By Wang Kaiding, Huang Mengting and Tang Xinran King & Wood Mallesons’ Corporate & Securities group

The Department of Foreign Capital and Overseas Investment of National Development and Reform Commission (“NDRC”) released the new Administrative Measures for Overseas Investment (draft for public comment) (“New Measures”) and drafting instructions on their official website[1] on 3 November, 2017. This consultation period, during which the public can give their opinion, ends on 3 December 2017.

The New Measures contains six chapters and 66 articles. There are several major changes from the Administrative Measures for the Verification and Record-filing on Outbound Investment Projects[2] (“Regulation No.9”). The regulation’s name change indicates that regulation of foreign investment will no longer be limited to pre-transaction “verification” and “record-filing”, but also covers interim and ex post supervision.

The main points to note about the New Measures are:

“Road-pass” regime annulled, time costs reduced, and more transaction certainty

Article 10 of Regulation No. 9 states that:

“When undertaking overseas acquisitions or bidding projects with total investment exceeding USD300 million (inclusive), Chinese investors shall submit a project information report to NDRC before carrying out any substantive work.”

Dubbed the “road-pass” regime, this article drew great attention from the market. The demise of the “road-pass” regime evidences the NDRC’s intention to “further streamline administration and delegate power”. This is a highlight of the New Measures.

Broader application, covering all types of foreign investment

1.Foreign investment projects conducted by domestic enterprises and natural persons through controlled foreign enterprises will be regulated

(1)Foreign investment projects conducted by domestic enterprises through controlled foreign enterprises

Domestic investors conducting foreign investment projects through their foreign enterprises are not governed by Regulation No. 9 unless they have provided cross-border financing or guarantees. In practice, many investors have used this loophole to avoid the verification and record-filing procedures required by Regulation No.9 through overseas financing or guarantees.

All overseas investment conducted by domestic enterprises through their controlled foreign enterprises, no matter domestic enterprise provides cross-border financing or guarantees or not, will now fall within the scope of the New Measures[3]. This is limited to foreign enterprises controlled by domestic enterprises.

(2)Foreign investment projects conducted by domestic natural persons through controlled foreign enterprises

As of today, regulations relating to domestic natural persons engaged in overseas investment are limited to regulations on foreign exchange registration by the State Administration of Foreign Exchange of the establishment of overseas special purpose companies and return investment by domestic residents.  No specific regulations are provided by NDRC or the Ministry of Commerce with respect to overseas investment by natural persons.

The New Measures still do not apply to direct overseas investment by domestic natural persons. However, the New Measures apply to foreign investment projects conducted by domestic natural persons through overseas enterprises under their control[4].

(3)No substantial increase in compliance costs

The wider coverage of the New Measures will not substantially increase compliance costs for investors.

With respect to those domestic enterprises and natural persons newly covered by New Measures who conduct overseas investment projects through controlled overseas enterprises (instead of making direct capital or interests investment, or providing direct financing or guarantee):

  • Sensitive projects will be subject to a verification procedure. But as sensitive projects only account for a small proportion of overseas investment projects (around 1% in the past 2 years) this change will have a limited influence.
  • For non-sensitive projects, if the total investment from Chinese investors exceeds USD300 million (inclusive), investors shall only submit a report to NDRC before the implementation of the project.[5] Verification and record-filing procedures are not necessary. If the total investment amount from Chinese investors is less than USD300 million, then no pre-transaction verification, record-filing or reporting is required.

Besides the above changes, there is no substantial difference in the requirements of pre-transaction verification and record-filing for overseas investments in the New Measures.

2. Several overseas investment activities are listed

The New Measures defines overseas investment and lists several typical overseas investment activities[6], which is helpful for investors to determine whether an overseas activity is classed as an overseas investment or not.

According to the New Measures, investment activities include but are not limited to:

  • Acquiring rights and interests such as ownership and land use rights in overseas land;
  • Acquiring rights and interests such as exploration and exploitation concession in overseas natural resources;
  • Acquiring interests such as ownership, operation and management rights in overseas infrastructure;
  • Acquiring interests such as ownership, operation and management rights in overseas enterprises or assets;
  • Establishing, renovating or expanding overseas fixed assets;
  • Establishing or investing in overseas enterprises;
  • Establishing or participating in foreign equity funds;
  • Controlling overseas enterprises or assets through agreements or trusts.

3. Foreign investments made by financial enterprises are also regulated by the NDRC

Regulation No.9 did not explicitly exclude financial enterprises, but, in practice, market players were always unclear about whether it applied to overseas investments made by financial enterprises.

Under the New Measures, NDRC has specified that foreign investments made by financial enterprises will be regulated.

Redefining sensitive projects, focusing on national interests and security

“Sensitive projects” include projects involving sensitive countries, regions or industries.

The New Measures defines a “sensitive industry” as including:

  • research on, production and repair of weaponry;
  • cross-border water resources development and utilization;
  • news media;
  •  industries restricted from making foreign investments according to national macroeconomic control policies[7].

A Sensitive Industry Directory will be released by the NDRC separately.

These changes to the definition of a “sensitive industry” reflect a new focus on safeguarding national interests and security. Further adjustments will be made in accordance with national macroeconomic control policies.

Verification and record-filing as implementation condition– to comply with international practices and market conditions

Under Regulation No.9, verification documents or record-filing notices issued by the NDRC were a condition precedent to the effectiveness of transaction agreements.

In the international market, government approval is usually a condition for closing but does not effect a contract’s validity. In reality, many cross-border M&A’s conducted by domestic enterprises also regard government approvals as closing conditions. Therefore, there is a gap between such provision in Regulation No. 9 and market practice.

Under the New Measures, verification and record-filing procedures have been re-categorized as conditions for implementation (rather than effectiveness)[8]. “Implementation” is defined as “before the implementation of a project” – where investors or controlled foreign enterprises have not yet invested assets or interests into[9], or provided financing or guarantees for a project.

Explicitly stating circumstances and procedures where ‘change’ applications are required

Under the New Measures, circumstances that require a ‘change’ application include[10]:

  • Any change to the number of investors, any substantial change to the investment ratio, or any change to the control of investors;
  • Any substantial change to the investment destination;
  • Any substantial change to main content and scale;
  • Any change to the Chinese investment amount greater than 20% (compared to the verified and filed amount) or of more than USD 100 million;
  • Other circumstances where substantial changes are needed with respect to verification documents or record-filing notices.

The New Measures also state the time limit for the review procedure of ‘change’ application.

Strengthening interim and ex post supervision

Articles 43, 44 and 45 of the New Measures provide mechanisms for reporting material adverse conditions, project completion, and inquiry and reports about material matters.

Regulation by the NDRC is no longer limited to pre-transaction regulation, with reporting and regulation mechanisms added for during the deal and after its closing. It is worth stressing that under the New Measures, such mechanisms only require investors to inform the authorities about those information but not performing verification and record-filing procedures.

In addition, the New Measures provide for the establishment of an online platform, to strengthen guidance on and services for foreign investment. A “blacklist” will also be established, as will a joint disciplinary team to comprehensively examine and refine the existing system.

Although the final version of the New Measures is not yet released and may still subject to changes, the direction of the reform is clear — streamline administration and delegate power, combine liberation with regulation, and improve services. The final outcome will be a more transparent and predictable foreign investment administrative system.


[2] Issued in April 2014 and amended in December 2014.

[3] See Article 2.

[4] See Article 63.

[5] Article 42.

[6] Article 2.

[7] See Article 13.

[8] Article 32.

[9] Excluding preliminary expenses for verification and record-filing in accordance with Article 17 of the Measures

[10] Article 34