China’s Ministry of Commerce recently (March, 2009) enacted Measures to better facilitate China’s outbound investments. The previous regulatory regime was considered vague and led to some confusion. The new Measures bifurcate approval authority between the Beijing National office level and the local level (provinces, municipalities, and other governmental units) with each level obtaining specific criteria to acquire jurisdiction. Some see obtaining approval outside Beijing as easier and requiring less time and so it is preferable to re-structure the deal in order to avoid Beijing.
In 2008, China overseas investment doubled to $52.2 billion, and 2009 has already outpaced that figure, according to China’s Ministry of Commerce. China’s direct outbound investment should exceed US$60 billion by 2010, according to Assistant Minister of Commerce Chen Jian. For comparison, U.S. direct investment abroad, was $333 billion in 2007 and $241 billion in 2006, according to the U.S. Department of Commerce.
The Measures create the Overseas Investment Management System (OIMS) allowing Beijing and all other governmental units to centralize application processing. It is expected that this system will reduce processing times. Though the new Measures give the local level approval authority, Beijing still must approve the lower level decision and the OIMS will reduce processing times.
The goal for Chinese entities (and their overseas beneficiaries) is to receive an Enterprise Overseas Investment Certificate (“Certificate”) allowing the Chinese legal entity to proceed with the outbound investment. With the Certificate, the Chinese legal entity should receive full support from all other China organs (tax, customs, foreign exchange) as well as from banking intermediaries.
In order to avoid Beijing’s jurisdiction, a potential overseas investment needs to make sure that it involves none of the following:
1. Overseas investment in a country which has not established diplomatic relations with China [There are about 23 of these countries. Generally, it is those countries that maintain diplomatic ties with the Republic of China (Taiwan). The top three countries in terms of GDP in which this applies are the Dominican Republic (75th), Guatemala (80th), and El Salvador (91st)];
2. Overseas investment in a specific country or region identified by the Ministry of Commerce in conjunction with the Ministry of Foreign Affairs and other relevant departments [Though this list has not yet been published, investment in the United States and the United Kingdom were not allowed to be approved at the local level as of 2004 in MoC’s Order No. 16. This recent Measure, though, has abolished that Order];
3. Where the Chinese party invests USD 100 million or more;
4. Overseas investment which involves the interests of multiple countries or regions; or
5. Setting up a special-purpose company overseas [The Measures defines this term as an overseas company directly or indirectly controlled by the Chinese legal entity for the purpose of listing on a foreign exchange with the rights and interests actually owned by the Chinese legal entity].
If the investment falls outside one of these five categories, then it can apply for the Certificate at the local level where the chances of approval and expediency are probable.
While drafting an agreement related to a potential deal with a Chinese entity, it is probably beneficial to include a provision shifting the burden of China government approval to the Chinese side. They are, after all, in the better position to get the Certificate.
One should be wary of the possibility of rejection because of “national interest” policies. The Measures provide for this. Any investment that “endangers the state sovereignty, national security and public interests of China; violates a law or regulation of China; or damages the relationship between China and a relevant country or region” then it shall be rejected. It is suggested to make sure the Chinese side is responsible for avoiding such a designation.
Diaz Reus & Targ LLP