Concrete Analysis

Chinese investment push abroad to gain from simplified approvals

The streamlining of administrative measures will further boost the fast-growing flow of money aimed at overseas real estate

PUBLISHED : Tuesday, 21 October, 2014, 6:16pm
UPDATED : Wednesday, 22 October, 2014, 4:58am

The new administrative measures for outbound investment issued by the Ministry of Commerce came into effect on October 6. The new measures, replacing regulations from 2009, are another significant step in the Chinese government's "go abroad" investment policy.

They will streamline the regulatory process for outbound investment in "non-sensitive" sectors such as real estate. Although certain approval and filing requirements still remain, they will no doubt further boost the fast-growing flow of outbound real estate investment.

Approval by the ministry is now only required when the outbound investment is in a "sensitive" country or industry. This streamlining is in line with a regulation issued earlier this year by the National Development and Reform Commission.

"Sensitive" countries and regions include those that do not have diplomatic ties with China or that are subject to United Nations sanctions. "Sensitive" industries are defined as those subject to China's export control regime and where the investment affects more than one foreign country's interests.

Acquisition of a real estate asset or operating platform in developed countries such as the United States, Britain and Australia should no longer require approval. Instead, Chinese outbound investors are now required to complete a simplified filing process with the ministry or its local bureaus.

Take a Chinese company based in Shanghai that plans to acquire a hotel in Paris for US$1.5 billion. It now only needs to make a simplified filing with the ministry's Shanghai bureau.

If the filing documents are complete and accurate, the bureau will then issue a "certificate of outbound investment" to the company within three working days. Previously, as the investment exceeds US$1 billion, the company would have been required to go through a full-blown approval process.

Although the new regulation has removed the "investment-size-based" approval requirement under the ministry's regime for investments in "non-sensitive" countries and industries, the NDRC still maintains certain "investment-size-based" regulatory requirements for outbound investments (including real estate investments) in a "non-sensitive" country.

In the above example, the company is still required to obtain NDRC approval. If the investment is below US$300 million, then the firm would only need to make a simplified filing with the commission's Shanghai bureau.

If the Chinese investor involved is a state-owned enterprise "centrally administered" by the State-owned Assets Supervision and Administration Commission, all the filing or approval steps will be handled by the ministry and the NDRC rather than their local bureaus. The certificate of outbound investment from the ministry (or its local bureau) is a prerequisite document for a Chinese investor to obtain approval from the local bureau of the State Administration for Foreign Exchange for wiring the investment capital out of the country.

Although a Chinese investor still needs to complete the ministry, NDRC and SAFE procedures, this process of deregulation by the ministry and other Chinese authorities is indeed important. The ministry's new regulation has simplified one key component of the whole regulatory process for outbound investment.

Besides price, most sellers consider deal speed and certainty to be very important in selecting the buyer. In the past, the more onerous Chinese regulatory process had resulted in higher deal uncertainty for the parties and a longer time for them to complete a transaction. This had put Chinese investors at a competitive disadvantage.

These changes come at an opportune time. The Chinese property market has been quite volatile, while the investment environment in many foreign countries is quite favourable. These factors have attracted a wave of Chinese real estate developers and institutional investors looking for better returns and alternative growth strategies abroad.

Statistics from the ministry indicate outbound investment (excluding financial sectors) last month was US$9.79 billion, representing a 90.5 per cent increase year on year. This came after increases of 112.1 per cent in August and 84.9 per cent in July.

According to figures published by the ministry, total outbound investment (excluding financial sectors) reached US$92.74 billion in 2013, of which US$7.6 billion was in the commercial real estate sector, according to JLL. The consultancy predicts the total Chinese outbound real estate investment may surpass US$10 billion in 2014.

On October 8, Premier Li Keqiang said: "Save for a few exceptions, all approvals for outbound investment will be abolished." It is expected that this new regulation will provide even greater impetus to China's already robust outbound investment appetite.

Rico Chan and Bee Chun Boo are partners in the Hong Kong and China offices of Baker & McKenzie