China: China Outbound Investment Approval Process Refined

Last Updated: 1 July 2009
Article by David Olsson and Jin Xiong

Originally Published 24th June 2009

China's National Development and Reform Commission (NDRC) has issued new rules to enable it to exert greater control over strategic overseas investments by Chinese companies.

NDRC promulgated a circular entitled "Circular on Improving the Administration of Offshore Investment" (Circular) on 8 June 2009, imposing a new "preliminary review" process on significant Chinese outbound investments.

While the Chinese government has undertaken several steps in recent times to encourage and facilitate outbound investment by Chinese companies, the Circular signals a desire by the government's main approval body to take a more active role in approving strategic offshore investments.


Chinese outbound investment is subject to a number of regulatory approvals involving key ministries (commissions) such as NDRC, the Ministry of Commerce (MOFCOM), the State Administration of Foreign Exchange (SAFE) and the State-owned Assets Supervisory and Administration Commission (SASAC).

In practice, the approval by NDRC (including its provincial agencies) and the State Council (China's cabinet), which is called "project verification", is considered to be most critical. The applications to other regulators for approvals must be supported by NDRC's project verification.

Readers familiar with PRC investment into the resources sector in Australia will be familiar with the notion that NDRC approval has typically been the last remaining condition for a deal to proceed, generally after all the necessary Australian approvals are granted.

The current NDRC approval regime is established by the regulation entitled "Provisional Administrative Measures on Verification of Offshore Investment Projects", which was issued by NDRC on 9 October 2004 (commonly referred to as No.21 Decree).

Key Aspects Of The Circular

The Circular supplements (rather than supersedes) No.21 Decree. It only regulates "offshore investment projects" which, according to No.21 Decree, must be approved by NDRC or the State Council (after initial review by NDRC).

Such projects (significant projects) generally include general investment exceeding USD 10 million, resources investment exceeding USD 30 million and investment in Taiwan and countries/regions where China does not have diplomatic relationship.

Outbound investment other than those significant projects still follows the rules set out in No.21 Decree.

The key aspect of the Circular is that it requires significant projects to separately go through a "preliminary review process" which is in addition to the approval established by No.21 Decree. Prior to undertaking any "substantive work", the PRC investor of a significant project must first submit a Project Information Report to NDRC, copying all the relevant industry regulators of the State Council.

Such "substantive work" includes the signing of any legally binding agreements, lodging any legally binding bidding documents and lodging any approval applications to the government in the investment destination. A template of the Project Information Report is published with the Circular which the PRC investor is required to use for their lodgement purposes. NDRC is expected to issue a Confirmation Letter within 7 business days if the report lodged by the investor is in order.

If NDRC considers that a significant project has "apparent significant adverse factors", it may make particular remarks on the risk in the Confirmation Letter. The Circular says that in such cases, NDRC must undertake "strict review" and "the relevant enterprises and financial institutions shall prudently make decisions". It is not entirely clear what those expressions mean, but it does appear that such projects are unlikely to receive final approval by NDRC when the investor further progresses its project verification process with NDRC down the track (see below).

The Confirmation Letter is required when the investor later lodges its Project Application Report to NDRC pursuant to No.21 Decree, which is generally done after the investor has completed the so-called "substantive work". From this point onwards, the investor must follow the existing approval (verification) regime established by No.21 Decree.

The Circular also has penalty provisions, but in a typical vague fashion of Chinese legislation. Those investors who breach the Circular may be "criticised" by NDRC (including on public media) and must rectify their wrongdoings.

If an investment has caused significant damage to the state and the investor, NDRC may punish the investor jointly with other "relevant departments". Punishment is specified as including the pursuit of personal liability of the relevant corporate leader of the investor. The Circular also warns the PRC financial institution not to provide funding to "projects which breach the relevant rules".


Our experience suggests that as an unwritten protocol, major state-owned enterprises (SOEs) generally consult with NDRC at an early stage of their investment proposals in any case, particularly if a major investment is being considered.

In some instances, NDRC in fact dictates which SOE should be the chosen investor for a given target - this is particularly the case where the investment is negotiated between the Chinese government and the foreign government. It is therefore probably fair to say that the Circular simply formalises the existing protocol.

In any event, this new policy move should not be interpreted in any way as a backlash against the increasing tide of PRC outbound investment. If any thing, it indicates that the Chinese government wants offshore investment to be undertaken strategically and in a way that will enhance the prospects of success.

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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