China Newsletter: China further eases restrictions on outbound investments

China Newsletter: China further eases restrictions on outbound invest

China Newsletter: China further eases restrictions on outbound investments

22.09.2014 BE law

New regulations by MOFCOM and SAFE build on earlier regulatory efforts to facilitate outbound investments.

China’s Ministry of Commerce (MOFCOM) and State Administration of Foreign Exchange (SAFE) have recently issued new sets of rules that facilitate outbound investments by Chinese companies as well as by individuals. In this newsletter, we will discuss both the MOFCOM and SAFE new rules as well as their likely impact on the outbound market.


Outbound investments by Chinese companies normally require the prior approval of several competent regulatory authorities in China. Typically, an outbound transaction must be approved by the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE). If State-owned enterprises (SOEs) are involved, the approval of the State-owned Assets Supervision and Administration Commission (SASAC) is likely to be required also. Finally, approvals by industry regulators may be required for investments in or by specific sectors.

The need for such regulatory approvals stems from the Chinese government’s desire to monitor outbound activity to ensure outbound investments are in China’s best interest and that its vast foreign exchange reserves are adequately used. However, the regulatory approval process typically puts Chinese companies at a competitive disadvantage against their foreign peers, therefore often forces them to pay a “China premium” (a higher consideration to offset the regulatory uncertainty). For that reason, i.e. in order to allow its companies to compete on a level playing field, the Chinese authorities are gradually simplifying and relaxing the approval regime, without however fully eliminating the supervision.

MOFCOM’s revised Measures for Foreign Investment Management (Measures No. 3, 2014)

On 6 September 2014, MOFCOM published the new Measures for Foreign Investment Management (Measures No. 3). These new measures will take effect on 6 October 2014.

Measures No. 3 simplify the former MOFCOM approval regime for Chinese companies’ outbound investment. They improve on the current situation in several ways:

1 Filing v. approval

The new measures introduce the filing of outbound investments as the default rule. Only investments in sensitive countries/regions (these include countries and regions that have no diplomatic ties with China and those under UN sanctions) or in sensitive fields remain subject to examination and approval. All other investments should only be filed. 
Under the former regime (Measures No. 5), all outbound investments were subject to approval by MOFCOM. A mere filing procedure was not available.

2 Timing

The new measures shorten the time limit for MOFCOM’s approval and verification, which must now be granted within 20 (for central SOEs) or 30 (for other enterprises) working days.

3 Procedure

Measures No. 3 introduce a simple filing procedure whereby companies are only required to complete an “outbound investment registration form” and submit such form to MOFCOM or provincial-level MOFCOM. 
As such, it is expected that a filing procedure can be completed in three working days, assuming that (i) the content filled in the form is authentic, complete and in compliance with the prescribed form, and (ii) the proposed investment does not (a) endanger the sovereignty, security, public order or violate the laws; (b) jeopardize the China’s diplomatic relations with other countries or regions; (c) violate the international treaties and covenant China enters into, nor (d) export products and technology that are forbidden to export.

4 MOFCOM subsidiarity

According to the Measures No. 3, the provincial commercial departments of MOFCOM can take charge of the filing management of local enterprises investing overseas, and they can issue and print the certificates for enterprises to invest overseas. 
In other words, the outbound investment overseeing powers are being distributed between state-level and provincial-level MOFCOM, which can be expected to result in a speeding-up of the regulatory process.

In the coming months, it is expected that provincial implementation rules will be published and that these will provide further regulatory guidance.

The stated aim of Measures No. 3 was to further define the dominant position of the (Chinese) enterprises in foreign investment and to promote the facilitation of overseas investment, thereby implementing the decision of the Third Plenary Session of the 18th CPC Central Committee and the spirit of the State Council for reducing administrative examination and approval, and streamlining administration and delegating power to the lower level. Together with the new measures published by the NDRC (Order 9) in April of this year (click here to see our newsletter on the matter), the new Measures No. 3 certainly go a long way into achieving that goal.

The SAFE New Notice (Circular 37, 2014)

On 14 July 2014, SAFE published its Notice of the SAFE on Relevant Issues relating to Outbound Investment, Financing and Roundtrip Investment undertaken by Domestic Residents via Special Purpose Vehicles (Circular 37). Circular 37 became effective on 14 July 2014; it replaces the former Circular 75, which was issued in 2005.

Circular 37 explicitly states that its purpose is to support the implementation of “going out” policy (…) and to further simplify and facilitate (…) cross-border capital transactions.

The new Circular will be of particular relevance for Chinese individuals, since whilst the rules for outbound investments initiated by Chinese enterprises are generally rather clear, rules for outbound investment initiated by Chinese individuals (domestic residents) are either unclear or undeveloped. In many areas, domestic residents refrained from making outbound investments due to the uncertainty of regulations.

Circular 37 improves on the situation by allowing an overseas SPV (the most popular way of making outbound investments) to be used not only for offshore equity financing purposes, but also for outbound investment purposes and roundtrip investments. The new rules also allow Chinese residents to use their overseas assets or interests to set up such SPV (whereas previously only domestic assets or interests could be used), but in a clarification that it reminiscent of China’s ongoing anti-corruption campaign, they specify that such assets must have been lawfully obtained.

Furthermore, Circular 37 and its implementing rules allow profits and gains realised by an SPV to remain outside of China (under the previous rules they had to be repatriated into China and converted into RMB within 180 days from the date the relevant PRC resident was entitled to receive them). With this requirement being removed, any offshore profits or gains can now be used for re-investment purposes.

Pursuant to Circular 37 and its implementing rules, only the first level of SPV immediately controlled by a domestic resident needs to be registered instead of the entire corporate chain. This is a very welcome change as many outbound investments are structured through myriad layers of Hong Kong, BVI, Cayman and other jurisdictions (including Benelux vehicles). It remains however to be seen whether this liberalisation will be fully implemented in practice.


Under China’s “going out” policy, Chinese firms are being encouraged to invest overseas to render them more globally competitive, to boost the country’s economic development and to slow the increase of China’s foreign exchange reserves. Indeed, Chinese outbound investments in 2013 hit a record USD 90.2 billion, a 16.8% increase over the previous year. With the regulatory hurdles gradually retreating so that Chinese companies can compete on a level playing field, Chinese outbound activity is bound to continue on its upward trajectory.

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