China’s recently released official guidelines on outbound direct investments will help formalise the approval process for Mainland investors to invest overseas, providing greater certainty to what had been an ad hoc procedure, according to US-based legal firm Latham & Watkins.
Beijing began to tighten controls on direct investments abroad to stem capital outflow and prop up its currency last November, a move that resulted in a 46% decline in such investments in the non-financial sector in the first half of 2017, China’s Ministry of Commerce (MOFCOM) said in July.
But there were no formal guidelines at the time. The controls were applied through informal guidelines and discussions with government officials. Such ad hoc implementation made it difficult for investors to predict how long it would take to secure regulatory approval for their planned investments, Latham & Watkins says in a commentary.
It wasn’t until August 18 that Chinese authorities, including the National Development and Reform Commission (NDRC), MOFCOM, and the People’s Bank of China, jointly issued guidelines to formalise the regulatory steps to seek approval for direct investments overseas.
This “helps clarify the regulatory framework”, for buyers and sellers of such investments, Latham & Watkins says in the August 31 commentary.
It also notes that the guidelines “promote outbound investments that align with China’s ‘One Belt, One Road’ policies”, an initiative which focuses on connectivity and cooperation between Europe and Asia.
Under the guidelines, outbound investments are classified into three groups: encouraged, restricted, and prohibited transactions.
For example, the guidelines stipulate that restricted transactions such as real estate investments are subject to a longer regulatory approval process.
Latham &Watkins expects the guidelines to be implemented and administrated by the NDRC, MOFCOM, and the State Administration of Foreign Exchange, which oversees China’s foreign reserves.
The regulators are expected to establish an inter-agency overseas investment “blacklist” to track and punish investors who violate the regulations, according to the legal firm.
Overall, the guidelines “provide a level of increased clarity for deal makers contemplating outbound direct investment transactions, which will hopefully spur additional growth in these investments”, Latham & Watkins says.
