United States: New NDRC Rules Set To Facilitate China Outbound Investments

Last Updated: April 29 2014
Article by Xiaohu Ma, Paul D. McKenzie and Jun Deng

As we reported in our February 18, 2014 alert, China's State Council adopted a new, more permissive approach to regulation of overseas direct investment ("ODI") with the promulgation on December 2, 2013 of 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"). The focal point of this new approach is to largely replace the decades-old approval system with a system that requires a mere "filing for the record" or "recordation filing" ("备案" or "bei an" in Chinese). Specifically, all ODI projects involving investment of less than US$1 billion, other than projects involving designated "sensitive regions" or "sensitive industries" , are subject to a filing procedure with the National Development and Reform Commission ("NDRC") at the central level. For ODI projects involving investment of less than US$300 million, filing with the competent provincial government agency is generally sufficient.

More than four months after the release of the 2013 Catalogue, the NDRC finally announced the Administrative Measures for Approval and Recordation Filing of Overseas Investment Projects (境外投资项目核准和备案管理办法)on April 8, 2014 (the "New NDRC Rules"), which will take effect on May 8, 2014 and supersede the 2004 Tentative Administrative Measures for Approval of Overseas Investment Projects. The New NDRC Rules constitute a concrete step to put the State Council's new ODI policy into operation.

This alert provides highlights of the just-released New NDRC Rules.

SUMMARY OF ODI APPROVAL AND FILING REGIME

The approval and filing regime embodied in the New NDRC Rules for non-sensitive ODI projects is consistent with the requirements of the State Council's 2013 Catalogue and can be summarized as follows:

KEY OBSERVATIONS

  • Liberalizing effect: As summarized above, the New NDRC Rules have removed the approval requirements for most ODI projects of less than US$1 billion and delegated administrative authority over most ODI projects of less than US$300 million to the provincial governments, thus substantially reducing the regulatory hurdles for China's ODI activities.

In addition, according to the NDRC's replies to media inquiries on April 10, 2014, the NDRC has resolved to take further steps to reduce bureaucracy in implementing the New NDRC Rules. According to the NDRC, an applicant may now submit an application for NDRC ODI approval or filing directly to the competent provincial government without the application first being processed by governmental agencies at the county or municipal level – a significant step in simplifying application procedures. NDRC also contemplates introducing an online electronic filing system in the second half of this year, which would require an applicant to fill out only a pre-formulated application form and attach certain related documents.

  • Overseas reinvestment: The liberalizing effect of the New NDRC Rules on ODI projects is also expected to facilitate reinvestments overseas by an offshore entity previously established or acquired as part of an ODI transaction. The NDRC has indicated in its replies to media inquiries that such an offshore entity can reinvest funds overseas without either a further ODI approval or filing being required so long as the domestic parent is not providing any financing or guarantee associated with the reinvestment transaction.
  • Pre-transaction procedure: We questioned in our previous client alert whether the newly introduced ODI filing system would be operated as a semi-approval procedure that would involve the government's substantive review of the filing materials. The New NDRC Rules provide that the relevant NDRC approval must be obtained or the relevant NDRC filing must be completed either before the parties enter into a definitive agreement or before the signed definitive agreement takes effect. This is an interesting requirement, since under typical regulatory practice, where a transaction is subject to a "bei an" filing, the filing would be undertaken after the transaction has been undertaken and the effectiveness of the transaction documents would not be conditioned on the filing being made. Doubtless the new filing requirement for most ODI projects is much less stringent than the approval requirement under the old ODI regulations. Nonetheless, requiring the filing pre- rather than post-transaction gives the NDRC de facto power to vet ODI projects in the process of deciding whether to accept the related filing application. As a practical matter, if NDRC chose not to accept or confirm an ODI filing application, the related transaction would not be able to proceed because the definitive transaction document will not come into effect. We will monitor closely how NDRC and its provincial counterparts implement this pre-transaction filing requirement in practice.

The New NDRC Rules also include a separate pre-signing reporting requirement for overseas acquisition and bidding projects involving investment of US$300 million or more. This reporting requirement is inherited from NDRC's 2004 rules and was in the past a major obstacle that China ODI investors had to overcome in pursuing overseas acquisition opportunities. It appears that NDRC has retained this requirement in the New NDRC Rules to reduce or avoid, among other things, Chinese companies' internal competition in chasing the same offshore deal.

  • Clarification of timeframes: The New NDRC Rules provide greater clarity on the time frames for the NDRC's responses to applications. The New NDRC Rules provide the NDRC with 20 business days to review an application for ODI approval. That 20 day period may be extended for another 10 business days and excludes the evaluation period discussed below. NDRC review time for ODI filing applications is limited to only seven business days.

A key point to note is that the time period in each case runs from the date the application is officially accepted. NDRC retains the discretionary authority that is typical in most regulatory application procedures in China to determine when an application is in proper order and can be officially accepted. Helpfully, the New NDRC Rules also seek to limit the time the NDRC can take at this stage, stating that the NDRC must decide within five business days after an application is submitted whether the submission is in good order. Still, the actual submissions process could turn out to be quite bureaucratic, permitting the ODI approval/filing process to be delayed substantially beyond the regulatory timeframe – as is the case with other applications processes for governmental approval, filing or registration in China, such as current antitrust approval procedures.

  • Evaluation: The New NDRC Rules provide that the NDRC may engage, at its own cost, a qualified agency to conduct an evaluation associated with the NDRC's review of proposed, sensitive ODI projects and ODI involving US$1 billion or more. Such evaluation procedure may take up to 40 business days to complete. If triggered, this evaluation procedure could potentially increase the uncertainty in NDRC's ODI approval process. Having sensed the concerns over this evaluation procedure, NDRC has publicly clarified that this procedure will apply only to a very limited number of ODI projects involving complicated or sensitive external issues.
  • Sensitive regions and sensitive industries defined: The New NDRC Rules specifically define "sensitive countries or regions" as those with which China does not have diplomatic relations and those that are under international sanctions or are involved in wars or domestic chaos. Likewise, "sensitive industries" are defined to include telecommunications infrastructure, cross-border water resources development, large scale land development, power mains, power grids and news media. Tax havens like the Cayman Islands and the British Virgin Islands have no diplomatic relations with China and may fall out of favor as targets for Chinese ODI. Other jurisdictions that do have diplomatic relations with China – and favorable tax treaties with China as well – ought to be in a more favorable position to receive Chinese ODI. In particular, Hong Kong may become a preferred investment target for many Chinese companies.
  • Term of validity: The approvals and the confirmations of filing issued by the NDRC are not perpetual. Once issued, they remain valid for only one year – or two years for investments in construction projects. While the New NDRC Rules provide for the possibility of renewal, investors must remain alert to the possible expiry of the approval or filing and prepare in advance.
  • Regulations limited to corporate investors: The New NDRC Rules govern only corporate investors. Thus, it remains unclear as to how individuals' outbound investments will be regulated.

While certain issues remain unsettled as we note above, the New NDRC Rules are set to open a new chapter for China's ODI regulatory control, which, we expect, will be followed by additional actions taken by the Ministry of Commerce and other relevant Chinese authorities, such as the State Administration of Foreign Exchange. We note that the Ministry of Commerce has previously published a set of draft ODI administrative rules to solicit comments. We will keep you updated on related regulatory developments.

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

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Xiaohu Ma
Paul D. McKenzie
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions