(May 16, 2012) The rate of Chinese state-owned enterprises investing in the overseas investment market has expanded in recent years, and with this there has also been an increase in the risks to their success. In response to these risks, the Chinese government has taken urgent action to introduce measures relating to the supervision and management of such investments. On March 18, 2011, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) promulgated the Interim Measures for Supervision and Management of Outbound Investment of Central Enterprises. (Zhongyang Qiye Jingwai Touzi Jiandu Guanli Banfa, SASAC website (Apr. 11, 2012).) The Measures are designed to reduce overseas investment risks, strengthen overseas investment cooperation, and prevent cutthroat competition among central enterprises. (Id. art. 3.)
The Measures apply to all outbound investments made by central enterprises and their wholly-owned or controlled subsidiaries at all levels outside the territory of mainland China, and are also applicable to investment in the Hong Kong Special Administrative Region, the Macao Special Administrative Region, and the Taiwan Region. (Id. art. 2.) A central enterprise (CE) is an enterprise in which SASAC takes responsibility as a capital contributor. (Id. art. 1.) Both fixed-asset investment and equity investments are subject to these Measures. (Id. art. 2.)
As the supervisory agency for CEs, SASAC provided specific principles in the Measures for formulating an outbound investment strategy, which a CE is required to map out. The strategy must:
- conform to the national economic and social development plans and the industrial policies;
- focus on the CE's core industries and support improvement in its international competitiveness;
- make the scale of investment compatible with the CE's assets and business-scale, asset-liability level, actual fund-raising ability, and financial capacity; and
- comply with the laws and policies of the countries (regions) targeted for investment and respect the local customs of these countries (regions). (Id. art. 5.)
In general, in order to control risk, a CE is not allowed to invest in fields outside its core industries, unless it has obtained special approval from SASAC after submitting an application to invest in the non-core industry. The application should comprise a feasibility study and reports on due diligence, risk assessment, risk control, and risk prevention. (Id. art. 10.)
The Measures strictly require that CEs report to SASAC on their internal investment management systems, annual overseas investment proposals (AOIP), and key projects in core industries. (Id. arts. 6 & 7.) A key investment project refers to a project in which the CE and its subsidiaries will invest, based upon the approval of the highest investment decision-making organ of the CE according to its internal management system. (Id.art. 7.) SASAC is authorized to disapprove of an application to add a key investment project that is not listed in the AOIP (id. art. 9). The AOIP should cover:
- the total scale, source, and structure of the funding, of the overseas investment; and
- basic information on the key investment projects, including the projects' background and content, equity structure, investment location and amount, financing scheme, implementation period, risk analysis, and the investment benefits. (Id. art. 7.)
The CE is required to promptly report to the SASAC any substantive change in the project's content or major adjustment of the investment amount and equity structure during the implementation of a key investment project. (Id.art. 11.)
In order to improve the ability to control risk, SASAC encourages CEs to collect risk information pertinent to the countries targeted for investment and to conduct quantitative and qualitative analysis, to enable the CEs to give precautionary warnings of potential risks, prepare effective schemes for preventing risks, and resolve existing risks. (Id. art. 14.)
The measures came into force on May 1, 2012.
Prepared by Rong Xiang, Foreign Law Research Consultant, under the guidance of Kelly Buchanan, Chief, Foreign, Comparative and International Law (FCIL) I. Ms. Xiang has a Bachelor of Laws degree from Nanjing University in China and an LL.M degree from the City University of Hong Kong. She recently earned an LL.M. in International Business Law from The American University Washington College of Law.