China Further Eases Restrictions on Outbound Investments

April 18, 2014

In an effort to further liberalize the approval regime for outbound investments by Chinese companies, the National Development and Reform Commission ("NDRC"), China’s top economic planner, issued the Administrative Measures for Verification and Filing of Outbound Investment Projects (the "New Rules") on April 8, 2014.  The Administrative Rules will take effect on May 8, 2014 and are expected to lead to more M&A activities by Chinese companies outside of China. 

Delegation of Authority

Outbound investments by Chinese companies require government approval.  The approvals are granted by either the central or the local governments, depending primarily on the amount of funds involved in a particular investment.  Under the existing rules, for instance, approval (technically called "verification" in the rules) by the central government’s NDRC is required if the amount of an outbound investment is US$300 million or more in the natural resources sector or US$100 million or more in the other sectors.

The New Rules have not dispensed with the government approval requirement.  Rather, they have further simplified the approval procedures and delegated more authority to local governments.  Specifically, under the New Rules, outbound investments either must be "verified" by or "filed" with government authorities as follows: 

First, any outbound investment involving US$1 billion or more must be verified by NDRC.   In addition, the NDRC verification is also required if an investment involves "sensitive" countries (such as countries under international sanctions or with which China does not have diplomatic relationships or countries suffering wars or internal disorders) or relates to "sensitive" sectors (such as telecom infrastructure operations, cross-border water projects, large-scale land development, power grids and news media), regardless of the amount involved.

Second, any outbound investment of US$300 million or more but less than US$1 billion must be filed with NDRC.   

Third, any outbound investment which involves less than US$300 million and is not related to either sensitive countries or sensitive sectors only needs to be filed with a provincial government. 

While the exact differences between verification and filing are not obvious, as NDRC has not published the relevant forms, it is clear from the New Rules that more information and scrutiny will be required for investments that need to be verified compared with investments that only need to be filed.  Nonetheless, it should be noted that both verification and filing function as prior approvals which must be obtained before a Chinese company can make an investment outside of China.

Simplified Verification and Filing Procedures

The New Rules further set out clear timelines for NDRC to complete its review of applications for outbound investments.  Within five working days after receiving the application materials, NDRC is required to notify the applicant if the materials are incomplete or otherwise deficient. 

With respect to outbound investments that need to be verified, NDRC must complete its review within 20 working days (or, subject to approval of a director of NDRC, 30 working days) after accepting the application.  If NDRC believes that a proposed investment warrants an appraisal, it shall appoint a qualified appraiser within five working days, and the appraisal time generally may not exceed 40 business days. 

With respect to outbound investments that need to be filed, NDRC must complete its review within seven working days after accepting the application.

Confirmation Letter

Under the existing rules, if a Chinese company wishes to participate in a bid to purchase an offshore asset, it is required to submit a "project information report" to the NDRC.  The NDRC should issue a confirmation letter within seven working days, and the Chinese company may not make the bid until it has obtained the confirmation letter.  The New Rules have retained this requirement, but have made it applicable only to investments involving US$300 million or more.  (This does not mean that such confirmation letter will not be required at all, but that, mostly likely, the letter will be issued by a provincial government).


Another significant change adopted in the New Rules is that re-investments in existing projects by existing offshore subsidiaries of Chinese companies are no longer subject to NDRC’s verification or filing requirement, unless additional onshore funds or security have to be provided by Chinese companies.  Accordingly, if a Chinese company has offshore cash and financing capacity (such that additional onshore collateral or guarantees are not required), then it can use those offshore funds to make additional investments into a previously approved acquisition vehicle, without needing additional approvals.

Tightening Up on Financing Structures

While the New Rules are intended to make it easier for Chinese companies to obtain outbound investment approvals, they have also tightened up rules against a practice that some Chinese companies have used to get around the existing rules.  This involves so-called "onshore collateral/offshore lending" and works as follows:

If a Chinese investor wishes to make an outbound investment, instead of applying for the required government approval, it sometimes would deposit cash with a domestic bank which would use it as collateral for issuing a letter of credit to an offshore bank (or the offshore branch of the same domestic bank).  In reliance on this letter of credit, the offshore bank (or the offshore branch) would make a loan to an offshore affiliate of the Chinese investor, which would then use the proceeds to make the offshore investment.  This way the Chinese investor would use "onshore collateral" to obtain "offshore lending" without having to obtain the required outbound investment approval.

The New Rules have specifically disallowed this practice by expanding the definition of outbound investment to include Chinese companies providing financing or guarantees to enable its offshore entities to make offshore investments.

Other Approvals

Outbound investments by Chinese companies are also subject to approvals by the Ministry of Commerce ("MOFCOM") and the State Administration of Foreign Exchange ("SAFE"), in addition to NDRC.  However, the approval by NDRC is the first and most critical step in the entire approval process.  As has happened in the past, MOFCOM and SAFE are likely to amend their outbound investment regulations in line with the New Rules.  Provincial governments are also expected to follow suit with respect to outbound investments falling within their approval authority. 

The essence of the New Rules is to delegate more approval authority to local governments.  As it is generally much easier to obtain approvals from local governments compared with the central government, the New Rules are likely to encourage more outbound investments by Chinese companies.  Still, as long as the requirement of government approval is in existence, it will continue to put Chinese companies at a competitive disadvantage compared with investors from other countries that do not have this requirement.  This is especially true in a bidding situation, which often has forced many Chinese companies to agree to pay a heavy reverse breakup fee in case they cannot obtain the required Chinese government approval to close a transaction. 

Gibson, Dunn & Crutcher LLP   

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about this development.  Please contact the Gibson Dunn lawyer with whom you usually work or the following:

Yi Zhang – Hong Kong (+852 2214 3988, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])

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