For decades, China has been the largest recipient of foreign direct investment. Now, an increasing number of Chinese companies are investing abroad, seeking new market and resource opportunities. The Chinese Government has encouraged this trend since 2005, in an effort to help relieve pressure on the renminbi by promoting capital outflows.
China’s outbound investment totaled approximately US$20 billion in 2007. In 2008, overseas investment by Chinese companies more than doubled to US$52.2 billion, including financial sector investments. New contracts in the first two months of 2009 were valued at US$23.7 billion, an increase of 68 per cent from 2008, despite the global economic downturn, according to Bloomberg.
On 16 March 2009, China’s Ministry of Commerce (MOFCOM) released the Measures for the Administration of Outbound Investment, which will come into effect on 1 May 2009. The previous MOFCOM regulation on China outbound investment, The Provisions on the Review and Approval of Outbound Investment to Establish Enterprises, released by MOFCOM on 1 October 2004, will be repealed on the same date.
Major Changes to the MOFCOM Review Process
The main changes in the Measures relate to the MOFCOM approval process, which will be simplified and handled mainly by local authorities rather than the central Government. According to the Measures, MOFCOM will only review applications for overseas investment at or above US$100 million, or for investments in particular countries, including those without diplomatic relations with China and others on a list to be issued. Investments involving more than one country or region, or investments with special purposes, are also subject to the approval of the central MOFCOM. Based on the number of approved applications in 2008, it is estimated that 85 percent of applications will be handled by commerce administrations at the provincial level. But there are other governmental authorities in charge of overseeing outbound investment, including the National Development and Reform Commission (NDRC) and the State Administration of Foreign Exchange, whose approval requirements have not changed.
Local enterprises must apply for approval from a provincial branch of MOFCOM for projects that have an investment of at least US$10 million but less than US$100 million, projects in energy and mineral resources, and projects that involve investment in China.
For a project that does not require approval of MOFCOM or its provincial offices, only an application form is required, and it may be approved in as little as three working days.
The Measures also indicate that MOFCOM may only consider major issues that could affect bilateral relations, national economic security, international obligations or fair competition. MOFCOM’s review will not include a feasibility study of the economic or technical aspects of the investment; enterprises will be responsible for their feasibility studies.
The Measures require that commerce authorities support overseas investment by offering information services and promoting bilateral or multilateral communications and negotiations with foreign governments. The business and commerce offices of China’s foreign embassies and consulates around the world are also supposed to offer suggestions on the projects for any investment needing the approval of the central MOFCOM, or those in the energy and mineral resource sectors subject to an approval of the provincial MOFCOM. For other investments, the provincial branch of MOFCOM may exercise discretion on whether to seek an opinion from the embassies or consulates.
Outbound Investment Approval Certificate
Once it has approved an outbound investment project, MOFCOM will issue an Outbound Investment Approval Certificate to the Chinese investor. The Chinese investor will provide that Certificate for foreign currency, banking and customs procedures with the relevant Chinese Government agencies.
Under the Measures, any contracts or agreements in relation to outbound investments will not become effective until approval and/or the Certificate is given by the relevant authorities, such as MOFCOM and NDRC.
The Measures have also introduced a new reporting mechanism, by which any offshore reinvestment made by an offshore enterprise established by a Chinese outbound investor must be filed with the central or provincial MOFCOM within one month after completion of the legal procedures for the reinvestment.
Chinese outbound investment has entered a faster stage of development. Its development likely will accelerate further in coming years as outbound rules continue to be relaxed and Chinese companies shift their strategies to compete globally, particularly in light of the concerns of China’s foreign exchange reserves, which are the world’s largest.