Chinese Authorities Issue Guidelines on Overseas Investments, Limit Non-Entity Foreign Investment
Guo Liqin
/SOURCE : Yicai
Chinese Authorities Issue Guidelines on Overseas Investments, Limit Non-Entity Foreign Investment

(Yicai Global) Aug. 21 -- Following the first public announcement on the issue in December, the General Office of the State Council has re-posted the opinions of four ministries and commissions on Aug. 18 which again specify in more detail regulations on overseas investments by Chinese enterprises.

Jointly issued by the National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), the People's Bank of China (PBOC) and Ministry of Foreign Affairs (MOFA) and re-posted by the General Office of the State Council, the Notice on the Guidelines for Further Guiding and Regulating the Direction of Overseas Investment (Guidelines) provides for the direction of subsequent overseas investments in more detail by grouping them into three categories: Encouraged, Restricted and Prohibited.

The NDRC is working with relevant parties to proactively push for the promulgation of the Regulation on Overseas Investment to provide legal support to implement the Guidelines.

The Guidelines resemble a manual to steer the overseas investment sector, Liang Guoyong, from the Division on Investment and Enterprise at the United Nations Conference on Trade and Development (UNCTAD), told Yicai Global. While tightening the restricted and prohibited categories, they also clearly fix the direction of encouraged categories, especially investments relating to the One Belt, One Road initiative.

"Equity investment funds and special purpose vehicles (SPV) set up abroad without specific industry projects," will be subjected to stricter reviews and approval procedures, several sector experts interviewed by Yicai Global, including Liang, noted.

Restricted Investments:

  • Overseas investments in sensitive countries and regions that have not established diplomatic relations with China, are at war, or are restricted under bilateral and/or multilateral treaties or agreements China has signed.
  • Overseas investments in real estate, hotels, studios, entertainment and athletic clubs.
  • Equity investment funds and special purpose vehicles (SPV) set up abroad without specific industry projects.
  • Overseas investments using outdated production equipment that does not conform to the technical standards of the target country.
  • Overseas investments that fail to meet the environmental protection, energy savings and security standards of the target country.
  • The first three categories subject to approval by authorities in charge of overseas investments.

Source: gov.cn

More Rational Outbound Investments

Chinese enterprises have become more rational when making outbound investments since Dec. last year, while relevant policies have also been gradually refined, statistics show.

China's domestic investors made additional non-financial direct investments in 4,411 foreign enterprises from 148 countries from January to July, latest data shows. The cumulative investment stood at USD57.2 billion, down 44.3 annual percentage points, as authorities managed to further contain irrational outbound investments.

With the tightening of outbound investment inspection and approval, authorities have summed up relevant experience and adjusted their policy orientation after changes in the macro environment, an insider told Yicai Global.

An NDRC official summarized the background to the Guidelines, indicating that problems exist in the outbound investments of Chinese enterprises. For instance, some focus on the real estate and other non-entity sectors, which have not only failed to drive domestic economic development, but also led to significant increases in cross-border capital outflows, thus impacting China's financial security.

The Guidelines point to the six encouraged categories of outbound investments in the fields of infrastructure, production and equipment, high-tech and advanced manufacturing, energy resources, agriculture and services.

On the one hand, the pressure of capital outflows and international financial risks have increased, and on the other hand, the Belt and Road initiative needs urgent financial support, Liang told Yicai Global.

The encouraged categories must take part in the exploration and development of offshore oil and gas, mineral and other energy resources based on prudent assessment of economic benefits, he particularly noted.

Metal ore prices experienced dramatic decreases after 2012 and oil prices also slumped after mid-2014, he explained. Though they are witnessing a stable rebound, the basic landscape of China's resources and energy outbound supply has undergone significant changes. As a result, the environment and mentality of yearning to acquire overseas natural resources have changed during the commodity super cycle.

"In other words, we should analyze the extent to which acquisitions of overseas mineral resources and reserves will serve China's national energy and resource security strategy. This measure is more sensible," Liang added.

Restrictions on Non-entity Overseas Investments

In addition to real estate, hotels, studios, entertainment industry, and sports clubs, the scope of the ban also extends to "the establishment of equity investment funds or investment platforms with no specific industrial projects abroad," several insiders noted.

In practice, many overseas acquisition projects are plied by setting up a special purpose vehicle (SPV) which often refers to legal entities established for specific and dedicated purposes (usually companies and sometimes partnerships).

Companies, for example, complete acquisitions by establishing SPVs in overseas countries, which poses no problem in the Overseas Loan under Domestic Guarantee structure, but poses a risk in substantial transactions, i.e. the overseas business acquired at a high price actually does not perform well, he said.

"Leverage is usually required for the acquisition transaction, and the bank loans can only be repaid if the business outlook is favorable. The use of leverage exerts an impact on the bank's asset quality and may result in (financial) systemic risks," an insider said.

The Overseas Loan under Domestic Guarantee structure and other means are still feasible, being unrelated to the nature of the enterprise, but more expensive, several persons who promote overseas investments advised.

Investments are not completely banned. However, the restriction on platforms "with no specific industrial projects" will affect almost all investments in overseas mergers and acquisitions and will cause more difficulties to unlisted red-chip enterprises' returns, said another insider. How to view the ban is still unclear, as is how to impose the restrictions and under what circumstances this tableau will continue, and the approval cycle and the probability of approval are also quite uncertain. "Funds with a track record in overseas business will be less affected."

In the process of verifying authenticity, the agency found some large and irrational corporate investments in non-leading businesses, said Zhou Liujun, director-general of Department of Outward Investment and Economic Cooperation of MOFCOM, told Yicai Global at the end of last year.

At that time, the next plan was to promote legislation and institutional design at the national level, in Zhou's view. MOFCOM will promote the promulgation of Overseas Investment Regulations, develop and formulate policies to strengthen management of overseas investments and ensure the effective verification of authenticity. It will also enunciate its Opinions on Enhancing Prior and Post Supervision on Overseas Investment, tighten the compliance review for going global and coordination of large-scale overseas projects, improve the construction of the corporate credit system, and assess the statistical work on direct outbound investments.

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Keywords: General Office of The State Council , NDRC , MOFCOM , Investment Abroad , The Belt And Road , SPV , Overseas Loan Under Domestic Guarantee