China’s outward FDI grew by 13.3% in 2015, hitting a historical high of USD 139.5 billion; and China’s outbound investment is expected to grow by more than 10%, and maintain a sustainable high growth for the next five years, as shown in the report Going Out – the global dream of a manufacturing power – 2016 China Outbound Investment Outlook issued by EY on April 14, 2016.
The world’s second-biggest economy trounced the United States in another aspect as Chinese companies inked the highest number of overseas deals so far this year. The number of deals, mostly purchase by foreign companies, since January amounted to $110.8 billion, reported by The Times of India on May 12, 2016.
Go Global Strategy
Adhering to the basic state policy of opening up, China will better integrate the “bring in” and “go global” strategies, expand the areas of opening up, optimize its structure, raise its quality, and turn our open economy into one in which domestic development and opening to the outside world interact and Chinese businesses and their foreign counterparts engage in a win-win cooperation, and one that features security and efficiency, in order to gain new advantages for China in an international economic cooperation and competition amid economic globalization. This strategic policy was formally raised in the Report of 17th National Congress of the Communist Party of China.
One Belt, One Road
The Silk Road Economic Belt and the 21st-century Maritime Silk Road, also known as The Belt and Road (abbreviated B&R), One Belt, One Road (abbreviated OBOR) or the Belt and Road Initiative is a development strategy and framework, proposed by Chinese paramount leader Xi Jinping that focuses on connectivity and cooperation among countries primarily between the People’s Republic of China and the rest of Eurasia, which consists of two main components, the land-based “Silk Road Economic Belt” (SREB), including Central Asia, West Asia, the Middle East, and Europe, and the oceangoing “Maritime Silk Road” (MSR), the South China Sea, the South Pacific Ocean, and the wider Indian Ocean area. The Initiative calls for the integration of the region into a cohesive economic area through building infrastructure, increasing cultural exchanges, and broadening trade.
Chinese Capital is Climbing up the Global Value Chain
With the implementation of the “Made in China 2015” and the “One Belt One Road” strategies, and the development of international cooperation on production capacity and machinery manufacturing, the traditional overseas investment in infrastructure and manufacturing will remain strong. However, the objectives of the overseas investment of Chinese capital have been shifting from acquiring basic production essentials into accessing advanced technology, brands and markets in the last years, and the currently the China’s overseas investment is focusing on the high end sectors, such as technology, media & telecommunications (TMT), auto & transportation, and financial services.
Can a Chinese Domestic Individual Make Overseas Investment?
In accordance with Article 17 of the Administrative Regulations of the People’s Republic of China on Foreign Exchange (Revised in 2008), any domestic organization or individual that seeks to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas shall make the appropriate registrations in accordance with State Council foreign exchange administrative department provisions. Any such organization or individual that is required to obtain approval from or make a filing with the relevant competent authority in accordance with State provisions shall go through the approval or filing formalities before making said registrations. However, the SAFE has made no further detailed rules for implementation on how to obtain the approval or make the filing, so the legislation about overseas investment by a Chinese domestic individual is inoperative.
Therefore, since domestic individual overseas investment has not opened yet, currently the adoptable ways for a domestic individual who desires to make overseas investment are by QDII (Qualified Domestic Institutional Investor), to raise funds and make overseas investment in the name of institutional investor, or by a domestic company incorporated by such individual and make overseas investment by the company.
Convenience for Overseas Investment from Chinese Government
In accordance with the Administrative Measures for Outbound Investment newly promulgated by the Ministry of Commerce on September 6, 2014, 1) the management mode of “giving priority to filing, with approval as a supplement” is established, the MOFCOM implements approval management on investments in sensitive countries and regions or sensitive industries, and the remaining is only subject to filing requirements; 2) the scope of approval management is narrowed, the time limit for approval is shortened, and the provision on a certain value or above being subject to approval is canceled, and the time limit for approval is shortened by 5 working days; 3) the requirements and procedures of filing are made clear, an enterprise may get filing within 3 working days only if it completes the Filing Form in a faithful and complete manner; 4) the provincial level of authority of the MOFCOM is responsible for the filing management on local enterprises investing or incorporating a company abroad, and may print and issue Enterprise Overseas Investment Certificate; 5) the Government will enhance guidance and regulation on the activities of overseas investment of the enterprises while continuing to provide services for the enterprises.
China’s chief outbound investment regulator, the National Development and Reform Commission (NDRC), had sought comments on its draft revised version of the Administrative Measures for Approval and Record-filing on Overseas Investment Projects during April 13 to May 13, 2016, the new measures aimed at both speeding up approvals and allowing head-to-head competition between Chinese bidders.
The Difficulties of Chinese Overseas Investment
The Chinese enterprises reflected that their overseas businesses were generally in a good condition, more than half of the enterprises were making profits, 24% of the enterprises were breaking even, and the remaining 24% of the enterprises were temporarily losing money, as shown in the 2015 Report on the Sustainable Development of Chinese Enterprises Overseas jointly issued by the UNDP, the research center under the State-owned Assets Supervision and Administration Commission of the State Council, and the International Trade and Economic Cooperation Institute, Ministry of Commerce. However, failed Chinese enterprises overseas investments can be found everywhere and some Chinese overseas investments are facing with difficulties and cannot acclimatize themselves to the new business environment.
Mr. Zhou Weihong, Chief Economic Manager of CGN summarized in the conference of Boao Forum for Asia on May 25, 2016 that the reasons why Chinese enterprises cannot acclimatize themselves to the foreign business environment are as follows:
1) the local economic environment will affect the costs;
2) the local laws have great impacts;
3) the local employment conditions will also bring in unexpected problems.
He advised the Chinese enterprises going abroad to have a deeper understanding of the local business environment.
Suggestions to the Chinese Enterprises Going Global
Although the Chinese enterprises are active in going global, most enterprises still suffer of a lack of experience in overseas investments. Therefore, engaging legal, financial, tax and other professionals of rich experience in overseas investments is necessary for a prudent enterprise going abroad.
D’Andrea & Partners can help in this matter and provide professional consultancy. If you want further information, write an email to info@dandreapartners.com
Disclaimer
This article is intended solely for informational purposes and does not constitute legal advice. Although the information in this article was obtained from reliable official sources, no guarantee is made with regard to its accuracy and completeness.
Copyright 2016
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