China Eases Rules on Outbound Investment

Rules governing overseas acquisitions by Chinese firms were loosened in May with the introduction of the Ministry of Commerce's (MofCom) Administrative Measures for Outbound Investment.

Traditionally, most deals required approval from MofCom in Beijing, with a few exceptions. If an investment was targeted at one of a small list of countries (not including the US, India or Japan), and if the value came to less than US$10 million, provincial authorities were permitted to issue approval.

The new rules extend the powers of provincial-level authorities by creating three investment classes. Gone are the country restrictions—with the exception of diplomatically sensitive areas such as Afghanistan, Iraq and Taiwan—and in their place are simple monetary guidelines. Investments of over US$100 million still require approval from central MofCom, but anything in the US$10 million to US$100 million range can be handled at local level. Investments of under US$10 million simply require filling out an online application form.

As a whole, the measures have been received warmly.

"Apart from being positive in terms of content...the fact the regulations are out, that companies are being encouraged to go overseas and that government officials are talking positively about this sort of opportunity, is all encouragement,"said Ian Lewis, a partner at JSM in Beijing.

Particularly encouraging, observers say, is the decentralization of authority. Greater efficiency is only one potential advantage. David Marchick, managing director for global government and regulatory affairs at the Carlyle Group, notes that it could have a positive effect on innovation. "It's in the provinces that a lot of the creative development takes place—through the [small and medium-sized enterprises],"he said.

As MofCom eases up, however, other regulators may stand in the way. The National Development and Reform Commission (NDRC) issued a circular in June outlining a review process for strategic overseas investments, including general investments exceeding US$10 million. Some deals may involve other regulators, such as the State-owned Assets Supervisory and Administration Commission (SASAC) and the State Administration of Foreign Exchange.

Bureaucratic tension was highlighted in July as MofCom and the NDRC disagreed over the proposed acquisition of GM's Hummer brand by Sichuan Tengzhong Heavy Industrial Machinery. While MofCom supported the deal as an example of a firm taking advantage of market weakness overseas, the NDRC was put off by environmental concerns and Tengzhong's inexperience.

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