The Hong Kong Institute of Chartered Secretaries

Enhanced Continuing Professional Development (ECPD) Training

China Outbound Investment Regulatory Developments

21 June 2018

Presenters:

Ms Karen Ip

Ms Karen Ip is a corporate partner of Herbert Smith Freehills who advises on cross-border transactions
relating to China. Based in Beijing, she has more than 20 years' experience advising clients on inbound
and outbound transactions.

Karen helps businesses – mainly in the financial, real estate, retail, telecommunications and healthcare
sectors in China – handle cross-border mergers and acquisitions (M&A) transactions, establishment of
presence, and meet regulatory compliance requirements (including in relation to consumer protection,
product liability, competition and employment issues).

Karen’s expertise is reflected by her consistent listings in Legal 500 Asia Pacific, Chambers Asia-Pacific,
and IFLR1000. According to Chambers Asia-Pacific 2016, Karen is ‘a very capable corporate partner’.

Ms Nanda Lau

Ms Nanda Lau is a partner of Herbert Smith Freehills based in Shanghai. Her practice covers a wide
range of corporate and commercial work including M&A, foreign direct investment, private equity,
joint ventures, corporate restructuring, competition law and regulatory compliance matters in China.

Her clients include multi-national corporations and Chinese companies in a broad range of sectors,
including aerospace, automobile, chemical, food and beverages, financial services, pharmaceutical, real
estate, retail and TMT.

Nanda has extensive experience in advising clients on doing business in China and cross-border
transactions with a China element.

The Hong Kong Institute of Chartered Secretaries 香港特許秘書公會

(Incorporated in Hong Kong with limited liability by guarantee) (All rights reserved) Page 1 of 2
 The Hong Kong Institute of Chartered Secretaries
Enhanced Continuing Professional Development (ECPD) Training

China Outbound Investment Regulatory Developments

21 June 2018

Chair:

Ms Cynthia Chen

Ms Cynthia Chen FCIS FCS is the Named Company Secretary of the Listed Company. Ms Chen holds a
Bachelor’s Degree in Business Administration and a Master’s Degree in Corporate Governance. She is
currently studying for a PhD in Finance. She is a Fellow of The Hong Kong Institute of Chartered
Secretaries and a Fellow of The Institute of Chartered Secretaries and Administrators. She has more
than sixteen years’ extensive experience in the company secretarial practice and has over twenty years’
experience in large well-known enterprises management, and she has worked in Singapore for more
than three years.

The Hong Kong Institute of Chartered Secretaries 香港特許秘書公會

(Incorporated in Hong Kong with limited liability by guarantee) (All rights reserved) Page 2 of 2
REGULATORY UPDATES ON CHINA OUTBOUND INVESTMENT

THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES

JUNE 2018

Karen Ip, Partner, +86 1065355135, [email protected]

Nanda Lau, Partner, +86 2123222117, [email protected]
AGENDA

• Part 1: Recent regulatory trends

• Part 2: Key statistics and trends
• Part 3: Approval and filing requirements
• Part 4: Financing of China Outbound Investment
• Part 5: Case studies
• Observations

2018 PROSPECTS – POINTS TO TAKE AWAY

// 2
Part 1: Recent regulatory trends

Tightened control on capital outflow since late 2016

• Government paying close attention to potential risks associated with certain types
of outbound investments
• "Window guidance" and bank practice

Remittance of foreign exchange in the amount of US$5 million or more to be
reported to SAFE for approval
• NDRC & MOFCOM enhanced examination process

NDRC beefed up information reporting of outbound acquisition and bidding
projects

MOFCOM upgraded online system to strengthen authenticity examination

Additional documents required

Form review  substantive review

// 3
Part 1: Recent regulatory trends

Notice on Further Guiding and Regulating the Direction of Outbound

Investment (Guidelines) in August 2017
• Negative list approach – encouraged, restricted, prohibited
categories
• Extended scope of outbound investments subject to approval
• Regulatory substantive review
• The Guidelines consolidate regulatory practice but require further
clarification

