"BE NOT AFRAID OF GROWING SLOWLY, BE AFRAID ONLY OF STANDING STILL"
Recent developments in the PRC regulatory approvals process reflect an ongoing commitment to China's Go Global Policy and represent a growing sophistication in the management of legitimate competing policy objectives. A careful analysis of the entire approval regime shows a government that is seeking to balance competing policies – on the one hand the encouragement of OFDI and resulting management of capital reserves, and on the other hand, putting in place policies to bring increasing fiscal rigor and accountability to the SOE sector.
Despite recent media speculation of a slowdown in China, Chinese outbound foreign direct investment (OFDI) continues to grow. Indeed, in December 2012 China recorded its highest levels of Chinese OFDI and in a first OFDI exceeded inbound FDI. According to the Ministry of Commerce, Chinese OFDI for the year 2012 was US$77.2 billion, up from US$60.1 billion in 2011. Australia as a beneficiary of Chinese OFDI needs to understand the PRC regulatory framework governing Chinese OFDI.
The proposed amendments to the PRC regulatory approvals process announced by the National Development Reform Commission (NDRC) will further facilitate and encourage higher levels of Chinese OFDI. On 16 August 2012, the NDRC published consultation draft rules relating to the approval of outbound investments with the aim to simplify the approval procedures set out in the Tentative Measures for the Administration of Approval Outbound Investment Projects.
In essence, the new rules (which apply to State owned enterprises and PRC private investors):
- will encourage expansion of the scope and scale of overseas investments, encouraging outbound investment in the transportation and infrastructure projects; and
- simplify the approvals procedures, including removing the need for prior reporting to the NDRC of investments below US$100 million.
The table below summarises the key proposed changes to the approvals for outbound investment.
|Approval||Current Rules||New Draft Rules|
|NDRC confirmation letter||All offshore bids and acquisitions||Offshore bids and acquisitions > US$ 100 million|
|State Council verification (after NDRC review)||
Resource projects > US$ 200 million
Any other projects > US$ 50 million
|Any investment in sensitive sectors|
Resource projects US$ 30 million - US$ 200 million;
Any other project US$ 10 million - US$ 50 million
Resource development, transportation and infrastructure investment projects > US$ 300 million
Any other projects > US$ 100 million
Provincial DRC Approval
Self-decision and filing with NDRC (Central SOEs)
Resource projects < US$ 30 million
Any other projects < US$ 10 million
Resource development, transportation and infrastructure
Any other projects < US$ 100 million
|Provincial DRC Approval + Prior filing with NDRC||N/A||
Resource development, transportation and infrastructure investment projects US$ 30 million – US$ 300 million
Any other projects US$ 10 million – US$ 100 million
The consultation period for the draft rules ended on 15 September 2012. While the authority of these new draft rules is unclear, based on the current experience of PRC investors it would appear that the NDRC and provincial development reform commissions have, as a practical matter, adopted the new draft rules as if formally promulgated.
The new draft rules are particularly interesting in the context of the State Assets and Supervision Council (SASAC) reforms in 2011 and 2012 to strengthen the investment processes and accountability of State Owned Enterprises. Under these measures, an SOE must report to SASAC before making major OFDI related to their core business. The report must contain details of an investment plan and financing sources.
Importantly, (in the context of some spectacular losses resulting from SOE OFDI) if an SOE suffers a major loss as a result of an investment, the new measures require that the enterprise and all related persons, will be held accountable. These requirements, coupled with the 2011 measures which require SOEs to procure feasibility studies and due diligence for all OFDI, reflect a clear desire on the part of the PRC Government to strengthen investment processes and accountability of SOEs. (For a further discussion of these measure see New SASAC rules signal greater transparency and accountability).
The potential implications of these apparently inconsistent policy developments are keenly seen in the recent cases of Cathay Fortune and Tianqi and Hanlong and Sundance and their proposed investments in Australia. Hanlong, Cathay Fortune and Tianqi are each PRC private investors and each has involved or will involve the provision of an SOE "partner" to the investment.
Looking at these recent deals through the framework of the NDRC and SASAC policies, the involvement of an SOE may be viewed in the following two ways:
- as tangible evidence of a shift in the NDRC policies to support outbound investment by private investors, which include a policy to encourage State Policy Banks to provide investment finance to private enterprises (see Chinese Investment – A new bolder approach); or
- as one which despite the NDRC relaxation of its rules, ultimately provides the PRC Government with control over investments.
Alternatively, the recent policy developments may be construed in a third way. That is to say, rather than forming easily drawn conclusions about the policy developments, the policies show an attempt by the PRC Government to legitimately balance competing policies – on the one hand the encouragement of OFDI and resulting management of capital reserves, and on the other hand, effective risk management.
What cannot be denied is that a measured approach to OFDI which provides levels of flexibility while at the same time respecting the lessons learned from previous investment reflects a growing sophistication and maturity in China's approach to outbound investment.
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.
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