On October 31, the State Council of China promulgated the 2014 Catalogue of Investment Projects Subject to Government Approval (the 2014 Catalogue), further changing the landscape of the regulatory procedures for outbound investments.
Approximately one year ago, the issuance of the 2013 Catalogue of Investment Projects Subject to Government Approval (the 2013 Catalogue), which was replaced by the 2014 Catalogue, signaled the start of China’s reforms of the regulatory procedures for outbound investments, which was followed by the implementation measures issued by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) (respectively, the “New NDRC Measures” and the “New MOFCOM Measures”1), the two major authorities in charge of the regulatory clearance for outbound investment projects (Projects). The focus of the reform is to further streamline the existing regulatory procedures for outbound investments.
The 2014 Catalogue moved a step further by entirely cancelling the monetary thresholds of a Project for NDRC’s approval. We expect that NDRC will soon issue an amendment to the New NDRC Measures to reconcile with the 2014 Catalogue. Earlier this year, MOFCOM already eliminated the monetary thresholds under the New MOFCOM Measures.
We summarize below the major changes in the landscape as brought about by the reform that commenced last year.
Shift from Pre-approval to Less Burdensome Pre-recordal
Before the issuance of the 2013 Catalogue, only a small portion of Projects were subject to NDRC’s and MOFCOM’s recordal procedures2, and most of the Projects were subject to the more burdensome and time-consuming approval procedures. Since the issuance of the 2013 Catalogue, the scope of Projects for approval has been remarkably reduced, largely due to the cancellation of the monetary thresholds for approval of Projects. Now, a Project will need NDRC’s and MOFCOM’s approval only if it involves a sensitive country/region or industry. For all other Projects, recordal with NDRC and MOFCOM will be sufficient.
Sensitive countries/regions include those having no diplomatic relations with China and those subject to international sanctions. For NDRC, sensitive countries/regions also include those where wars, civil strife, etc., are occurring. MOFCOM has not included such countries/regions in the New MOFCOM Measures, but has reserved the power to release lists of other sensitive countries/regions in the future.
The scope of sensitive industries varies substantially between NDRC and MOFCOM measures. A Project may be considered a sensitive industry by NDRC but not by MOFCOM, and vice versa. For NDRC, sensitive industries include basic telecommunications operations, cross-border development and utilization of water resources, large-scale land development, main power transmission lines and power grids and news media industries. As far as MOFCOM is concerned, sensitive industries means industries involving export of products or technologies subject to China’s export restrictions, or industries affecting interests of more than one country/region, e.g., construction of railroads that cross the border(s) of two or more countries.
Although NDRC and MOFCOM both refer to their recordal procedures as “recordal,” MOFCOM’s recordal system lives up more accurately to its name. For MOFCOM’s recordal, only an application form and a photocopy of the Chinese investor’s business license must be filed, and the process will be successfully completed as long as the application form is “truthfully and completely filled out and is in the legally required form”3. By contrast, NDRC’s recordal procedures involve more discretion by NDRC. NDRC will make the decision for recordal, based on criteria substantially similar to those for approval. That said, NDRC’s shift from an approval-based regime to a recordal-based regime is still impressive progress, considering the remarkably shortened time period for most of the Projects, as further discussed below.
Since the scope of Projects for recordal (rather than approval) has been substantially expanded, most outbound investors will need to go through only the recordal procedures. The statutory time limits for NDRC’s and MOFCOM’s recordal processes after acceptance of the application are only seven working days and three working days respectively.
Furthermore, it is feasible that NDRC and MOFCOM can review an application for one Project simultaneously. Under the New MOFCOM Measures, MOFCOM has eliminated the documentation requirement of the approval/recordal certificates issued by NDRC evidencing successful completion of NDRC’s procedures. A reasonable inference is that the completion of NDRC procedures is no longer a pre-requisite for the commencement of MOFCOM procedures. Under this assumption, for most Projects for recordal with NDRC and MOFCOM, the time period for completing the procedures can be as short as seven working days from acceptance of the applications by each of the two authorities.
If NDRC or MOFCOM requests additional or corrections to application documents before accepting the application (after a preliminary review), that request must be within a specific time period, namely five working days for NDRC and three working days for MOFCOM. These clear and short statutory time limits will help avoid a situation where the authorities could potentially delay the processes by repeatedly requesting additional or corrected documents. Previously, NDRC did not have such requirement, and MOFCOM had a longer period of five working days.
More Powers Delegated to Provincial Authorities
Under the new regulatory regime, more powers are delegated to the provincial counterparts of NDRC and MOFCOM for recordal. This may also contribute to streamlining the regulatory procedures, as local procedures are typically more efficient.
Below is a table outlining the Project approval/recordal requirements:
Pre-filing Signing of Investment Agreements Now Permitted
Under the old regulatory regime, signing of the final binding investment agreement4 must be subsequent to the issuance of NDRC’s approval/recordal certificate (i.e., when NDRC’s approval/recordal procedures are successfully completed). Under the New NDRC Measures, the parties are allowed to sign the investment agreement before obtaining NDRC’s approval/recordal certificate, as long as the agreement provides that it will become effective after the issuance of the certificate. The old requirement has long been deemed burdensome and impractical. The change shows NDRC’s efforts to accommodate international market practices and to further facilitate outbound investments.
More Aggressive Enforcement Against Non-compliance
In the past, NDRC’s approval/recordal requirements were not strictly followed or enforced throughout the country, mainly because (a) cross-border investment opportunities are usually time-sensitive, (b) NDRC’s regulatory procedures are onerous and time-consuming, and (c) in practice some post-NDRC procedures (e.g., the foreign exchange related procedures) do not require outbound investors to present NDRC’s approval/recordal certificates (though statutorily required). The New NDRC Measures have provided NDRC with the power to order termination of a Project without proper NDRC approval/recordal, indicating NDRC’s determination for more aggressive enforcement. With the regulatory procedures overall being relaxed and streamlined, we strongly recommend full compliance with NDRC’s procedural requirements to avoid unfavorable results.
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1The New NDRC Measures: Administrative Measures for the Approval and Recordal of Outbound Investment Projects (Order No. 9  of NDRC), promulgated by NDRC on April 8, 2014 and taking effect on May 8, 2014, replacing the old Interim Administrative Measures for the Approval of Outbound Investment Projects (Order No. 21  of NDRC) promulgated by NDRC on October 9, 2004 and taking effect on the same day. The New MOFCOM Measures: Measures for the Administration of Outbound Investment (Order No.3  of MOFCOM), promulgated by MOFCOM on September 6, 2014 and taking effect on October 6, 2014, replacing the old Measures for the Administration of Outbound Investment (Order No. 5  of MOFCOM) promulgated by MOFCOM on March 16, 2009 and taking effect on May 1, 2009.
2Previously, MOFCOM had a 3-day expedited approval procedure similar in nature to the recordal procedure today, despite of the name.
3Article 9 of the New MOFCOM Measures.
4This requirement excludes framework agreements.
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