// 4
Part 1: Recent regulatory trends

• Outbound M&As in 2017 significantly slow down

• Fewer mega deals, more smaller deals
• Considerable slowdown in the regulatory approval and filing processes –
increased execution risk and delayed time table
• Government continues to support core strategic (e.g. One Belt One Road) and
long-term outbound investments by Chinese buyers, while tightening scrutiny on
investments in non-core sectors or speculative, over-valued projects
• Rising protectionism against Chinese outbound investment
• New NDRC Measures: expand the transaction scope subject to its approval/filing
authority (not only those with domestic funding /guarantee) while simplifying
China outbound investment process

// 5
Part 2: Key statistics and trends of ODI

ODI
• After a record high of US$170 billion in 2016, non-financial ODI value in 2017
down by 29.4%
• China's outbound non-financial direct investment rises for seventh consecutive
month. In first five months of 2018, non-financial ODI value increased by 38.5%

Non-financial ODI value Year-on-year growth

(US$ billion) 50.00% 44.10%
180 38.50%
170.11 40.00%
160 28.60%
140 30.00%
120 118.02 20.00% 16.80%
100 120.08 14.70%
102.89 10.00% 14.10%
80 90.17
60 77.2 47.89 0.00%
40 2012 2013 2014 2015 2016 2017 First five
-10.00% months
20
0 -20.00% of 2018
2012 2013 2014 2015 2016 2017 First five
-30.00%
months
of 2018 -40.00% -29.40%

Source: http://hzs.mofcom.gov.cn/article/date/201804/20180402737726.shtml

// 6
Part 2: Key statistics and trends of ODI

ODI
• In first five months of 2018: ODI Value
• The industrial structure was
optimized, and irrational investment
was effectively curbed.
Leasing
• ODI in the leasing and business and
service, mining, wholesale, and retail Others Business
business accounted for 29.9%, 15%, Service
12.3% and 7.6%, respectively, of the
total outflow.
• There were no new projects in the
real estate, sports, or entertainment Mining
industries.
Retail
business
Wholesale

Source: http://www.xinhuanet.com/fortune/2018-06/14/c_1122987677.htm

// 7
Part 2: Key statistics and trends of ODI
ODI IN EU
• ODI in EU down 17% in
2017, which is still lower
than the 29% drop in ODI
globally
• After a period of large
investments in Southern
Europe, Chinese investors
returned to the largest
European economies in
2016 and 2017
• UK, Germany and France
accounted for 75% of
China’s total EU
investment in 2017, the
highest share in ten years

Source: https://www.merics.org/en/papers-on-china/chinese-fdi-in-europe

// 8
Part 2: Key statistics and trends of ODI

ODI IN EU
• Transportation,
public utilities and
infrastructure
facilities have
become the top
sectors for Chinese
investment in Europe
in 2017
• High-tech, advanced
manufacturing, real
estate and hospitality
also accounted for a
significant share

Source: https://www.merics.org/en/papers-on-china/chinese-fdi-in-europe

// 9
Part 2: Key statistics and trends of ODI

ODI IN BELT & ROAD COUNTRIES

• After a record high of US$14.82 billion in 2015, non-financial ODI value in Belt &
Road countries in 2016 and 2017 down
• In first five months of 2018, trade volume in nations covered by the “Belt and
Road” initiative continued to grow, with new direct investments worth USD
5.93bn, up 8.2% compared with the same period last year

Non-financial ODI value Year-on-year growth

(US$ billion) 20.00%
18.20%
16
14 14.82 14.53 15.00%
14.36
12
10 10.00%
8.20%
8
6 5.93 5.00%
4
2
0.00%
0 2015 2016 2017 First five
2015 2016 2017 First five months -1.20% months of 2018
-2.00%
of 2018 -5.00%

Source: http://hzs.mofcom.gov.cn/article/date/201801/20180102699454.shtml; http://www.xinhuanet.com/fortune/2018-06/14/c_1122987677.htm

// 10
Part 3: Approval and filing requirements

• China outbound investment pre-notification, approvals and filings

National Development & Reform Commission (NDRC)

Ministry of Commerce (MOFCOM)
• Provision of cross-border guarantee by China-incorporated entity

Registration with State Administration for Foreign Exchange (SAFE)
• Investment with state-owned asset administration

Approval of, or filing with State-owned Assets Supervision and Administration
Commission (SASAC)
• Investment by PRC financial institutions

Approval of, or filing with CBIRC (combination of CBRC and CIRC) or CSRC
• Compliance with PRC listing rules

Approval of China Securities Regulatory Commission (CSRC)

PRC Listco’s shareholder meeting approval
• Merger control filing

Clearance by Anti-monopoly Bureau of State Administration of Market Regulation

// 11
Part 3: Approval and filing requirements
• Determining Factors

Business of the Target – sensitive sectors?

