China＇s Approval Regime on Outbound Investment

On February 26， 2010， the Ministry of Commerce of China (\"MOFCOM\") issued the Guiding Opinions on 2010 Outbound Invest-ment and Coo-peration indicating that non-financial outbound direct invest-

ment amount increased by 6.5% from US$40.7 billionin 2008 to US$43.3 billion in 2009. Against the backg-round of the severe international financial crisis and economic down-turn in 2009， such growth of outbound investment is remarkable around the world. On March 28， 2010， after a drawn-out negotiation， Zhejiang Geely Holding Group Co.， Ltd (\"Geely Group\") executed a definitive agreement with Ford Motor Company (\"Ford\") in the presence of Li Yizhong， Minister of the Ministry of Industry and Informa-tion Technology， to take over Volvo Car Corporation (\"Volvo\") owned by Ford. This deal is the largest acquisi-tion of overseas enterprise owning high-end brand by Chinese auto maker in history. Li Yizhong's attendance highlighted the attitude of Chinese government towards outbound invest-ment by Chinese enterprises. In consideration of tremendous growth of state foreign exchange reserves and upward pressure on the Renminbi， Chinese central government has placed much emphasis on the capital outflow and outbound investment recently. Apart from encouragement from government， Chinese companies are also eager to seek new overseas markets and explore more investment opportunitiesbased on the rapid development and capital accumulation in the new century.

However， Chinese enterprises planning to conduct outbound invest-ments shall obtain a series of approvals or registrations from related competent authorities prior to closing of the proposed transactions. To some extent， these procedures are cumbersomeand complicated. Current Chinese governmental authorities in charge of approval and registration of outbound investment are mainly composed of the National Development and Reform Commission (\"NDRC\")， the MOFCOM， and the State Administration of Foreign Exchange (\"SAFE\"). In certain circumstances， the State-owned Assets Supervision and Administration Commission (\"SASAC\")， the China Securities Regu-latory Commission (\"CSRC\")，the China Banking Regulatory Commission(\"CB-RC\")， China Insurance Regulatory Commission (\"CIRC\")， Anti-monopoly Bureau (\"AMB\") etc. may also be invol-ved in such approval procedures.

1.Approval from the NDRC

NDRC is in charge of project approval in connection with the outbound investment. Chinese dome-

stic companies wishing for outbound investment shall firstly obtain the approval from the NDRC before obtaining otherapprovals from other competent governmental authorities. On October 9， 2004， the NDRC promulgated the Tentative Admi-nistrative Measures on Approval of Outbound Investment Project (\"Measures on Project Approval\") which currently governs approval procedures of the NDRC regarding the outbound investment. On June 8， 2009， the NDRC also issued another applicable rule regarding outbound investment， the Notice on Relevant Issues Concerning Improving the Administration of Outbound Invest-ment Project(\"Improving Notice\")， to supplementthe Measures on Project Approval. The Improving Notice further imposed certain reporting obligations on part of the companies engaged in outbound acquisition or bidding project and elaborated on the procedures of such reporting.

In accordance with the Measures on Project Approval， the NDRC shall be responsible for approving transac tions in the following circumstances:

(1)the amount to be invested in na-tural resource development by the Chinese investor equals or exceeds US$30 million (if such amount equals or exceeds US$200 million， approval from the State Council shall be also required).

(2)the amount to be invested in other sectors apart from the natural resource development by the Chinese investor equals or exceeds US$10 million (if such amount equals or exceedsUS$50 million， approval from the State Council shall be also required).

(3)the investment regardless of its amount is to take place in the Taiwan region or a country with which China has not established diplomatic relations (such investment shall be also approved by the State Council). In addition， outbound investment by the central state-owned enterprises which can not reach the foregoing thresholds shall be registered with the NDRC. The local counterparts at provincial level of the NDRC shall be responsible for approving transactions in the following circumstances:

(1)the amount to be invested in na-tural resource development by the Chinese investor is less than US$30 million.

(2)the amount to be invested in ot-her sectors apart from the natural resource development by the Chinese investor is less than US$10 million.

The companies proposing to mak-eoutbound investment shall obtain approval from the NDRC before any definitive binding agreements are executed. Among others， the companies engaged in outbound acquisition or bidding project which requires appro-valfrom the NDRC or the State Council according to the Measures on Project Approval shall report the information of proposed project to the NDRC prior to commencing material activities. If related companies fails to file information reports with the NDRC in advance of the formal application of the approval， such application will be rejected and the NDRC will also impose other punishment， for example， circulating a notice of criticism or economic penal-ties.

2.Approval from the MOFCOM

MOFCOM is responsible for the approval of the outbound investment agreements. The agreements executed by the Chinese investors and theiro-verseas cooperators shall not become effective until the approvals from the MOFCOM or its provincial branches have been obtained. At present， the Measures on the Administration of Outbound Investment (\"Measures on Outbound Investment\")， which was issued on March 16， 2009 by the MOFCOM and became effective on May 1， 2009， is the major rules governing the MOFCOM's approval procedures inconnection with the outbound investment. The Measures on Outbound Investment greatly simplified the approvalprocedures and transferred many approval power to its provincial branches. According to Yao Jian， spokesman of the MOF-COM， approximate 85% outbound investment will be approved by the provincial branches of the MOFCOM in the future.

