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China's foreign exchange reserves experienced a rapid, short-term drop during the second half of 2016. Several causes are suspected to have contributed to the drop, including people selling renminbi to avoid depreciation from the falling renminbi exchange rate and Chinese enterprises increasing their overseas M&A activities. The Chinese government is particularly concerned with the role played by irrational investment trends and other unusual conduct from Chinese enterprises going global in causing the drop.

New regulatory policy

To date, no unified, formal regulatory documents have been issued to guard against cross-border capital flow risks and to effectively maintain stability in the foreign exchange market. Nonetheless, since November 2016 regulators such as the People's Bank of China (PBOC), the State Administration of Foreign Exchange (SAFE), the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) have repeatedly and publicly expressed their requirement for steps to be taken to guard against overseas investment risks. In practice, regulators have quietly started experimenting with regulatory measures to control large outward remittances of foreign exchange.

(1) Authorities reaffirm commitment to examine the authenticity and compliance of overseas investments

At a press conference held on 28 November 2016, leading officials of the NDRC, MOFCOM, the PBOC and SAFE answered questions on current overseas investment trends and overseas investment policies. They noted that China would keep the current recordal system as the main method for administering overseas investment and would simplify overseas investment on the one hand while guarding against overseas investment risk on the other.

At a press conference held on 6 December 2016, leading officials from those four authorities explained that China supports authentic and compliant overseas investment from capable and qualified Chinese enterprises. The officials also noted that the government is paying close attention to:

  • irrational overseas investment trends emerging in areas such as real estate, hotels, cinemas, the entertainment industry, sports clubs, etc.
  • potential overseas investment risks posed by large overseas investments outside the investors' main line of business, overseas investments by limited partnerships, overseas investments by small parent companies with large subsidiaries, overseas investments by enterprises established hastily or rushing to go global, etc.

(2) MOFCOM strengthens authentication of overseas investments by requiring the submission of additional documentation during the filing and approval process

On 2 December 2016, MOFCOM's Department of Outward Investment and Economic Cooperation published a notice on its website with the stated aim of improving the examination of the authenticity of direct overseas investments (other than finance-related investments) by Chinese enterprises.

According to the notice, in addition to submitting documents as required under current regulations (namely an Overseas Investment Filing Form or an Overseas Investment Application Form and a photocopy of the investor's business licence), a Chinese investor when submitting an overseas investment filing or approval request should also submit the following documents:

  • the articles of association (or the contract or agreement) relating to the enterprise to be established or relevant to the M&A activities to be carried out with the overseas investment
  • the Chinese investor's relevant board resolution or capital contribution resolution
  • the Chinese investor's most recent audited financial statements
  • a description of the preparations made for the investment (including the due diligence investigation, feasibility study, description of the source of the funds to be invested, an analytical evaluation of the investment environment, etc.)
  • an undertaking as to the authenticity of the overseas investment.

If the overseas investment involves a merger or acquisition, the investor should additionally submit an online Report Form on Preparations for an Overseas Merger or Acquisition.

(3) NDRC strengthens authentication of overseas investments by revising the format of the overseas investment information report

On 5 December 2016, the General Office of the NDRC published on its website a notice titled Notice of the General Office of the National Development and Reform Commission on Revision of the Submission Format of the Information Report on Overseas Acquisition or Bidding Projects (ref. Fa Gai Ban Wai Zi [2016] No. 2613). The notice revised the reporting requirements for overseas acquisitions and bidding projects.

First, the investor must submit the following additional investor information: main line of business, date and place of incorporation, return on equity ratio, etc.

Second, while continuing to submit the memoranda of intent and internal approval documents, the investor should also submit its business licence, its audited financial statements and the investment project's due diligence report.

(4) PBOC

(a) PBOC strengthens regulation of overseas renminbi lending by domestic enterprises

To deal with the large outflow of renminbi, the PBOC issued the Notice on Further Clarification of Issues Concerning Overseas Renminbi Lending by Enterprises in China dated 29 November 2016 (ref. Yin Fa 3 Baker McKenzie January 2017 [2016] No. 306) (Notice 306). The notice addresses the policies and processes of overseas renminbi lending by domestic enterprises.

Under Notice 306, the main regulatory changes to overseas renminbi lending by domestic enterprises are:

(b) PBOC revises the Measures for Administration of the Reporting of Large Transactions and Suspicious Transactions of Financial Institutions

By Order [2016] No. 3 dated 28 December 2016, the PBOC issued a revised version of the Measures for Administration of the Reporting by Financial Institutions of Large Transactions and Suspicious Transactions, to be implemented from 1 July 2017.

These measures:

(i) establish "reasonable suspicion" as the standard for when the handling banks are required to report suspicious transactions; and

(ii)lower the large transaction reporting threshold for renminbi cash transactions from RMB 200,000 to RMB 50,000 or the foreign currency equivalent of USD 10,000, and establish the reporting threshold for cross-border transactions denominated in renminbi as RMB 200,000 or the foreign currency equivalent of USD 10,000.

Bank practice

In response to the pressure on foreign exchange reserves, SAFE and the PBOC met on 28 November 2016 to adjust the regulatory process for the outward flow of funds. Although no official documents have emerged from this meeting, some banks have adjusted their practices for outward remittances of overseas investment funds as follows:

  • A regulatory interview will be conducted for any remittance requested after 28 November 2016.
  • Where a single foreign exchange purchase or payment for a capital account item equals or exceeds the equivalent of USD 5 million, it must be submitted to the capital account section of the local SAFE branch through the information exchange platform and may not be effected until the PBOC and SAFE have completed their examination of its authenticity and compliance.
  • No remittance where the outward remittance quota for the overseas investment equals or exceeds USD 50 million may be effected until the PBOC and SAFE have examined its authenticity and compliance.
  • The examination of a large remittance may not be evaded by breaking the large remittance into smaller remittances.
  • No state-owned enterprise may remit an investment overseas if less than 20% of the investment funds consists of its own money, unless otherwise approved in writing by the relevant authorities.
  • The six types of enterprises designated by the NDRC and commerce commissions as requiring strict examination may not remit investments overseas.

Investments subject to scrutiny and investments considered unusual are:


China is strengthening its regulatory practice with respect to the outflow of overseas investment funds. Although we have yet to see a formal, unified approach, we have seen regulators closely examining overseas investments for authentic investment transactions and for strict compliance with all related rules and regulations. They are also restricting domestic enterprises from making irrational or risky overseas investments. We will continue to observe these regulatory practices for new developments.

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