Location of Target – sensitive jurisdictions?

Investment amount – over US$300 million?

Acquisition of controlling stake?

Place of incorporation of acquisition vehicle (inside or outside China)

Direct investment or indirect investment via offshore SPV?

Source of funding to finance the acquisition (any remittance of funds from
China?)

Any guarantee to foreign lenders in support of the financing of the acquisition
from China-incorporated entity?

Is the Chinese buyer state-owned, a PRC Listco and/or subject to
administration of any special regulatory commission such as CIRC?

Is the “Chinese buyer” a Chinese national?

// 12
Part 3: New NDRC china outbound investment
measures
New NDRC Outbound Investment Measures (Document No. 11)
• Effective 1 March 2018
• Expand the scope of transactions subject to NDRC scrutiny

Regardless of the source of funding or guarantee

Cover offshore equity investment funds and investment through contractual or trust
arrangements

Cover outbound investment made by offshore entities which are controlled by Chinese
individuals
• Expand scope of sensitive sectors
• Enhance post-approval and filing supervision

Deadline for completing approval/filing - before the implementation of the investment
• Streamline the approval and filing procedures

Abolishing the “road pass” (project information report) requirement

A local enterprise may submit tis application directly to the central NDRC for approval
(no longer needs to go through local NDRC)

// 13
Part 3: New NDRC china outbound investment
measures
Sensitive Industry Catalogue
• Published by NDRC on 31 Jan 2018: research, manufacturing and maintenance of
defense equipment; development and utilisation of cross-border water resources; news
and media

Notice on Further Guiding and Regulating the Direction of Outbound Investment in
August 2017: real estate, hotel, cinema, entertainment, sports clubs

Q&A published by NDRC since 25 April 2018

• 6 types of real estate transactions NOT regarded as sensitive "real estate" projects
that are subject to NDRC approval, including:

RE projects do not involve contribution of assets or interests from China or provide
financing or guarantee from China, and only financed by funds raised from abroad

Investment in the infrastructure facilities construction and construction
development for actual industrial business, e.g. Industrial park, technology park,
warehouse logistics park.

// 14
Part 3: Approval and filing requirements
- NDRC Approval/Filing Mandate
Involving Sensitive Countries
and Regions1 or Sensitive
Industries2

Yes No

Subject to Central Direct

NDRC Approval Investment

Yes No
Non-CAEs with
Investment Amount over Investment
US$ 300m Amount over
US$ 300m
Or CAEs

Yes No Yes No
Subject to Subject to
Online report No approval /filing/
Central Provincial
to NDRC reporting required
NDRC Filing DRC Filing

#1: “sensitive countries and regions” include those with which China has no diplomatic relations, countries in which investment is
restricted under international treaties to which China is a party, and countries or regions affected by war or civil strife.
#2: NDRC has published 2018 Catalogue of Sensitive Industries effective since March 2018.
#3: “investment” means directly or via its controlled overseas enterprises, acquiring ownership, controlling power, rights of operation
and management and other rights and interests overseas by making asset or equity investment, providing financing or guarantee, etc.

// 15
Part 3: Approval and filing requirements
- MOFCOM Approval/Filing Mandate

Direct
investment

Yes No

Involving Sensitive Countries

and Regions1 or Sensitive No CAEs
Industries2

Yes Yes No

Subject to
Subject to Central Subject to
Central
MOFCOM Provincial COC
MOFCOM
Approval Filing
Filing

#1: “sensitive countries and regions” include those with which China has no diplomatic relations, countries subject to United Nations
sanctions.
#2: “sensitive industries‘” include industries involving products or technologies the exportation of which is restricted by China, or in
which multiple countries/regions have an interest (for example, a cross-border railway project).

