Briefing

Greater China | Global Investment Outlook: China’s ODI regulatory landscape

Welcome to the first instalment of ‘Global Investment Outlook’, a series of articles aimed at Chinese companies and produced by HFW’s China ODI & Compliance Hub.

This article focusses on China’s regulatory framework for overseas direct investment by Chinese companies. Subsequent articles will discuss related procedures and practice and examine regulatory enforcement trends.

Background

When planning ‘Overseas Direct Investment’ (ODI) activities, such as establishing new overseas entities, mergers and acquisitions, equity participation, or capital increases for overseas subsidiaries, Chinese companies (enterprises) must identify the applicable regulatory requirements under Chinese law, secure filings or approvals, ensure compliance and arrange capital flows accordingly.

As Chinese enterprises rapidly expand their overseas operations, the regulatory system which governs ODI continues to evolve and deepen and is now a comprehensive and multi-layered approach which requires careful consideration.

Drawing on HFW’s experience in cross-border transactions and compliance matters, this article outlines the national-level regulatory framework that domestic enterprises must comply with when engaging in ODI.

Overview of regulatory framework: A multi-system approach

ODI by Chinese enterprises is regulated through multiple administrative systems applying in parallel, each administered by a specific government authority (at the central level and, where applicable, the provincial level), and each focusing on a distinct regulatory aspect of ODI.

At the national level, the ODI‑related administrative systems include:

the Development and Reform System, administered by the National Development and Reform Commission (NDRC) and its provincial counterparts;
the Commerce System, administered by the Ministry of Commerce (MOFCOM) and the competent provincial commerce authorities;
the Foreign Exchange Management System, administered by the State Administration of Foreign Exchange (SAFE) through designated banks; and
for state‑owned enterprises (SOEs), the State‑owned Assets Supervision System, administered by the State‑owned Assets Supervision and Administration Commission of the State Council (SASAC) or its local counterparts.

Core concepts in the ODI context

Certain administrative concepts apply across multiple ODI regulatory systems. These concepts are used to allocate regulatory responsibility and determine the applicable approval or filing procedures.

Project Sensitivity

The primary classification question is whether an ODI project is considered to be “sensitive“, as this determines whether the project is subject to approval or filing and which authority is competent to handle the matter. Where a project is not sensitive, the allocation of the competent authority further depends on who the investor is and the amount invested from China.

Allocation of Regulatory Authority

For ODI regulatory purposes, PRC enterprises are commonly classified as ‘central’ or ‘local’ enterprises to determine which level of government authority is responsible for administering the relevant approval or filing procedures.

Central enterprises are enterprises whose ODI matters are administered at the central government level. These typically include centrally managed enterprises, such as major SOEs directly managed by the SASAC.
By contrast, local enterprises refer to enterprises whose ODI matters are generally handled by provincial‑level authorities, save for projects involving circumstances classified as sensitive under applicable regulations, or proposing to invest a large sum abroad. This is an administrative distinction used to allocate regulatory responsibility, and local enterprises may include private enterprises as well as local SOEs.

The development and reform system: Project-level regulation

The Development and Reform System regulates ODI at the project level. It is administered by the NDRC and, in accordance with the applicable rules, by the competent provincial‑level Development and Reform authorities. Under this system, ODI projects are subject to either an ‘approval management’ process or a ‘filing management’ process, depending on whether the project is classified as sensitive. The authorities’ review focuses primarily on regulatory considerations related to national security and macroeconomic management of ODI.

Sensitive projects

An approval system applies, under which approval is sought from the NDRC to proceed with the ODI project. This system applies to ODI projects involving:

sensitive countries / regions (including those without diplomatic relations with China, those experiencing war or civil unrest, or those requiring investment restrictions under international treaties or agreements concluded or participated in by China); or
sensitive industries (including weapons and equipment, cross-border water resource development and utilization, news media, and industries where foreign investment is restricted according to laws, regulations and relevant policies).

Non-sensitive projects

A filing system applies and:

Projects where the investing entity is a central enterprise, or where the amount to be invested by a local enterprise is US$300 million or more, are filed with the NDRC;
Projects where the investing entity is a local enterprise and the amount being invested is below US$300 million, are filed with the provincial-level Development and Reform authority.

The Commerce System: Regulation of investment activities

The Commerce System regulates ODI at the level of ODI activities conducted by enterprises. It is administered by MOFCOM and, depending on the investor type and sensitivity of the investment, by the relevant provincial Commerce authorities.

Under the Commerce System, sensitivity is determined by reference to whether the ODI falls within the categories of sensitive countries / regions or sensitive industries as defined under the applicable provisions, rather than by reference to commercial or financial considerations. Where an investment falls within the sensitive categories, it is subject to approval by MOFCOM; otherwise, it is generally subject to record‑filing with MOFCOM or the relevant provincial Commerce authority.

Sensitive projects

An approval system applies to ODI involving:

sensitive countries / regions (including countries / regions that have not established diplomatic relations with China, countries subject to UN sanctions and countries / regions restricted by international treaties); or
sensitive industries (including those involving products and technologies subject to export prohibitions or restrictions or industries that may impact the interests of one or more countries).

