China Daily, US Edition: SmithStreet Offers its Investment Research Insights on China Outbound Investment
New rules may boost overseas investment By Jennifer Harris (China Daily)
August, 2009
NEW YORK: For years, China has received more foreign direct investment than any other country in the world. But now, the cash flow is increasingly going the other way as China is paving the way to boost its investment abroad.
China's State Administration of Foreign Exchange (SAFE) announced in June it would allow Chinese companies to lend capital of up to 30 percent of the value of their equity to their foreign interests.
The new rules, effective this week, will allow smaller Chinese companies to join state-backed corporations in expanding global investments.
Sun Lujun, an official at SAFE, told a news conference that the new regulations could release $30 billion in Chinese financing overseas.
The decision comes as Chinese investment in overseas companies continues its upward trend.
In 2008, Chinese foreign investment totaled $52.2 billion, up from $20 billion the previous year.
The Chinese government appears interested in boosting that amount.
This year, in addition to SAFE's June announcement, two other regulatory bodies-China's Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC)-have also updated their regulations for outbound investments.
However, the effects of these changes are mixed. Some of the changes will make outbound investment easier for Chinese companies, while others will slow the approval process.
In May, new MOFCOM rules went into effect for Chinese firms looking to invest in foreign enterprises. The rules, the first update of its kind in five years, establish three approval tiers for any outgoing investments.
The first is a fast track for non-sensitive investments of less than $10 million.
However, the procedure for investments outside this category has "not moved forward hugely since the 2004 rules," said Jeanette Chan, a partner at global law firm Paul, Weiss, Rifkind, Wharton & Garrison. "If anything, the new rules emphasize the central government's tight grip on large scale or sensitive investments."
The second tier is for investments between $10 million and $100 million, as well as any investments in natural resources or energy.
These investments may be approved at the provincial commerce authorities as well, but the process will be lengthier.
MOFCOM approval is required for investments of more than $100 million; investments that involve the establishment of overseas special purpose vehicles for roundtrip investments; investments that involve multiple jurisdictions; and investments in assets in certain sensitive jurisdictions.
These moves by the Chinese government reflect its belief that it now holds too much foreign currency, particularly US dollars, said Steven Lee, head of investment research at SmithStreetSolutions, an investing firm.
Loosening government controls over currency flows will help to relieve some of that pressure, he said.
But in June, the NDRC also issued new rules that would tighten its control over Chinese overseas investment.
The rules would mainly impact investments of more than $10 million, natural resource investments of more than $30 million, and investment in China's Taiwan province or countries with whom China does not have diplomatic relations.
Such investments will have to go through a preliminary review process prior to starting negotiations with sellers.
"You've got several different administrations involved [in the approval process]," said Gregory Louvel, a lawyer with Norton Rose in Beijing. "There are different layers of approval, and sometimes the administrations don't have the same targets. MOFCOM is trying to make investments possible, and the NDRC rules are more to control investment."
One prominent example of the type of conflict that can arise from this situation is the ongoing efforts of Sichuan Tengzhong Heavy Industrial Machinery, a small private company, to acquire GM's Hummer unit.
MOFCOM is said to have no problem with the deal going forward, while the NDRC is said to oppose the deal because it's not in line with China's goals of increasing its energy efficiency.
The seemingly contradictory decision to both encourage and tighten control over China's outbound investment is in line with the Chinese government's approach to business, said Franklin Yao, CEO of SmithStreetSolutions.
"For larger size deals, the approval process may now be more complex, but this is not being done with the intention of reducing deal flow," Yao said. "The government looks at businesses as a parent would its children. In this case it is trying to protect firms from making decisions that are not in their best interests."
To see original article, please visit: