matters. While the NDRC approvals were project-based, the MOFCOM approvals were entity-based. Each prospective investor had to obtain approvals from MOFCOM for all of the overseas entities to be owned or controlled by such investors, irrespective of whether any specific project would be carried out through such overseas entity.
The new streamlined system
On December 2, 2013, the State Council issued a Catalogue of Investment Projects Subject to Government Approval (the Catalogue). In line with the current administration’s pledge to simplify governance and decentralize power, as well as with China’s “Going Global Strategy”—aiming at encouraging Chinese enterprises to invest overseas—the Catalogue indicates that only those projects with transactions amounting to US$1 billion or more, as well as those projects involving sensitive countries, regions or industries would need to obtain prior approval from NDRC (Note: On November 18, 2014, a new edition of the Catalogue was released which does not require investments of over US$1 billion to obtain approval; however, approval is still required for investments in sensitive countries, regions and industries).[1] Similarly, MOFCOM’s approval authority was limited to those investors making investments in sensitive countries, regions or in sensitive industries.[2] However, the Catalogue did not provide detailed guidance with respect to the new approval process, nor did it offer any definitions or examples for what would constitute “sensitive countries (regions)” or “sensitive industries.” Further, the Catalogue did not address whether investments not subject to approval would be subject to any form of regulation, and if so, how.
Some additional clarity on those questions arrived on April 8, 2014, with the issuance of the NDRC’s Administrative Measures for Approving and Filling of Overseas Investment (which came into effect a month later). The NDRC Measures largely followed the prescription of the Catalogue and provided that only those projects identified in the Catalogue would be subject to NDRC approval,[3] while others would only need to go through a relatively straightforward online filing procedure. In addition, the NDRC Measures also provided explanations on the two key terms not defined in the Catalogue. According to the NDRC Measures, “sensitive countries (regions)” are those “with no diplomatic relationships with China, subject to international sanctions or undergoing war or riot”[4]; and “sensitive industries” referred to in the NDRC Measures “include but not limited to basic telecommunication operation, cross-border water resource development and utilization, large-scale land development[5], line power, electrical grids, and news media.”[6]
MOFCOM also relaxed its approval requirements in its Administrative Measures for Overseas Investment issued on September 6, 2014 (and which went into effect on October 6, 2015), replacing an earlier version issued five years ago. Like its NDRC counterpart, the MOFCOM Measures also established that the filing system would become the norm and the approval requirements would be the exceptions, applying only to those investors identified in the Catalogue.[7] However, when it comes to the key definitions, the MOFCOM Measures took a less precise approach. It defined “sensitive countries (regions)” as those “with no diplomatic relationships with China, subject to United Nations sanctions or other countries (regions) designated by MOFCOM when necessary”[8]; and “sensitive industries” as “industries involving products or technologies the exportation of which is restricted by China, or where more than one country (region) has an interest.”[9] The latter is particularly vague. Although a list of products and technologies restricted for export can be easily revealed by conducting a quick desk research on relevant catalogues published by the Chinese government, the reference to “involving” adds a significant dose of uncertainty to the scope of restricted projects. Would it be unreasonable, for instance, to infer that it covers manufacturing equipment to produce such restricted products or using the restricted products or technology in the development of downstream products or technologies? Leaving this text open for broad interpretation makes the legislation less predictable. In addition, the term “more than one country (region) has an interest” can be construed broadly. For example, the earlier version of the regulation also referred to a similar term without further explanation, and the MOFCOM and its provincial counterparts had construed it in practice covering not only any investments involving countries or regions where the sovereignty or territory were in disputes, but also any investments located in one country or region with impact of operations reaching another country or region.
What impact on investment for sustainable development?
Although the new measures are yet to be fully tested in practice, the shift from the previous approval-based system to the new filing-based system has been largely welcomed by the enterprises in China that are contemplating going abroad. Despite the vague definitions noted above, the new system is undoubtedly a significant step towards a more streamlined process. Provided that other conditions remain favorable, it is reasonable to assume that it will therefore encourage more outward Chinese investment.
But aside from the quantity of investment, a key issue for host states will be the quality of that investment. For example, will the simplified pre-investment process open the floodgate for investors that had not been able to expand overseas (whether because they were unwilling or unable to pass the approvals under the previous system), or will the new measures free up the government resources from reviewing mountainous applications so that it can actually focus more on monitoring and regulating investment activities in host states? The government’s intention seems to be the latter.
The MOFCOM Measures specifically requires that all Chinese investors observe the laws and local customs of the host states and pay attention to the performance of social responsibilities in areas including environment, employment and local communities;[10] a requirement that did not exist in the previous legislation. To provide that requirement with necessary teeth, the MOFCOM Measures also grants MOFCOM and its provincial counter-parts the authority to supervise and monitor the performance of those obligations by Chinese investors overseas.[11]
Although similar requirements are not spelled out in the NDRC Measures, according to relevant persons in charge of NDRC at a press conference introducing the new measures, one of the criteria the agency would look at when reviewing those projects subject to approval would be whether it was in compliance with the principle of mutual benefit and common development from the community and public interest perspective.[12] Indeed, according to an application template for projects subject to approval published by NDRC in May 2014, among the information required to disclose by applicants are information on project-related laws of host state, opinions from local communities, environmental measures taken by the applicant, etc. [13]
Furthermore, NDRC has also publicly pledged to prioritize regulating the investment activities and operations of overseas Chinese businesses by working closely with other agencies including MOFCOM[14], who also made a similar pledge when it issued the MOFCOM Measures in September.[15]
However, so far we have only seen a seemingly more streamlined pre-investment process for Chinese overseas investments. It will be interesting to watch the post-investment supervision and monitoring mechanism actually taking up its role as envisaged under the new regime.
Author: Joe Zhang is a legal advisor in the IISD’s investment for sustainable development program.
[1] Catalogue of Investment Projects Subject to Government Approval (2013 Version), Article 13.
[2] Id.
[3] Administrative Measures for Approving and Filling of Overseas Investment Projects, Article 7. Nevertheless, according to Article 8, for each outward investment project involving cross-border biddings or mergers and acquisitions with transaction amount over USD$300 million, prior to entering into any binding agreements or making any binding offers, its investor had to obtain a confirmation letter from NDRC.
[4] Id.
[5] This may include all large scale agricultural, mining and infrastructure projects as the Land Management Law of China defines land to include agricultural land and construction land, the latter is further defined to include land used for mining and infrastructure.
[6] Administrative Measures for Approving and Filling of Overseas Investment Projects, Article 7.
[7] Administrative Measures for Overseas Investment, Article 6.
[8] Id. Article 7.
[9] Id.
[10] Id. Article 20.
[11] Id. Article 5.