// 16
Part 3: Approval and filing requirements
- SASAC supervision
Recent Development: SASAC control on outbound investment by CAE
• Pre-investment Supervision

Projects included in annual

investment plan filed with SASAC

Yes No

Negative List / non- In principle investment

principal business prohibited

Yes No

Prohibited Regulated Category / At enterprises’

Category non-principal business own discretion

Investment SASAC approval before Above rules also apply to the outbound
Prohibited NDRC/MOFCOM investment made by the wholly-owned or
controlled subsidiaries of the CAE.

// 17
Part 3: Approval and filing requirements
- SASAC supervision
Recent Development: SASAC control on outbound investment by CAE
• Pre-investment Supervision

Negative List

Yes No

Prohibited Regulated At enterprises’ own

Category Category discretion

Application to SASAC for

Investment Prohibited approval before
NDRC/MOFCOM

// 18
Part 3: Approval and filing requirements
- SASAC supervision
Recent Development: SASAC control on outbound investment by CAE
• Investment Supervision

Random examination for significant outbound investment 1 by SASAC

Report quarterly to SASAC the implementation status of outbound
investment project

• Post-Investment Supervision

Submission to SASAC of annual report on the implementation of outbound
investment

Evaluation of outbound investment project by SASAC

#1: “significant outbound investment” refers to outbound investment that is

approved by resolution of the board of directors in accordance with the Articles of
Association and investment management rules of the enterprise.
// 19
PART 3: Approval and filing requirements
- SASAC supervision
Buyer is a non-CAE SOEs

• Generally subject to rules of outbound investment approval requirement formulated

and implemented by local branches of SASAC, varying from locations:
e.g. for provincial SOEs

Local SASAC approval for all outbound investments, e.g. in Beijing and
Guangdong

Local SASAC approval for investment in non-core business or acquisition of

controlling shares, and local SASAC filing for investment in core business
investment, e.g. in Zhejiang

Local SASAC approval for investment in non-core business and local SASAC
filing for investment in core business investment, e.g. in Shanghai

// 20
Part 3: Approval and filing requirements
- SASAC supervision
Buyer is a non-CAE SOEs

• Investment in projects not included in the annual investment plans requires

approval or filing depending on locations of the SOE

• Recent development to enforce a 20BD review period by SASAC before a SOE

can submit a final binding bid for an outbound acquisition

• The Measures for the Financial Management of the Overseas Investments by

SOEs (effective on 1 August 2017): the whole process of overseas investment
decision-making, business operation, performance evaluation, etc.

• The Code of Conduct for Overseas Investments by SOEs is coming soon

// 21
Part 3: CSRC approval and filing requirements -
Regulations on listco
• Buyer is a PRC Listco
• Supermajority Shareholders’ Approval

If the transaction constitutes a “Major Asset Restructuring” under PRC
Company Law or the applicable listing rules of stock exchange (Shanghai or
Shenzhen) subjecting PRC Listco companies to obtain shareholders approval

Articles of Association might provide for lower thresholds

Timing consideration: notice period to call shareholders meeting and time
required for preparing audited report (for share deal) or an asset valuation
report (for asset deal) on the target company
• CSRC Approval

the transaction constitutes back door listing

the Listco issues new shares as the acquisition price

// 22
Part 3: CSRC approval and filing requirements
- Regulations on listco

• Buyer is a PRC Listco

Applicable listing rules of stock exchange (Shanghai or Shenzhen)

Transactions subject to public announcement

Public announcement of the transaction normally made after the board
resolution approving the transaction
• Conditions Precedent for Closing

The shareholders approval and/or CSRC approval (where applicable) should be
a closing CP (otherwise the projects may not be implemented)

Rules set out in slides 22 and 23 also apply to outbound investment made by
Listco’s controlled subsidiaries

// 23
PART 3 : CSRC approval and filing requirements

CSRC to Tighten Administration of Outbound Agencies by Securities and Fund

Operators

Administrative Measures for Securities Companies and Securities Investment Fund

Management Companies to Establish, Acquire and Make Capital Contribution into
Outbound Operation Agencies (Draft for Comment) on May 4, 2018
• Maintaining proper threshold and backing securities and fund operators' efforts to
go global
• Regulating the business scope and improving the organizational structure
• Urging parent companies to step up management and control and improving
administration of outbound agencies
• Intensifying the ongoing regulation and optimizing collaboration in cross-border
regulation