Under the Measures on Outbound Investment， there is a clear division of the approval tracks with regard to outbound investment. In the first track， which is the most cumbersome one， the following outbound investments shall be subject to the MOFCOM's approval: (i) investments in countries without diplomatic relationships with China; (ii) investments in countries or regions specially defined by related governmental departments (it appears that Afghanistan， Iraq and Taiwan are currently defined); (iii) investments by the Chinese investors with an amount of US$100 million or more; (iv) investments related to the interest of several countries and regions; (v) investments in order to establish the overseas special purpose entities. In the second track， the following outbound investments shall be approved by the provincial branches of the MOFCOM: (i) investments by the Chinese investors with an amount of US$10 million or more and less than US$100 million; (ii) investments in energy or natural resources; (iii) investments requiring fund-raising from domestic market. In the third track， which is the most simple and commonly used approval track， the outbound investments less than US$ 10 million and not falling within the foregoing two tracks do not need a full review and only subject to a formal examination by the MOFCOM (only for certain central state-owned enterprises) or its provincial branches.

Upon the MOFCOM or itspro-vincial branches approve the outbound investment， they will issue the outbound investment approval certificate which is an essential document to tackle the following procedures of foreign exchange， banking， customs， foreign affairs etc. As such certificate shall expire within two years upon its issuance， the Chinese investors should better finish the follow-up overseas or domestic procedures in two years.

3.Registration with the SAFE

The SAFE is empowered tomo-nitor the flows of foreign currency in and out of China. Under China's current foreign exchange control regime， foreign exchange under capital account is subject to severe review procedures. Domestic entities wishing to conduct outbound investment have to clear the SAFE's review procedures and register with the SAFE in order to change their capitals from Renminbi into proper foreign currencies and inject such capitals into the outbound investment project.

In the past， such review proce-dures in the SAFE were strict and proactive. As to outbound investment， review by the SAFE was the very first step among other approval procedures in the NDRC or MOFCOM. The Foreign Exchange Administrative Ruleson Outbound Direct Investment by Domestic Entities (\"Foreign Exch-ange Administrative Rules\")，which was promulgated by the SAFE on July 13， 2009 and became effective on August 1， 2009， changed such situation and streamlined the cumbersome procedures. According to the Foreign Exchange Administrative Rules， the domestic entities only need to make registration with the SAFE or its local braches until they have obtained the approvals from the NDRC or MOFCOM. Upon the registration with the SAFE， domestic entities shall get a certificate of registration by which domestic entities can remit their capitals out of China into the outbound investment project.

The Foreign Exchange Adminis-trative Rules further enlarge thescope of the foreign exchange source to facilitate the outbound investment. During the course of the outbound investment， domestic entities can use many kinds of foreign exchange sources including their own foreign currencies (for example， foreign currencies under the current account， capital account of foreign-invested enterprises)， foreign exchange loan from domestic financial institutions， foreign currencies or asset purchased by Renminbi， intangible assets， and other foreign currencies sources approved by the SAFE. Inaddition， profits arising from the outbound investment can also be used for further outbound investment.

To facilitate outbound investment and further handle some actual problems of domestic entities， the SAFE also offered an f lexible shortcut for domestic entities which are eager to get access to foreign currencies in advance. In accordance with the Foreign Exchange Administrative Rules， some qualified domestic entities can remit certain preliminary expenses out of China into outbound investment project even prior to obtaining the approvals from the NDRC and MOFCOM. Such preliminary expenses generally shall not exceed 15% of the total investment amount of the proposed outbound investment and may include but are not limited to guarantee deposit during the process of bidding or acquisition， expenses regarding market research， office lease， employees engagement and so on.

4.Other Competent Authorities

Apart from the foregoing three major authorities， some outbound investments may also trigger additi-onal approval procedures in other sector-specific authorities. SASAC of the State Council takes responsibilities as investor of state-owned assets on behalf of the central government and aims to strengthen the management of state-owned assets. In the event that the domestic entities proposing to make outbound investment are state-owned enterprises， they have to apply for the SASAC's approval to initiate the application procedures in other competent authorities regarding the outbound investment as the SASAC is their investor in theory.

The SCSC is the state authority responsible for conducting supervision and regulation of the securities markets in accordance with the law. If the domestic entities proposing to make outbound investment are listed enterprises in Shanghai or Shenzhen or plan to acquire or control foreign listed companies， they also have to obtain the SCSC's approval prior to the outbound investments. As the CIRC and CBRC are the regulators in insurance and banking sectors， the outbound investments regarding insurance and banking institutions are subject to their review and approval. According to the China's Anti-Monopoly Law (\"AML\")，if the con-centration stemmed from such outbound investment reach certain thresholds， AMB directly under the MOFCOM may intervene such outbound investment and embark on a preliminary investigation. Although there is no precedent of intervention imposed on outbound investment by domestic entities under the AML till now， it is worth noting that such investigation is beginning to come up as the amount of the outbound investments is larger and bigger.

5.Conclusion

China's current approval regime on outbound investment bases on several rules and regulations issued by more than five governmental authorities. At present， there is no one unified and complete law governing the business in such fields. Therefore， there are too many competent authorities engaged in outbound investment regulation to simplify the approval procedures of outbound investment. In view of the foregoing， many scholars， deputies to the National People's Congress and some officials called for an overhaul of the current approval regimeon outbound investment.

On March 5， 2010， Wen Jiabao， Premier of the State Council， delivered the Report on the Work of the Government (\"Work Report\") at the third session of the 11th National People's Congress. According to the Work Report， Premier Wen vowed to further simplify the outbound investments examination and approval procedures，and grant enterprises decisionmaking power over their outbound investments.It can be expected that Chinese central govern-ment may adopt more measures to simplify and streamline the current approval regime on outbound invest-ments in the future.(Author: Assistant Lawyer of an international law firm)