China: Limitations On Foreign Investments By State-Owned Enterprises

As of 1 May 2012, State-owned enterprises that are owned by the Chinese central government ("Central SOEs") are no longer permitted to invest in non-core businesses outside of Mainland China. Although they can be exempted from this prohibition in special circumstances, it can result in delays and longer and more difficult negotiations. This new development is therefore especially relevant for clients who plan to attract investments from Central SOEs or sell assets to them.

Central SOEs, such as PetroChina, SinoChem, Chinalco and AVIC, undertake a large part of Chinese outbound investments. In the past six years Central SOEs have made over 100  investments abroad of at least USD100 million each.  However, some of these investments have resulted in substantial losses. In order to mitigate these foreign investment risks, Interim Measures have recently been issued by the PRC State-Owned Asset Supervision and Administration Commission ("SASAC").

Under the Interim Measures, Central SOEs - including their wholly owned overseas subsidiaries and companies in which they have a controlling stake - are not allowed to invest in non-core businesses outside of Mainland China. If there is a special circumstance which makes it necessary to make a non-core investment outside of Mainland China, Central SOEs need to obtain prior approval from SASAC. Unfortunately, the Interim Measures do not provide definitions of "non-core businesses" or "special circumstances". This therefore needs to be discussed with the relevant Central SOE, which in turn might need to discuss this with SASAC. Unless properly managed, this can result in delays when implementing a transaction.

In order to request SASAC's approval for a non-core investment outside of Mainland China, a Central SOE needs to file a feasibility and due diligence report, risk control report and such other materials as SASAC deems necessary. SASAC's review will focus on the necessity of the project, influences on the core business and the implementation of risk control measures. Although the approval period officially is 20 working days, in practice SASAC can extend it by asking for more materials.

If a Central SOE invests in a core business outside of Mainland China, it only needs to file certain documents with SASAC. However, SASAC reserves the right to object to transactions that increase the risk profile of the foreign investments. As a result this filing procedure can also effectively become an approval procedure.

Finally, we note that the Interim Measures provide that if a Central SOE violates the provisions thereof and suffers a major loss, the Central SOE and the related responsible individuals will be held liable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.