In recent years, China outbound investments have grown rapidly. Encouraged by the Belt and Road Initiative launched by President Xi Jinping in 2013, Chinese enterprises have sought overseas investment and cooperation to facilitate the growth of Belt and Road. As a result, the investment of relevant products, technologies and services assisted the transformation of the Chinese economy. However, some investments, whilst bringing opportunities to the Chinese economy, also raised risks and problems both in China and the country of investment.
In order to mitigate risk and instability in outbound investment, since 29 November 2016, Chinese banks have been required to report overseas transfers of 5 million USD or more to the State Administration of Foreign Affairs. Such transactions may only be made after the verification of its authenticity and compliance with the relevant regulations. Equally, all overseas direct investments of 50 million USD or more shall only be approved after the verification of its authenticity and compliance with the relevant regulations.
Most recently, on 18 August, the General Office of the State Council promulgated the Notice on Further Guiding and Regulating the Directions of Overseas Investment (Guiding Opinions) to provide further guidance on outbound investment. The Guiding Opinions were formulated by four key authorities: National Development and Reform Commission, Ministry of Commerce, People’ Bank of China and Minister of Foreign Affairs.
The Guiding Opinions reflects continued support for sustainable outbound investments led by the Belt and Road Initiative. Overseas Investments shall be standardized and regulated by administrative mechanisms to strategically direct projects for the benefit of economic and social development, as well as result in mutual benefits, win-win situations and in-common development with the destination country of investment.
Core investment basic principles
The core foundations for Chinese entities are outlined in the Basic Principles of the Guiding Opinions. These highlight the direction of compliant practises and policies including:
Responsible outbound investments
Investments shall be market orientated and executed accordingly with commercial principles and international practises. Under the leadership of the government, resources shall be allocated according to the market environment and enterprises shall make their own decisions and bear the sole responsibility for their own profit, losses and risks.
Supervising mechanisms shall be streamlined into an administration filling framework. Moving from the current case-by-case pre-approval system, the planned administrative filing system should be similar to the administrative filling system for Foreign Investment Entities in China, in which companies to fill all required documents into an online system to authenticate the company and investment adheres with laws and regulations, and receives approval from the relevant government body.
Cooperation with the foreign governments and companies
In order to strengthen mutual benefits and win-win results, Chinese investments need to consider the national conditions and markets demands of the destination. Equally, Chinese entities are encouraged to work with local governments and companies to foster economic and social benefits.
Chinese entities must commit to stable investments and prevent risks effectively. Emphasis is placed upon contributions to the national economy and foreign affairs, compliance with the law and risk prevention in the prior, interim and post-investment.
The Negative List
As guidance, the Guiding Opinion stipulates a list of categories for outbound investment. Similar to the negative list of encouraged, restricted and prohibited sectors for Foreign Investment in China, the list divides investments into encouraged, restricted and prohibited categories.Encouraged outbound investment
Encouraged outbound investment
Qualified and competent domestic companies are encouraged to actively and prudently engage in:
- Infrastructure projects related to the Belt and Road Initiative specifically interconnected with infrastructure of neighbouring cities along Belt and Road.
- Exportation of advanced production capacity, quality equipment and technical standards.
- Cooperation with overseas enterprises specialising in new and high technologies and advanced manufacturing, with a view of establishing Research and Development centres aboard.
- Prudent exploration and development of overseas energy and resources, such as oil, gas and minerals. However, investment should be executed after an evaluation of economic benefits is carried out.
- Expansion of agricultural collaboration and cooperation in agriculture, forestry, animal husbandry, side occupation, fishery and other relevant sectors that result in mutual benefits.
- Investments of commerce, trade, culture, logistics and service areas in an orderly manner.
- Establishing overseas branches and service networks of eligible financial institutions in compliance of the applicable laws and regulations.
Restricted outbound investment
Domestic companies shall be restricted from outbound investments which do not align with China’s national development, international practises and macroeconomic policies nor result in mutual benefit. These include the following:
- Projects invested in sensitive countries/regions with no diplomatic ties to China, in a state of war or limited by bilateral or multilateral treaties already agreed upon in China.
- Investments in real estate, hospitality, film cinemas, entertainment or sports clubs.
- Private equity funds or investment platforms established outside of China for non-concrete business purposes.
- Projects that do not comply with standards relevant to environmental protection, energy consumption and security established in the destination country.
- Projects involving outdated equipment which comply with technical standards established in the destination country.
The first three restricted investment points above shall be subject to approval from the relevant authorities.
Prohibited outbound investment
Domestic companies are prohibited from investing in projects endangering or may endanger the national interest or security in China, including:
- Exportation of military core technologies and products without prior approval from the government.
- Exportation of any banned technology, technique or products in China.
- Investments involving gambling and pornography.
- Projects prohibited under any international treaty concluded or consented in China.
- Other investments endangering or likely to endanger the national interest or security in China.
Policy measures will be adopted accordingly for each category. Specifically, more favourable conditions related to taxation, foreign exchange, insurance and customs are to be afforded to encourage investments; further guidance and instruction for restricted investments shall be approached with prudence and compliance. Furthermore, stricter control and penalties are to be imposed on prohibited investments, including a rigorous compliance regime to guard against false investment, a foreign blacklist system and joint governmental disciplinary actions.
A strong emphasis is placed on the utilisation of professional advisory, management and supervision of outbound investment projects. Chinese entities are encouraged to improve practises in the engagement of overseas enterprises and business operations areas including:
- Attainment of a comprehensive understanding of overseas investment policies, regulations and international practises.
- Compliance with the laws and regulations of the investment destination.
- Strengthening management and supervision of the overseas entity.
- Improving of overseas investment decision-making, financial management, legal and regulation compliance, risk assessment, risk management and accountability systems.
- Strengthening of guidance and supervision of investments in high-risk countries and regions, provide timely warnings about significant political, economic and social risks and establish preventive measures.
- For state-owned enterprises, improvements to the auditing system and safeguarding security in foreign state-owned enterprises.
In order to facilitate the above-encouraged practises, the Chinese government shall formulate a code of conduct and direct companies on the incorporation of overseas enterprises and risk review. Additionally, there is a call to develop relevant services in supporting investment projects, such as legal, arbitration, accounting, tax, valuation, investment consulting and risk assessment.
The Guiding Opinions provides Chinese entities with a clear vision for overseas investments. Whilst many believe that due to the recent regulations introduced in November 2016 for overseas bank transactions, China’s doors were closed to outbound investment. However, in the Guiding Opinions, we see robust encouragement for projects in line with the Belt and Road initiative, beneficial to economic and social growth, as well as improvements for the management of overseas enterprises and business operations.
Whilst, stricter control is introduced to protect against irrational and risky investments, overall, the message is clear and positive from the Chinese government: investment overseas shall be responsible and compliant with clear established mechanisms for management, supervision and risk prevention.
Post by Li Huajing, Horizons China contributing writer and editor to The Square. If you would like more information about the Belt and Road Initiative or other related issues, send us an email at email@example.com, and we’ll have a Horizons professional contact you.
Please visit our website at horizons-advisory.com