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Q&A: OVERSEAS INVESTMENT IN CHINA
IN August of this year, the National Development and Reform Commission (NDRC) in China published the Administrative Measures for Examination and Approval of Overseas Investment Projects draft for public comments. The draft will serve as an amendment to the Interim Administrative Measures for Examination and Approval of Overseas Investment Projects promulgated by the NDRC in 2004.
The draft which focuses on outbound Chinese investors will have significant impact on the way that companies here do business abroad. Here Fang He, Beijing-based partner at Jun He Law Offices reviews the administrative measures discussed in the draft.
He practices in the areas of mergers and acquisitions, outbound investment, foreign direct investment, private equity and intellectual property, and has experience advising in the Trademark Bureau of the Chinese State Administration for Industry and Commerce. She has experience in M&A transactions (inbound and outbound) and has advised on the establishment, operation, alteration and liquidation of foreign-invested and domestic enterprises. She has also acted for multinationals regarding the management and protection of their intellectual property rights in China and intellectual property infringement in China.
WHAT ARE THE MAJOR CHANGES OUTLINED IN THE NEW ADMINISTRATIVE MEASURES FOR EXAMINATION AND APPROVAL OF OVERSEAS INVESTMENT PROJECTS DRAFT?
There has been a notable adjustment on the scope of authority for examination and approval and the addition of a NDRC pre-registration process. According to the draft, NDRC approval is required for the overseas investment projects in resource development and transport infrastructure with the Chinese partys investment amounting to USD 300 m or more, those other than in resource development with the Chinese partys investment amounting to USD 100 m or more, as well as those in sensitive countries and industries. Other overseas investment projects conducted by local enterprises are to be examined and approved by provincial counterparts of NDRC.
In addition, the draft restated the NDRC preregistration system for the overseas investment projects with large amounts as mentioned in the Authority Decentralization Notice, this includes those projects in resource development and transport infrastructure with the Chinese partys investment amount of more than USD 30 m and less than USD 300 m, and those other than in resource development with the Chinese partys investment amount of more than USD 10 m and less than USD 100 m which are subject to the approval by provincial counterparts of NDRC, the provincial reform and development departments shall firstly file and register with NDRC prior to the issuance of approval documents regarding such projects.
There are fewer varieties of projects subject to examination and approval. The interim measures provides that it is applicable to the verification and approval of investment (including new establishment, merger and acquisition, equity participation, capital increase and re-investment) projects conducted overseas by various legal providers in the Peoples Republic of China and the overseas enterprises or organizations in which they hold a controlling share. While the scope of application as provided in the draft holds that an overseas re-investment project conducted by overseas enterprises or organizations of a domestic investor which is not financed or secured by such domestic investor will not be subject to the examination and approval stipulated by the draft. This simplifies the examination and approval procedure for overseas reinvestment projects to some extent.
In addition, there is more scope in first-phase project expenses subject to approval compared with interim measures, and the draft states that more varieties of first-phase project expenses to be remitted by the investor will be subject to approval, the varieties of such expenses expand from deposit for the performance of contract and letter of guarantee as enumerated in the interim measures, to deposit for the performance of contract, handling charge letter of guarantee, commission, resource exploration fee. The draft also provides that when remitting the above first-phase expenses, application formalities for the examination and approval for such expenses shall be proceeded in accordance with the requirements for the examination and approval on the overseas investment project.
The draft also provides for a new report system for equity or asset transfer of overseas investment projects after they are carried out, stipulating that when the investor intends to transfer the equity, asset or other interests in the overseas investment projects meeting certain thresholds after they are completely carried out, it shall submit a report regarding such transfer to NDRC within 10 business days after such transfer, while such transfer is not required to be examined or approved by NDRC.
The draft expressly stipulates that relevant formalities regarding overseas investment projects to be handled by authorities of commerce, foreign exchange, customs, and tax may not be commenced prior to the examination and approval by or filing with NDRC or provincial counterparts of NDRC. Comparatively, relevant provisions in the interim measures do not cover formalities of department of commerce.
One major change is that the draft seems to exclude those overseas investments by overseas subsidiary of a domestic investor which is not financed or secured by such domestic investor from the NDRC approval. This simplifies the examination and approval procedure for overseas re-investment projects to some extent.
The draft also expressly provides that the NDRC approval should be obtained before the approval of the Ministry of Commerce (MOFCOM), but this is not necessarily the case now. If the regulations are issued by NDRC alone without MOFCOM, it remains unclear whether MOFCOM will abide by this provision.
ARE THE NEW MEASURES WIDELY REGARDED AS POSITIVE DEVELOPMENTS?
In general, the draft has largely reflected the current regulations, policy and practice on the NDRC approval in respect of outbound investments.
We also note the NDRC draft trend towards somewhat expanding and enhancing its supervision and control over the examination and approval of overseas investment projects.
THE NEW MEASURES INCREASE THE STRENGTH OF CONTROL BY NDRC OVER THE APPROVAL OF OVERSEAS INVESTMENT PROJECTS HOW FAR DO YOU SEE THIS AS A POSITIVE MOVE?
This is largely consistent with the past policy and practice, so we do not think it necessarily a negative move or signal.
ARE THESE MEASURES GOING TO HAVE ANY MATERIAL EFFECT ON THE WAY FOREIGN CLIENTS OPERATE HERE?
The Draft focuses on outbound investment by Chinese investors, thus should not have material effect on the way foreign companies invest or operate here.
HOW FAR DO FOREIGN INVESTORS SEE THE CHINA MARKETPLACE AS A BUSINESS-FRIENDLY ENVIRONMENT IN WHICH TO INVEST? HAS THIS CHANGED?
We think China marketplace is still very attractive to foreign investors. But the relatively developed cities in China may be more business-friendly to foreign investments, probably because of the sophistication of the local government and community to deal with foreign investors and more transparent and efficient environment.
HAVE YOU SEEN A RISE IN FOREIGN INVESTORS INTO CHINA? WHAT FACTORS HAVE INFLUENCED THIS?
I feel it is a rather stable flow of foreign investment into China. A main reason is probable because China has been an inseparable part of the global economy.
WHAT ADVICE DO YOU PROVIDE YOUR FOREIGN CLIENTS LOOKING TO INVEST IN CHINA? ARE THERE ANY SPECIFIC REGULATIONS OR PITFALLS OF WHICH THEY SHOULD BE MADE AWARE?
Culture difference may be a major issue. It is true for both foreign companies investing in China and Chinese companies making outbound investment.
WHAT EFFECT, IF ANY, IS THE ONGOING UNCERTAINTY IN THE EUROZONE AND OTHER MAJOR GLOBAL HUBS HAVING ON THE RATE OF FOREIGN INVESTMENT IN CHINA? HAVE YOU SEEN THE PROFILE OF INVESTORS COMING INTO CHINA CHANGE AT ALL, FOR EXAMPLE?
I feel there is still consistent influx of foreign investment into China, but that foreign investors are more cautious, probably because of the current economy and increasingly stringent compliance requirements in both their home countries and here in China.