If the applicant is a central enterprise, the application is made to MOFCOM directly. If the applicant is a local enterprise, the provincial Commerce authority conducts a preliminary review before submitting the application to MOFCOM for approval.

Non-sensitive projects

A filing system applies:

if the investing entity is a central enterprise, the filing is handled by MOFCOM;
if the investing entity is a local enterprise, the provincial-level Commerce authority handles the filing.

Enterprise Overseas Investment Certificate

Following completion of the approval or filing process under the Commerce System, the competent commerce authority issues an Enterprise Overseas Investment Certificate (EOI Certificate). This Certificate is crucial to the success of an ODI project: it serves as documentary evidence of the ODI having completed the required approval or filing with the relevant Commerce authority. In practice, it is commonly required as a supporting document for subsequent ODI implementation steps, including foreign exchange registration with banks.

The Development and Reform System does not issue a standalone certificate. Instead, compliance is reflected in the issuance of an NDRC project approval document or filing notice.

Foreign exchange management

ODI transactions are subject to foreign exchange administration requirements, which are administered by the SAFE through designated banks. Before remitting ODI funds offshore (and, where applicable, purchasing foreign exchange), an enterprise must complete the relevant ODI foreign exchange registration.

The ODI Foreign Exchange Registration process combines “direct review and processing” by designated banks with “indirectsupervision” by the SAFE, an administrative agency under China’s State Council which manages foreign exchange for the People’s Bank of China.

The banks conduct authenticity reviews of investment contracts, source of funds and use of funds, payment routes and other matters in accordance with SAFE regulatory requirements, while verifying that the payments are consistent with the approvals secured under the Development and Reform System and the Commerce System.
SAFE has oversight over this process and conducts inspections of the review processes, reporting procedures and documentation retention practices adopted by the PRC banks.

Supervision by SASAC

SASAC exercises shareholder supervision over the ODI activities of central enterprises in order to protect state-owned assets and ensure that they are preserved or, better yet, appreciate in value. At the national level, investor oversight of ODI primarily targets central enterprises, while SOEs whose ODI matters are administered at the provincial level are subject to investor oversight by the relevant local counterparts of SASAC.

SASAC’s regulatory requirements apply concurrently with those of the Development and Reform System, Commerce System and Foreign Exchange Management System, and include:

Pre-investment: internal decision‑making procedures, feasibility and risk analysis, and (for projects falling within SASAC’s classified supervision or negative list framework) completion of shareholder review or reporting requirements;
During the life of the investment: Ensuring that project information and investment management data are available to SASAC to enable real time, dynamic, monitoring.
Post investment: undergoing supervision, inspections, investment evaluations, and accountability mechanisms.

Commentary

ODI projects must simultaneously comply with regulatory requirements set by multiple government bodies: NDRC, MOFCOM, SAFE, and, in the case of SOEs, are also subject to investor oversight exercised by SASAC or its relevant local counterparts.

Failure to comply with the regulatory requirements stipulated in each of those systems can have significant consequences. For example:

the enterprise may be unable to remit funds overseas, as agreed with its project partners.
a project may need to be delayed or even cancelled, in breach of contracts and other legal agreements.
overseas entities owned by the enterprise may be unable to operate compliantly (e.g. due to lack of funds).

In addition to the national framework, it is also important to consider the local regulatory landscape. Certain local authorities have introduced more flexible measures to encourage, for example, growth and innovation in certain sectors (e.g. the facilitation policies which operate in Shanghai to support its role as an international finance centreⁱ and encourage foreign funded R&D workⁱⁱ). If such measures are available in the province in which the enterprise is based, they could have a substantial impact on the ODI project timeline and efficiency.

In conclusion, clarifying the regulatory pathway, identifying potential roadblocks and deadlines and putting plans in place which will enable the enterprise to simultaneously comply with all of the required regulatory processes and reviews is necessary for the smooth delivery of an ODI project by a Chinese enterprise. This work should be carried out during the earliest stages of a project, to allow time for the various reports and assessments to be carried out by the enterprise and for government reviews to be completed.

Global investment outlook: What’s next?

The second article in our ‘Global Investment Outlook’ series examines the influence that China’s ODI regulations have had on overseas investment practices.

Contact us

The ‘Global Investment Outlook’ series is published by HFW China ODI & Compliance Hub.

Our team has expertise in disciplines which are crucial for successful ODI, including cross-border investment, mergers and acquisitions and multi-jurisdictional regulatory coordination. Leveraging our firm’s global network, we provide Chinese enterprises with end-to-end legal support, spanning project initiation, corporate structures, transaction execution and post-investment management.

Enterprises seeking further information or specific advice on a proposed ODI project or cross-border operations are welcome to contact our team via ODISupport@hfw.com.

HFW does not advise on Chinese law. Whilst every care has been taken to ensure the accuracy of this information at the time of publication, it is provided for general guidance only and should not be considered as legal advice or professional recommendations in relation to any specific transaction or project.

Footnotes