PRC Outward Investment: Liberalization Momentum Builds
In recent years, the government has been making the legal environment governing investment outside China by companies established in China, including foreign-invested companies, more progressive. A new SAFE circular furthers the liberalization programme.
By Xiaowei (Sherry) Yin, Neal Stender & Jiaolin Song, Coudert Brothers, Hong Kong, Beijing & Shanghai
There are two principal government bodies responsible for overseeing external1 investment by PRC companies: the State Administration of Foreign Exchange (SAFE) and the Ministry of Commerce (MOFCOM).2 SAFE and its local branches are responsible for administration of foreign exchange sourcing, conversion and remittance. After SAFE's examination of foreign exchange sourcing, each outward investment project must be examined and approved by MOFCOM, or by the local department to which MOFCOM has delegated authority. SAFE and MOFCOM have been liberalizing their procedures in a largely similar way, although there are still some inconsistencies.
The continuing trend of liberalization of the legal environment for investment abroad by PRC companies has been confirmed and advanced by SAFE in its Issues Relevant to Further Intensifying the Reform of Foreign Exchange Administration on External Investments Circular3 (the SAFE Circular), which was issued on October 15 2003.
Key New Provisions
The SAFE Circular simplifies procedures, permits PRC companies to make advance remittance of preparatory expenses for incorporating an external entity, and of deposits to be used in acquisitions, formalizes the authority of 14 local SAFE branches to give final foreign exchange approval for projects up to US$3 million in size, indicates a potential amnesty for previous non-compliance, and creates a basis for equal treatment of state-owned enterprises, private enterprises and foreign-invested enterprises. This last point is very interesting, as the new Circular does not distinguish among PRC companies according to their ownership. The SAFE Circular does not address external investments by PRC individuals.
The SAFE Circular permits PRC companies based in "pilot" localities to remit early stage expenses including acquisition deposits and/or preparatory expenses for incorporating an external entity, based on preliminary approval from a pilot SAFE branch, "according to the principle of actual necessity". PRC companies can directly disburse preparatory expenses to external entities or individuals; they must remit upfront money for an acquisition to an account, under the name of the PRC investor, in an external bank branch, with the first choice being a PRC-invested external bank branch. Previously, the need for final project approval before making any outward remittances had been a major practical obstacle to outward investment.
The SAFE Circular specifies that up to US$3 million may be invested based on final foreign exchange approval from one of the specially authorized local "pilot SAFE branches" in 14 provinces and provincial-level municipalities.4 (But, as we discuss below, there are inconsistencies between the localities of SAFE's pilot branches and MOFCOM's analogous list of pilot local departments enjoying expanded examination and approval powers.) The threshold for approval by other provincial-level SAFE branches remains unchanged at US$1 million.5
SAFE procedures have been substantially simplified in the new SAFE Circular. Most importantly, the commercial feasibility of an external investment project is no longer included in the scope of review by SAFE or its local branch.
The SAFE Circular clarifies that, after completion of a proposed acquisition or establishment of a proposed offshore company, surplus funds originally remitted for acquisition deposits or preparatory expenses may be directly transferred to the new external subsidiary. If the acquisition or establishment is abandoned, the entire surplus must be remitted back to the PRC within seven days of the investor's decision not to undertake the investment. The investors are also "requested" to report the details to the pilot SAFE branches within 20 days.
A potential amnesty offer is indicated in the SAFE Circular for PRC investors that hold external investments not previously in compliance with SAFE's registration procedures. SAFE will impose no penalties on violators who make full disclosure and bring their investments into compliance before May 31 2004. But this amnesty depends on a PRC investor's ability to obtain a "confirmation letter" from MOFCOM or its delegated local departments.
Background and Remaining Issues in Freeing Up External Investment Policies
The SAFE Circular caps a series of steps towards the liberalization of external investment procedures. SAFE's first tentative liberalization in this area, in 1999, affected only projects entailing foreign processing or assembly operations, "in kind" (non cash) investments by PRC investors, or foreign aid. PRC investors in these projects were allowed to substitute a mere letter of undertaking for the security deposit that was generally required from PRC outward investors.6 From late 2002, when the State Council signalled a move towards liberalization,7 until the issuance of the SAFE Circular, SAFE had already made the following changes in its procedures:
- had cancelled the security deposit requirement for all outward investment projects;8
- had eliminated foreign exchange risk from the scope of SAFE's examination;9
- had permitted use of funds from more sources, such as foreign exchange loans from PRC financial institutions;10
- had exempted "in kind" (non cash) invested projects and certain other projects from fund source examination;11
- had cancelled the letter of undertaking requirement;12 and
- had specified the procedures for refund of previous security deposits (with interest).13
During the same timeframe, the project approval procedures of MOFCOM (and its predecessor MOFTEC) had also been liberalized and rationalized to a degree. First came MOFTEC's clarification of standards and procedures for evaluating the results of outward investment.14 Then, the recently reorganized MOFCOM announced its delegation of increased authority to certain local "pilot" departments.15 Next, the State Council issued rules16 entrusting approvals for projects with investments of less than US$30 million to MOFCOM,17 except for projects involving the finance industry (which are subject to approval by the China Banking Regulatory Commission) or natural resources (still subject to examination and approval by the National Development and Reform Commission). Subsequently, MOFCOM announced its delegation of increased authority to additional local pilot departments.18 At the time of writing, MOFCOM is understood to be considering the issuance of comprehensive regulations for outward investment project approval.
