On the 13th, September, Ms. Mireia Paulo, Director of the European-American Market and Overseas Investment Projects at A&Z Law Firm, was invited to deliver a speech in the JUWAI China Agent Summit held in Shanghai. Ms. Paulo’s topic was about “China’s Capital Control Policy”.

Ms. Paulo introduced the background of China’s capital control context. Some of the elements that have influenced the decision of controlling capital flows highlighted were:

(1) Limit the drawdown of China’s foreign currency reserve;

(2) Keep the RMB/USD exchange rate relatively stable;

(3) Avoid persistency on bad investments with high-risk and lack of planning; and

(4) Restrict capital outflows relating to purchasing real estate assets abroad.

In addition, she explained which are the four main official supervision departments [National Development and Reform Commission; Ministry of Commerce of the People’s Republic of China; People’s Bank of China; State Administration of Foreign Exchange]. These four agencies are responsible for the examination and approval of outbound investment projects.

The latest regulations were also introduced to the attendees. When doing outbound investments in China, the main circular to look at is: <Circular of the General Office of the State Council on Forwarding the Guiding Opinions of the National Development and Reform Commission, the Ministry of Commerce, the People's Bank of China and the Ministry of Foreign Affairs on Further Guiding and Regulating the Outbound Investment Direction> “<Circular”>. This circular came into effect on 4 August 2017.

Under the circular, outbound investment projects are currently divided into three categories: encouraged, restricted and prohibited categories. Until this 2017 year, hot business sectors for Chinese outbound investments were real estate, hospitality, film cinemas, entertainment and sports clubs. 

The circular identifies these business sectors in the restricted category now, which means, any company interested in investing in those will need to obtain the approval by the four competent authorities. 

Approvals are based on a case-by-case basis, however, if those investment projects follow out of the investor core business and lack a solid strategic plan supported by a well-prepared dossier, it is unlikely to obtain the approval.

Despite this new situation, there are also positive outcomes for those conducting businesses following under encouraged category. Among those can be highlighted the following:

(1) Infrastructure projects that are favorable to the Belt and Road Initiative and the interconnection of infrastructure in neighboring countries;

(2) Investment that can drive the output of advanced production capacities, superior-quality equipment and technological standards;

(3) Projects focus on high/new technologies and advanced manufacturing aiming to encourage the establishment of research and development centers abroad; and

(4) Exploration and development of overseas energy resources such as oil gas and minerals.

Ms. Paulo illustrated the new capital control context in China by showing two different case studies: a failure project and a successful story. The unsuccessful case was Dalian Wanda Group entering the US TV industry after agreeing to acquire US-based Dick Clark Productions (DCP) for US$1bn. Regardless rumors about the transaction fee and possibilities to additional offshore money, the result was that Wanda had insufficient funds to purchase the asset by 17 January 2017. 

Wanda sent Eldridge a notice to extend the closing date to 28 February while paying a penalization fee for delays of $25 million. The new deadline, however, was not achieved, and consequently, Eldridge suited Wanda for an additional $25 million termination fee in Delaware Chancery Court. This case sent a clear message about official trends to Chinese companies interested in outbound investment projects.

In the afternoon sessions, Ms. Paulo took actively part in the discussions with investors and investees, and provided advices for their outbound investment projects. When doing overseas investment transactions between different stakeholders, multicultural and multi-disciplinary backgrounds, it is always recommended to count on the support of “bridge professionals” able to give advice on the regulatory matters, get and keep the team on the same page throughout the entire project.

In summary, when doing outbound investment transactions, make sure that your company/industry/partner falls into the encouraged category. Moreover, you should double-check whether your project needs to be approved or filed before carrying out the project and agreeing on the purchase conditions. Finally, you should verify that the project is in compliance with relevant Chinese laws and regulations to avoid possible barriers.

A&Z Law Firm

——“From the very beginning to the very end”

The information contained in the article is the opinion of the author’s alone and should be used only as a reference. This article does not constitute legal advice in any sense. Although we try to ensure accuracy, please note that the application and impact of laws vary based on contextual and circumstantial variables. Before taking any action, please ensure that you obtain professional advice specific to your circumstances. A&Z welcomes any and all questions pursuant hereto.

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