New Draft Rules for China Outbound Investments
The National Development and Reform Commission (NDRC) issued the Administrative Measures for Approval of Outbound Investment Projects (Draft for Consultation) (Draft Measures) on August 16, 2012. The Draft Measures will supersede the Interim Administrative Measures for Approval of Outbound Investment Projects (Interim Measures) issued by NDRC in October of 2004 after they are adopted and promulgated.
The Draft Measures do not make any significant changes in the outbound investment project approval and verification process and timeframe set out in the Interim Measures, but they do relax several requirements as well as incorporate a few regulatory changes adopted by NDRC in recent years.
Removal of Overseas Subsidiary Overseas Investment Approval Requirement
Under the Interim Measures, overseas investments made by a domestic company or its overseas subsidiary are subject to approval by NDRC or its provincial-level counterparts (DRCs). However, the Draft Measures provide that approvals will no longer be required for an overseas investment made by an overseas subsidiary of a domestic company if the domestic company does not provide additional funding or a guarantee to the overseas subsidiary to enable it to carry out the overseas investment.
Elevated Thresholds for Approval by NDRC
NDRC has classified outbound investment projects into two categories: resources development and non-resources development. In relation to "resources development projects," the Draft Measures add a specific reference to "natural gas development projects," reflecting the increased importance of such projects in the latest version of China's "Going Global" strategy.
Under the Interim Measures, "resources development projects" with investments over USD30 million and "non-resources development projects" with investments over USD10 million are required to be verified and approved by NDRC or even the State Council depending on the investment amount. However, in February 2011, the NDRC promulgated the Notice Relating to Delegation of Examination and Approval Authority for Overseas Investment (2011 Notice) to raise these thresholds ten times to reach USD300 million for "resources development projects" and USD100 million for "non-resources development projects" respectively. The Draft Measures incorporate this change, while providing that all investments above these thresholds will need to be verified and approved by NDRC.
However, the Draft Measures also stipulate that outbound investments involving "sensitive countries" and "sensitive industries" will be required to be approved by NDRC or the State Council irrespective of the investment amount. This special provision first appeared in the 2011 Notice and survives in the Draft Measures as Article 7. Under Article 7, "sensitive countries" refer to countries or areas which do not have a diplomatic relationship with China, are under international sanctions, have wars or riots or are otherwise identified as "sensitive countries" by NDRC. "Sensitive industries" include basic telecom operations, transborder water resource development and utilization, massive land development, power mains and grid, news media and other industries which are considered to be sensitive by NDRC.
Notwithstanding the above definitions, it seems likely that many investors will not be able to tell whether certain outbound investments should be regarded as "sensitive" or not, so it may be necessary for NDRC to issue a catalogue listing all "sensitive countries" and "sensitive industries" to address this uncertainty.
Turf Tensions with Other Regulators?
As is the case with the Interim Measures, the Draft Measures reiterate that approval from NDRC or a DRC should be received before getting approvals on outbound investments from other regulators, such as the Ministry of Commerce (MOFCOM) and the State Administration for Foreign Exchange (SAFE).
Although prior approval by NDRC or a DRC is in principle needed to apply for approvals from other regulators, MOFCOM and SAFE have not always followed this rule, probably since they, like NDRC, are also ministry-level authorities under the State Council with authority to issue and regulations with the same legal effect. Since the Draft Measures are issued by NDRC only, it is not clear that they will control the actions of MOFCOM and SAFE, or other ministry-level authorities.
Conclusion
It is apparent that NDRC would like to lead the oversight of outbound investments by Chinese companies and assert its authority as the prime regulatory body for such investments with the promulgation of the Draft Measures. However, it will need the cooperation of other authorities or coordination by the State Council to fully realize this objective.