// 24
Part 3: Approval and filing requirements
- Financial institutions
Investments by financial institutions subject to filing with, reporting to or approval of
relevant regulatory authorities:
• Securities institutions (e.g. securities company) - China Securities Regulatory
Commission (CSRC)
• Financial institutions (e.g. banks) - China Banking Regulatory Commission
(CBRC)
• Insurance institutions - China Insurance Regulatory Commission (CIRC)

Acquire controlling shareholding: approval of CIRC

Acquire non-controlling shareholding: reporting to the CIRC within 5 BDs
after execution of transaction documents

Investments by financial institutions also subject to NDRC approval/filing under the

new NDRC Measures.

// 25
Part 3: Recent policies on outbound investment by
PRC insurance companies
• Administrative Measures for Utilization of Insurance Funds

Effective 1 April 2018

Outbound investment using insurance funds shall be in compliance with
relevant provisions of CIRC, PBOC and SAFE

Equity investment acquiring controlling stake is limited to following companies:
 Insurance type companies: including insurance companies, insurance
asset management companies, insurance agency companies
 Non-insurance financial companies
 Insurance business related companies

Establishment of professional insurance assets management institution for
management of Immovable assets, infrastructure facilities, aged care, etc.

// 26
Part 3: Recent policies on outbound investment by
PRC insurance companies

Generally not permitted to deploy insurance funds:
 Investment in companies not in compliance with the state’s industrial
policies (whether by way of share or asset acquisition)
 Direct investment in real estate development and construction
• Notice on Regulating Overseas Loan Secured by Domestic Guarantee of
Insurance Institutions (effective 5 January 2018)

Loans secured by domestic guarantee shall not exceed 20% of the Insurance
Institution’s net asset as at the end of the preceding quarter
• Tightened control on outbound investment by insurance institutions

E.g. CIRC ordered three insurers (including Ping An, Xinhua Life Insurance
and China Re Asset Management) to fix violations of outbound investment
rules

// 27
Part 3: Recent relaxation of QDII, QDLP

What are QDII and QDLP

• Qualified Domestic Institutional Investor (QDII):
o allows investors to invest in foreign securities markets via certain fund
management institutions, insurance companies, securities companies and
other assets management institutions which have been approved by regulators
o a transitional arrangement which provides limited opportunities for domestic
investors to access foreign markets while RMB is still not freely traded
• Qualified domestic limited partnership (QDLP):
o allows foreign investors to set up a QFLP fund which is granted a fixed
investment quota
o the QFLP fund can raise funds directly from Chinese investors in China for
potential overseas investment in capital markets

// 28
Part 3: Recent relaxation of QDII, QDLP

The major differences between the QDII and QDLP

Main Features QDII QDLP

Applicable Institutions Domestic financial Offshore asset

institutions management institutions

Scope of Overseas Mainly overseas Various types of offshore

Investment secondary markets; funds;
required to meet the no clear limitations on
limitations imposed in other investments
QDII rules

// 29
Part 3: Recent relaxation of QDII, QDLP

Recent relaxation of QDII, QDLP etc.

• China’s State Administration of Foreign Exchange (SAFE) revives the Qualified
Domestic Institutional Investor (QDII) programme
• SAFE revives the Qualified domestic limited partnership (QDLP) programme and
increases the quotas of QDLP to US$5 billion
• According to SAFE records, 23 firms received fresh QDII quotas in April 2018 and
13 firms received fresh QDII quotas in May 2018
• The General Office of the People's Bank of China regulates RMB QDIIs' Outbound
Securities Investment: ban remitting RMB funds overseas to buy foreign
currencies

// 30
Part 4: Financing of China outbound investment

Direct outbound investment by PRC-incorporated company with financing of

domestic commercial bank loans

• Lower financing cost

• NDRC has not set any specific minimum debt equity ratio for China outbound
investment projects

• CBRC Guideline of 2015 – no more than 60% of the offshore acquisition price
shall be financed by PRC commercial banks.

