China: China Outbound Investment: Beginning Of The End Of The Approval System?

Last Updated: 28 February 2014
Article by Xiaohu Ma, Thomas Man and Jun Deng

Shortly after China concluded the Third Party Plenum in November 2013, the Chinese government kicked off a new round of economic reforms, aimed at overhauling its decades-old, approval-based cross-border investment (both inbound and outbound) regulatory system. On December 2, 2013, the State Council released the Circular Concerning the Catalogue of Investment Projects Subject to Governmental Approvals (2013 Version) (关于政府核准的投资项目目录(2013年本)的通知) (Guo-Fa [2013] No. 47) (the "2013 Catalogue"). As an updated version of the catalogue of investment projects (covering both onshore investments made by both foreign and domestic investors and outbound investments made by PRC investors) that require governmental approvals, the 2013 Catalogue supersedes its previous 2004 version (the "2004 Catalogue") from the date of its release and significantly reduces the approval requirements across a broad range of categories.

Compared with those affecting inbound investments, the changes made by the 2013 Catalogue to the approval requirements governing outbound or offshore direct investment ("ODI") are particularly significant. For the first time, the 2013 Catalogue declares as a state policy that the decades-old approval system will no longer be required for ODI projects under US$1 billion; instead a recordation filing for such projects will suffice, except for projects involving designated "sensitive regions" or "sensitive industries" (not clearly defined but generally understood to cover such industries as telecommunications, news media, land development, power network and cross-border water resources development). Moreover, if the size of the investment project is less than US$300 million, only a recordation filing with the competent local (provincial) government agencies will be required.


Historically, China's ODI regulatory regime has been extremely rigid due to China's tight foreign exchange control, particularly in relation to cross-border capital account transactions. Prior to the 2013 Catalogue, almost all outbound investments were subject to the dual approvals by the National Development and Reform Commission ("NDRC"), the almighty regulator of the national economy, and the Ministry of Commerce ("MOFCOM"), the central ministry in charge of trade and investment, and their respective local counterparts, depending on the size and nature of the investment. In addition, the investor had to obtain the approval of the State Administration of Foreign Exchange (SAFE) or its competent local branch in order to convert RMB into foreign currency and remit the funds out of China to consummate the investment.

This approval-based regime was nothing but all encompassing, as evidenced by NDRC's extensive power over China's ODI by both state-owned enterprises ("SOEs") and private investors. Under the 2004 Catalogue, any ODI project of US$10 million (or US$30 million if the investment was natural resources-related) or more required the approval of the central NDRC; if the investment amount was less than the threshold amount, the approval of the local counterpart of NDRC was generally required. The only exception under the 2004 Catalogue was reserved for those projects of less than US$10 million (or US$30 million if natural resources-related) invested by enterprises controlled and managed directly by the central government (aka the "Central SOEs"), in which case only a recordation filing with NDRC was required. In practice, the approval procedures of NDRC and its local counterparts for ODI tended to be very cumbersome and time-consuming, particularly for those non-state-owned private investors. Taken together, this multistep approval regime presented a formidable regulatory hurdle by imposing regulatory uncertainties and additional waiting periods for PRC investors intending to make foreign acquisitions or undertake other investments in overseas projects, often putting them at a disadvantage in commercial transactions, especially in a competitive bidding process or auction sale.


The 2013 Catalogue turns the limited and exceptional treatment previously enjoyed by the Central SOEs under the 2004 Catalogue into a general policy by extending the less burdensome filing procedure to all outbound investors including investors in the private sector. For instance, the requirement to obtain approval from NDRC has become the exception pursuant to the 2013 Catalogue ― only those investments of US$1 billion or more or those involving "sensitive" countries or regions or industries are subject to NDRC's approval.

Furthermore, pursuant to the 2013 Catalogue, the State Council has substantially expanded the administrative powers of local (mainly provincial) governments with respect to ODI. Any ODI project of less than US$300 million will only be subject to the recordation filing with the competent local (provincial) authorities.

Both NDRC and MOFCOM have recently indicated that they are amending their respective ODI rules promulgated in 2004 with a view to implementing a filing-based system.

Pending these amendments, local governments have started to take steps to implement the 2013 Catalogue. For instance, the Beijing Municipal Development and Reform Commission (the "Beijing DRC"), NDRC's provincial-level counterpart in Beijing, has adopted a transitional arrangement (which may be further adjusted to conform to NDRC's upcoming new ODI rules) concerning the recordation filing procedures for any outbound investments falling under the filing jurisdiction of the Beijing DRC. According to this transitional arrangement, a filing applicant is required only to submit an Overseas Investment Project Recordation Filing Form with necessary attachments. The Project Application Report, which applicants had to prepare in order to meet numerous requirements of the government, a process which was both demanding and time-consuming, is no longer required.


NDRC's and MOFCOM's amended ODI rules, required to implement the 2013 Catalogue, are expected in the next few months and will likely provide details concerning the filing procedures for outbound investments. These details and their subsequent implementation will define the nature of the filing procedures, that is, whether these procedures will be purely formal and administrative in nature or whether they will involve the government's substantive review of the filing materials. In either case, they will likely substantially reduce, if not entirely eliminate, the regulatory hurdles for most ODI projects, especially those undertaken by private Chinese entrepreneurs and domestic PE funds as their ODI investments tend to be less than US$300 million. This change should set the stage for a new ODI boom, including both private investors and SOEs and covering a wider range of sectors, not just the resources sector traditionally favored by SOE investors.

It is also possibly, although unlikely given the policy orientation toward system reform following the Third Party Plenum and the launch of the China (Shanghai) Free Trade Zone in late fall of 2013, that NDRC and MOFCOM will introduce a set of filing procedures for ODI that are substantially similar to the existing approval procedures. It is also not clear, at least based on the wording of the 2013 Catalogue, whether the newly introduced ODI filing system would benefit individual Chinese investors as well. In any event, we will closely monitor the pending amendments by NDRC and MOFCOM to their ODI rules and provide timely update.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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Xiaohu Ma
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