Outbound Investment
China, pressured by increasing foreign exchange reserves, is expected to step up measures to encourage outbound investment.
The country’s overseas financial assets rose 17 per cent in 2009 to US$3.46 trillion, while overseas financial liabilities climbed 12 per cent to US$1.64 trillion, the State Administration of Foreign Exchange has recorded.
Among financial assets, outbound direct investments rose 23.6 per cent to US$2.3 billion in 2009, but only accounted for 7 per cent of total assets.
The US$2.4 trillion in foreign exchange reserves represented a 23.3 per cent growth year on year and accounted for 69 per cent of total financial assets.
Other assets included equity investments made by China in foreign countries, trade credits, loans and deposits. Financial liabilities include foreign direct investment in China and other investments.
Economists widely expect China to encourage more companies to expand overseas through mergers and acquisitions this year as the global investment climate improves. This is a turnaround from 2009 when Beijing reined in many companies over fears of the unfolding financial crisis.
Approval Process for Outbound Investment Projects
In terms of regulation and oversight, there are, in effect, 3 classes of “State Owned Enterprises” (SOEs) in China. First, there is an elite group of companies which reports to the Central government, a second group which reports at the Provincial level, and a third class which is regulated at the Municipal level. If a provincial/municipal level company is the investment partner, then it is important to note that the approval process for outbound investment is replicated at the provincial level prior to being reviewed and approval at the central government level.
Any investment by a People’s Republic of China based company above US$ 100 million dollars requires Central government approval. This rule does not apply to companies incorporated in Hong Kong or with access to legally registered funds in Hong Kong.
In addition, legal permission to remit funds abroad requires the permission of the following persons/agencies: Chairman and the Board of Director’s of the Investor, SASAC, National Development and Reform Commission, Ministry of Commerce and the State Administration of Foreign Exchange. This separate approvals process is usually staged and often has a number of internal administrative stages before being formally ratified in writing/chopped. There is “verbal” or informal approval, concept or project approval, and final approval to implement the funding of the project based on a full written application being received. SOE’s and the Chinese private sector tend to describe conceptual approval as approval even though the formal or written approval that permits actual implementation can lag behind by months. This is something important to keep in mind from a practical point of view in terms of planning.
►1. Board Approval
This review would be similar to a western companies’ review of an investment and, by and large, examine the decision on whether or not it is in the company’s strategic and commercial interest to proceed.
►2. SASAC and NDRC
After the management team, is comfortable and the Board is comfortable, the investor will seek direction or support from SASAC.
SASAC is responsible for monitoring the operations, management, profit and loss and investment activities of SOEs. The State-Owned Assets Supervision and Administration Commission of the State Council and its provincial/municipal level counterparts perform in a manner which can be conceptually likened to the workings of a western holding company. SASAC will review an investment in the outbound investment target corporation in terms of the following factors: financial and technical strength of Chinese partner and its overall ability to complete the project, grade of project and deal terms, level of due diligence and analysis completed, strategic need for the project etc. This review would be similar to the review that the Board of Director’s and investment committee of the investor would have completed already but is an additional check and balance carried out on behalf of the State.
Note that SASAC also grants initial approval to enter into commercial negotiations and also usually approves all applications by management to travel outside of China to complete due diligence and or commercial negotiations.
SASAC will also co-ordinate internally to try and avoid competition amongst two state players for the same project.
SASAC will authorize the company to proceed with completion of commercial negotiations and final due diligence.
www.sasac.gov.cn | http://www.sasac.gov.cn/n2963340/2964236.html - (English)
The second level of approval is NDRC. The investor will seek “ conceptual approval” from NDRC usually prior to signing any binding documents.
National Development and Reform Commission reviews an application and in many cases will duplicate the analysis that SASAC completes. NDRC will also review the grade of the deposit, the project’s compliance to national industrial policy, the commercial terms and the third party technical valuation. In most cases the NDRC will accept reports from independent 3rd parties, but will require additional information on the “ Qualified Person” and professional credentials of the company that prepares the report.
►3. Ministry of Commerce
This Ministry and the Embassy/Consulate in question reviews the application approved by SASAC/NDRC and provides a supporting opinion/approval that the jurisdiction where the project is located is acceptable to the Chinese government, conducts basic due diligence on the bank account/incorporation documents of the company that obtains the investment and does a basic review of the merits of the project. MOFCOM is unlikely to turn down a project unless the country is extremely hostile investment environment for the sector or Chinese companies in general.
MOFCOM or provincial BOFCOM provides the final “Outbound Investment Certificate” to the investor.
►4. State Administration of Foreign Exchange
This organization is responsible for providing the approval of remittance to the bank. SAFE only requires the investor to demonstrate the origin of the funds and the Outbound Investment Certificate. SAFE may also verify the recipient’s bank details.
SAFE also permits commitment fees prior to approval to being processed but an SOE would likely want to have at least SASAC approval prior to making a commitment to a down payment of 0-15 % of the total investment.
Intercedent Comments:
Intercedent advises:
i) all press releases be tied to receipt of payment;
ii) that a penalty clause for delays in approvals be negotiated:
iii) the relevant Industry Association in China will normally provide a comfort letter to the NDRC; and
iv) some provinces have additional local approval procedures mandated by the provincial Governor’s office.
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