• SAFE registration

// 31
Part 4 : Financing of China outbound investment

Commercial Acquisition
Foreign Bank or Loans Price
Offshore Investment Seller of Target
Offshore Branch of
Vehicle Company
PRC Bank
Security
(assignment of interest,
pledge, mortgage, charge etc.)
Loan Capital
Outside China Contribution

Inside China
Guarantee
PRC-incorporated
Company

// 32
Part 4: Financing of China outbound investment
Outbound investment via an offshore investment vehicle:
• Capital increase to offshore investment vehicle
• SAFE registration

• Loan to offshore investment vehicle by PRC-incorporated company

• SAFE registration

as a CP for remitting funds out of China

subject to the cap of 30% of the China-incorporated company’s total
owner’s equity

// 33
Part 4: Financing of China outbound investment

• Guarantee to offshore lender by PRC-incorporated company

Provision of guarantee by PRC-incorporated company to foreign bank or
overseas branch of PRC bank in support of borrowing from offshore lenders
by offshore SPV

Arguably the CBRC Guideline of 2015 does not apply to non-PRC-
incorporated acquirers; borrowing by offshore SPV generally not subject to
PRC CBRC Guideline of 2015

SAFE Registration by onshore guarantor within 15 BDs after execution of the
guarantee agreement

Guarantee by PRC insurance company to offshore SPV: over US$50m shall
report to Insurance Asset Management Association of China (IAMAC)

// 34
PART 4 : Financing of China Outbound Investment
• Loan to offshore investment vehicle by offshore lenders without any guarantee
from PRC-incorporated company

Possible security offered to the offshore lenders:
 legal mortgage over certain assets of the offshore SPV
 assignment of the benefits of the claims under the SPA and interest in
respect of any sums payable pursuant to material insurance policies;
 fixed charge over land, plant and machinery, interests in the SPV and its
subsidiaries, interest in respect of any sums payable pursuant to the
material insurance policies, etc.
 floating charge over all other assets (not subject to assignment or fixed
charge)
 No SAFE registration required
• A combination of various financing options

// 35
Part 5: Case study

Case 1:
A PRC citizen intends to use his wholly-owned BVI company to acquire a UK
incorporated SPV which owns a major real estate in London. Share purchase price of
US$500 million will be paid by the BVI company using funds currently held in a Hong
Kong bank account.
Any restrictions? What regulatory approvals/filings are needed?

Real estate does not fall into “Sensitive Industries” 

 Central NDRC Approval not required

 Online report to NDRC required

// 36
Part 5: Case study

Case 2:
A PRC private company intends to use its wholly-owned Hong Kong subsidiary to
acquire shares in a UK incorporated technology company. The share purchase price
is US$ 500m and will be funded by offshore bank loan secured by guarantee
provided by the PRC company.
What regulatory approvals/filings are needed?

Not involving “Sensitive Industries” or “Sensitive Countries/Regions” +

Indirect Investment + Over US$ 300m 

Online report to NDRC: before closing

Provincial COC filing: post-closing

SAFE Registration: within 15 BDs after execution of the guarantee agreement

// 37
Part 5: Case study

Case 3:
A PRC insurance company which is a CAE intends to acquire controlling shares in an
aged care company incorporated in Singapore. The share purchase price is US$ 50m
and will be funded by its undistributed profit.
What regulatory approvals/filings are needed?

Principal business  SASAC Filing

Acquire controlling shareholding  CIRC Approval

No sensitive industries/regions + direct investment + CAE 
 Central NDRC Filing: before SAFE registration
 Central MOFCOM Filing: before SAFE registration
 SAFE Registration: before closing

// 38
Observations

• Implications on financing means

• Change of investment sectors and focus
• Termination fee
• Impacts on closing time

// 39
Summary:
2018 prospects – points to take away
• Outbound investment will resume
• Focus on manufacturing, high-tech, infrastructure, healthcare
etc.

// 40
China Investment Guide 2018

• The publication is accessible via the link below:

https://www.herbertsmithfreehills.com/latest-thinking/china-
investment-guide-2018

• You may also contact our publication team at

[email protected]

// 41
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// 42
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© Herbert Smith Freehills LLP 2017

// 43