Certain inconsistencies remain between the policies of SAFE and MOFCOM. MOFCOM's announcements of authority delegation to pilot departments have not specified a formal project size threshold. To be consistent with the SAFE Circular, this threshold should logically be set at US$3 million. Another inconsistency is that SAFE's and MOFCOM's designated pilot entities are not all in the same localities. Localities where pilot authority has been delegated by both SAFE and MOFCOM are: Beijing; Shanghai; Tianjin; Guangdong; Fujian; Jiangsu; Shandong; and Zhejiang. Localities where pilot authority has been delegated only by SAFE are Chongqing, Sichuan, Hainan, Guangxi, Hubei and Heilongjiang. Localities where pilot authority has been delegated only by MOFCOM are Ningbo, Qingdao, Shenzhen and Xiamen. Unless or until these lists are made identical, PRC companies in some localities will find that some procedures can be completed locally, while others must be completed at the national level.
Post-investment Issues
After investing abroad, a PRC company has continuing compliance obligations. The key post-investment procedure is annual inspection, which is now governed primarily by regulations issued and implemented jointly by SAFE and MOFCOM.19 Also, the SAFE Circular reaffirms the requirement that local SAFE branches collect statistics on PRC companies' external investment projects.
Spreading the Benefits
Foreign companies will also enjoy more options as liberalization continues. Aside from the possibility of using their PRC subsidiaries to make outward investments, foreign companies can invite PRC companies to form joint ventures outside the PRC to penetrate additional markets, to broaden the sharing of risks and opportunities, and to create worldwide alliances.
Liberalizing outward investment has the diplomatic benefit of addressing some criticisms made of the PRC's currency control and exchange rate policies. In addition, outward investment is being recognized more widely among PRC policymakers as a necessary stage in the maturation of PRC companies and as a precondition of their ability to compete in global markets.
Endnotes
1 External or outward (境外) investment, often referred to as "overseas" investment, includes investment into Hong Kong, Macao and Taiwan.
2 MOFCOM subsumes the functions, structures and personnel of the former Ministry of Foreign Trade and Economic Cooperation (MOFTEC).
3 国家外汇管理局关于进一步深化境外投资外汇管理改革有关问题的通知, effective on November 1 2003.
4 Pilot SAFE branches are located in: Beijing; Shanghai; Tianjin; Chongqing; Sichuan; Guangdong; Hainan; Jiangsu; Zhejiang; Shandong; Fujian; Heilongjiang; Guangxi; and Hubei.
5 See the Supplementary Circular (关于《境外投资外汇管理办法》的补充通知), issued by SAFE on September 14 1995 and effective on the same day.
6 See the Certain Items Exempted from Paying Security Deposits for Remittance of Profits from External Investment Circular (国家外汇管理局关于部分专案免缴境外投资汇回利润保证金的通知), issued by SAFE on September 7 1999 and effective the same day.
7 The State Council included outward investment risk examination in a list of activities no longer requiring governmental approvals. See The First Batch of Items in Respect of which Administrative Examination and Approval Requirements are to be Abolished Decision (国务院关于取消第一批行政审批专案的决定), issued by the State Council on November 1 2002 and effective on the same day.
8 See the Security Deposits for Remittance of Profits from External Investment Circular (国家外汇管理局关于清理境外投资汇回利润保证金有关问题的通知), issued by SAFE on November 12 2002 and effective on the same day.
9 See the November 1 2002 State Council regulation referred to in note 7 above, and also the Issues Relating to Simplification of External Investment Foreign Exchange Fund Source Examination Circular (国家外汇管理局关于简化境外投资外汇资金来源审查有关问题的通知), issued by SAFE on March 19 2003 and effective on the same day.
10 See the November 12 2002 SAFE regulation referred to note 8 above.
11 Also exempted were strategic projects approved by the State Council and foreign aid projects. See the March 19 2003 SAFE Circular referred to in note 9 above.
12 See the Refund of Security Deposits for Remittance of Profits from External Investment Circular (国家外汇管理局关于退还境外投资汇回利润保证金有关问题的通知), issued by SAFE on July 8 2003 and effective on the same day.
13 See ibid.
14 See the Comprehensive External Investment Results Evaluation Procedures (境外投资综合绩效评价办法), issued by MOFTEC on October 24 2002 and effective January 1 2003.
15 See the Agreement on Trial Delegation of Examination and Approval Authority for Non-trading External Investment Official Reply (关于同意下放非贸易性境外投资审批许可权改革试点的批复), issued by MOFCOM on February 19 2003.
16 See the Printing and Distribution Rules on the Ministry of Commerce's Main Functions, Internal Structure and Personnel Circular (国务院办公厅关于印发商务部主要职责内设机构和人员编制规定的通知), issued by the State Council on April 25 2003.
17 Projects of US$30 million or more are not clearly addressed by the most recent rules, indicating that final approval must still be obtained from the State Council, as under previous rules.
18 See the Expansion of Trial Delegation of Examination and Approval Authority for External Investment Official Reply (关于扩大境外投资审批许可权改革试点的批复), issued by MOFCOM on April 28 2003.
19 See the Joint Annual Inspection of Overseas Investment Tentative Procedures (境外投资联合年检暂行办法), issued jointly by SAFE and MOFCOM on October 31 2002, and effective January 1 2003.
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