PRC Outward Direct Investment: Liberalization Momentum Consolidated

July 02, 2006 | BY

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The Circular drops the previous acquisition deposit requirement but adds a repatriation requirement where approval procedures are not completed within six months.

PRC investors' ability to compete in the increasingly fast-moving market for cross-border M&A, and other forms of foreign direct investment, will be increased by simplification of various procedures and by expanded freedom to remit funds for early stage expenses.

Neal A. Stender, Orrick, Herrington & Sutcliffe, Hong Kong;
Xiaowei (Sherry) Yin, Nicholas Sheets and Lei Cui,
Coudert Brothers LLP, Beijing and Shanghai

Liberalization of restrictions on the purchase and remittance of capital account foreign exchange, for entities in the People's Republic of China (PRC) to make outward foreign direct investments, has been further consolidated by a series of circulars of the State Administration of Foreign Exchange (SAFE).1

The most recent changes are contained in SAFE's Circular on Revision of Certain Foreign Control Policies Relating to Overseas Investments (the 2006 Circular), which will become effective on July 1 2006. These changes reflect SAFE's confidence and experience gained throughout China under SAFE's 2005 Circular of the State Administration of Foreign Exchange on Issues Relating to Enlarging Pilot Reform of Foreign Exchange Administration Concerning Overseas Investment (the 2005 Circular). Before the 2005 Circular, a 'pilot reform' had been initiated in selected regions under SAFE's 2003 Circular on Issues Relevant to Further Intensifying the Reform of Foreign Exchange Administration on External Investments (the 2003 Circular), building upon a series of earlier reforms.2

Outward direct investment by PRC companies is increasingly important to China's economic development, as PRC companies globalize in line with China's integration into the international economy. According to statistics recently published by SAFE, aggregate outward direct investment by domestic firms as of 2005 had reached US$64.5 billion (Rmb5.15 trillion), up 22% from 2004. Furthermore, since the introduction of China's 'going global' strategy in 2001, which sets a policy direction of encouraging outward direct investments, there have been a number of major foreign acquisitions by PRC companies. Some of the most notable have been TCL's acquisition of operations from Thomson and Alcatel between 2003 and 2004, Lenovo's acquisition of IBM's personal computer unit in 2004, and CNPC's purchase of PetroKazahkstan in 2005. Moreover, the growth in PRC outward direct investment is expected to continue in the coming years as PRC companies increasingly look to expand and make a name for themselves abroad. The ambitions of, and the continuing regulatory difficulties faced by, PRC companies were illustrated by China Mobile's bid

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