State-owned assets (SOAs) play a dominant role in China's economy, and state-owned enterprises (SOEs) are among the most important participants in Chinese overseas investments. The enhancement of an enterprise's international competitiveness through overseas investments and acquisitions to maintain and increase the value of SOAs will become one of the reform directions for SOEs. This article focuses on SASAC's recently issued Measures for the Regulation of Overseas Investments by Enterprises under the Central Government (Order No. 35), and analyzes the recent changes in regulating overseas investments with SOAs.

Innovative regulation

SASAC formulates a negative list for offshore investment projects by enterprises under the central government (CGE), determines the offshore investment projects that fall into the prohibited category and the special oversight category, divides the regulation of the offshore investment projects of CGEs into categories, specifies the baseline for the oversight of the investments of investors and draws a redline for the investments of CGEs.  CGEs are prohibited from investing in all offshore investment projects included in the prohibited category of the negative list; for offshore investment projects included in the special oversight category of the negative list, CGEs are required to make submissions to SASAC to carry out investor review and checking procedures; and for offshore investment projects not included, CGEs are free to decide based on their strategic development plans.

CGEs are the decision-making, execution and responsible entities for offshore investment projects.  CGEs should formulate their own more stringent and specific offshore investment project negative lists on the basis of the SASAC negative list.

Order No. 35 defines certain key concepts.  The term "main business" means the main business engaged in by a CGE as determined in its strategic development plan and confirmed by SASAC; and non-main business means any business engaged in other than the main business.  Overseas investments are high risk and complex, and investments in main business are more conducive to the leveraging by an enterprise of its comparative advantages and enhancing the success rate.

Oversight over entire process

Order No. 35 requires oversight over the entire investment process, placing equal emphasis on before-the-fact, during-the-fact and after-the-fact oversight.  It emphasizes strengthening compliance before the fact, focusing on monitoring during the fact and strengthening accountability after the fact.  Details are shown in the table.


Oversight of entire process

SASAC oversight

Requirements of CGEs

Before the fact

Formulation of CGE's 5-year development plan outline and enterprise strategic development plan.

Formulation of international development plan, specifying the focal points of mid and long-term international operations, preparing annual offshore investment plans on this basis and incorporating the same into its annual investment plans.

Carrying out investor review and checking procedure regarding project risk, equity structure, capital strength, return level, competitive order, divestment conditions, etc. and, when necessary, engaging a third-party consulting firm to conduct fact finding.

An offshore investment project that falls within the special oversight category shall report the same to SASAC after carrying out its internal decision-making procedure and before the initial submission of documents to relevant state authorities.

Where investment in a non-main business is genuinely necessary due to special reasons, the same needs to be reported to SASAC for review and checking.

In principle, CGEs may not invest in non-main business abroad.

During the fact

Conducting random monitoring inspections of major offshore investment projects, focusing on such matters as the enterprise's decision-making on, and execution and results of, its major offshore investment project, and bringing to the attention of the enterprise any problems that are uncovered.

Submission of details of the quarterly progress of its offshore investment through the CGE investment administration information system by the 10th of the month immediately following the end of the 1st, 2nd and 3rd quarters of each year.  CGEs in certain key industries are required to submit quarterly offshore investment analyses as requested.

After the fact

Monitoring and guiding the CGE's post offshore investment project assessment; establishing a system of metrics for assessing CGEs' international operations, arranging for and conducting annual assessments of CGEs' international operations, setting the administration of international investments as a key focus of assessments of operations, and regular reporting and announcement of assessment results.

After completion of the annual offshore investment, a CGE is required to prepare a report on the annual progress of the offshore investment and submit the same to SASAC by January 31 of the following year.  After completion of implementation of a major offshore investment project, a regular audit is to be conducted, a post project assessment is to be timely conducted and a dedicated post project assessment report prepared.

Multifaceted oversight 

Order No. 35 stresses development of the investment oversight system.  Multifaceted oversight of the investment activities of enterprises is to be realized through the establishment of sound rules and regulations for the administration of investment, optimization of the investment administration information system, implementation of the investment project negative list, strengthening the linkage of investment and oversight, etc.

Firstly, SASAC and the central government are required to enhance the level of computerization of information on the administration of offshore investment, carry out full coverage dynamic monitoring, analysis and administration of offshore investment projects and preemptively guard against the political, legal, social, safety and other such risks faced by CGEs in their offshore investments.

Secondly, SASAC is to realize full coverage oversight of the offshore investment activities of CGEs and timely uncover at its own initiative investment risks through the establishment of a sound investment and oversight linkage mechanism and leveraging the coordination of such relevant oversight functions as strategic planning, legal compliance, financial monitoring, property title administration, assessment and distribution, capital application, cadre management, monitoring by external nominees to supervisory boards, discipline inspection, etc.

Through Order No. 35, SASAC has continued the practice of formulating dedicated measures for regulating offshore investment.  While essentially maintaining consistency between regulatory philosophy and regulatory methods, on the one hand, and domestic measures, on the other, it further emphasizes guidance by strategic plans, insists on focusing on main business and further emphasizes control of offshore risks and protection of the safety of offshore assets to safely escort the overseas investments of CGEs.

 (The article was translated and first published by China Business Law Journal in its 2017 volume/ issue 3)

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.