The new guidelines were jointly formulated by the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the People’s Bank of China and the Ministry of Foreign Affairs. The NDRC has indicated that it will update and amend currently existing rules to include the guidelines’ policies. Other branches of government are expected to follow.
As we reported in previous editions of In Context (see February 2017 and June 2017), the restrictions on outbound investments are driven by the increasing flow of capital out of China, which has further depleted foreign exchange reserves already under pressure by the government’s measures to stabilise a depreciating renminbi. The renewed government scrutiny on outbound investment has generally been effective in significantly decreasing Chinese capital outflow; the State Administration for Foreign Exchange (SAFE) reported last week that China’s foreign reserves have steadily risen since the beginning of this year, its longest run since 2014. However, the prioritisation of currency stability has come at the price of suppressing genuine Chinese outbound investments. As a result of the stricter controls, the path to regulatory approval has become longer and more uncertain.
The guidelines clarify that the Chinese government will continue to support outbound investments, albeit “in a rational and orderly manner”. This means within the limits of the regulatory regime currently in place and in accordance with the commercial rationale and political purpose further set out in the guidelines.
In addition, and most importantly, the guidelines now categorise outbound investments, by target industry or sector, into three distinct groups – “encouraged“, “restricted” and “prohibited” – resembling the way in which the Chinese government also classifies inbound foreign investment. The guidelines further provide specific policy considerations with regard to each category. The guidelines do not indicate if outbound investments which do not fall into one of the three categories will be permitted.
The categories and their policy treatment can be summarised as follows:
||“Encouraged investments” are to be facilitated through preferential taxation, foreign exchange, insurance, customs and information sharing.|
||“Restricted investments” from categories (i) – (iii) require approval by the relevant authorities, which might have to meet higher standards and levels of scrutiny than ordinary government clearance. Investors in “restricted investments” must be given necessary guidance and warnings.|
||“Prohibited investments” must be subject to strict management and control.|
Assessment and outlook
First and foremost, the policy as now codified in the guidelines reaffirms the existing tightened regulatory regime. This means that qualifying Chinese outbound investments will continue to require the approval of the Chinese authorities. As such, parties to those transactions should still expect the relevant filing and approval processes with agencies, including the local or national branches of the NDRC and MOFCOM, SAFE, and, in the case of a state-owned enterprise, the State-owned Assets Supervision and Administration Commission (SASAC). For this reason, any party to a Chinese overseas investment would be wise to carefully consider these guidelines and assess how a planned transaction fits in the provided categories. Deal uncertainty and time challenges remain. However, on a more positive note, the guidelines do offer some degree of clarity and, as such, transactions befitting the current agenda, i.e. those falling into the “encouraged” category, might meet a more favourable regulatory climate.