China Insight - Issue 20

Publication | January 2012

A new combination of “going global” and “welcoming in”

May 2011, Wang Yi, Li Jing


China’s direct investment abroad totalled US$59 billion in 2010, up 36.3 per cent. from a year earlier. Foreign Direct Investment (FDI) also hit a record US$105.74 billion in 2010, up 17.4 per cent. on the previous year. To accommodate the rapid growth in both outbound and inbound investment, the Chinese Government is taking steps to nurture a more mature legal environment for both, but with different approaches, rationales and timetables for each.

New NDRC circular

China’s Twelfth Five-Year Plan (the 125 Plan) was passed by the National People’s Congress in March 2011. A new approach to “promoting the implementation of Going Global” in the 125 Plan re-focuses China’s outbound investment on key sectors. These include energy resources, technology and R&D, manufacturing, agriculture and financial institutions.

After the 125 Plan was announced, the National Development and Reform Commission (NDRC) took steps to loosen significantly its scrutiny of Chinese companies’ outbound investment. It did this through the publication of an important circular, entitled “Delegating to Lower-level Authorities to Verify and Approve Outbound Investment Projects” (published on 18 March). Previous NDRC rules on “Overseas Investment Projects Examination and Approval Administrative Measures”, published in 2004, were quite different.

The main changes are:

  1. Central NDRC approval is now required for investments by Chinese companies exceeding US$300 million in the resources sector and for investments exceeding US$100 million in the non-resources sector. These thresholds are 10 times those set out in the 2004 Rules.
  2. Provincial-level NDRC approval is required for all investments by Chinese companies below the thresholds mentioned above, with one important caveat. If an investment is made by a central state-owned enterprise (enterprises directly controlled by the State Asset Supervision and Administration Committee)*, provincial NDRC approval is not needed and the central SOE can make its own decision.
  3. Central NDRC or State Council approval is now required for “special projects” - regardless of the amount of investment. These are defined as:
    • investment in countries or regions which do not have a formal diplomatic relationship with China or are on a list of international sanctions or where a war or riot is taking place
    • overseas investment in an industry of a sensitive nature (examples of this include basic telecom operations, development of cross-border water resources, large-scale land developments, trunk grids, news and media).

*There are 121 companies currently classified by the State Asset Supervision and Administration Committee as central state-owned enterprises.

PRC approvals for outbound investment

Time gap

Virtually all outbound investments by Chinese companies will require regulatory approvals from competent authorities in China. This means an inevitable gap between the signature of transaction documents and closing. NDRC approval is usually considered the determining factor in satisfying the Chinese government’s requirements. Once NDRC approval is obtained, approvals from other authorities such as MOFCOM (the Ministry of Commerce) and SAFE (the State Administration of Foreign Exchange) will probably follow soon thereafter. This process can slow matters by several months.

A sword or a shield

This lengthy pre-completion period adds a layer of uncertainty and complexity to negotiations and, in the scenario of competitive bidding, may disadvantage a Chinese bidder when battling against bidders from other jurisdictions. The seller, most often a junior mining company, might seek a firm commitment from the Chinese purchaser on the grounds that such delay is caused by China’s approval process. Such commitment may take the form of a deposit paid by the purchaser, a purchaser’s warranty, or an advance payment of part of the consideration to fund the operation of the target company during the pre-completion period.

The real concern behind such requests could be where the seller views the Chinese government as a last resort, a guardian of the state, enabling the purchaser walk away from the deal if necessary, using the approvals (usually the last condition precedent to be satisfied) as a reason. In reality, the Chinese purchaser may be equally eager to close the deal quickly. It is important for the foreign seller to understand that the Chinese approvals process reflects China’s official approach to “monitoring and reviewing” transactions under its political and economic policy, and in fact only eight per cent of outbound transactions have been rejected by the Chinese authorities in the last three years. The Chinese government is reported to be increasingly encouraging in its interpretation of “Going Global”. The publication of this new circular demonstrates this growing flexibility.

Impact of the new circular

The new circular has been welcomed by sellers and buyers because, in practice, provincial NDRC approval is quicker and easier to obtain than central NDRC approval. This thereby speeds up the process of obtaining PRC approvals.

By the end of 2010, the aggregate amount of China’s overseas direct investment had reached US$258.8 billion. The transaction value of most of those deals was in the range of US$30 to US$300 million. At least 80 per cent of future outbound deals could benefit from the changes outlined in the new circular.

Apart from the delegation of authority to the provincial level, the circular also highlighted the principle of “separation of politics and enterprise” (a frequently used phrase in the Chinese policy papers). This principle must be strictly applied to the provincial reviewing process. The project’s commercial aspects (economic feasibility, profitability, source of funding, etc) should be determined by the investor on its own; the provincial NDRC should review the transaction only from the perspective of potential political, macro-economic and legal risk.

The emphasis on this principle and its reiteration in the circular can be seen as a signal by the authorities that Chinese purchasers, especially state-owned enterprises, are making independent commercial decisions and the government is stepping back.

The definition of “special projects” in the circular suggests that the Chinese Government is growing more alert to the effect on its public image of the rapid growth of investment by Chinese investors around the world. The Government appears to wish to strengthen its control over political risk in connection with “special projects”. This has to be linked to the significant losses absorbed by Chinese companies in Libya and the accusation of colonisation from some media in the West reporting on China’s investment in Africa.

Focus on outbound and inbound investment

“Going Global” - outbound investment

The new circular is the first official step toward implementing the blueprints in the 125 Plan. In January 2011 the People’s Bank of China issued measures easing RMB overseas direct investment settlement for Chinese financial institutions and companies on a trial basis (“Measures for the Administration of Pilot RMB Settlement for Overseas Direct Investment”).

As a result, Chinese investors are allowed to make overseas investments in RMB funds and to remit profits from overseas direct investment projects back to China in RMB; and banks are allowed to issue RMB-denominated loans to domestic enterprises for overseas projects and equity investments.

RMB is not yet widely accepted by foreign sellers, but this represents progress in promoting the recognition of RMB at an international level and encouraging outbound investments in countries and regions where RMB swap arrangement have been established with China.

According to recent interviews with officials from NDRC and MOFCOM, Chinese authorities (including NDRC, MOFCOM, SAFE, tax and customs authorities) are drafting comprehensive national legislation, consolidating existing regulations on outbound transactions. This will be ready for discussion at legislative authority level later this year.

“Welcoming In” - inbound investment

When the new circular was published, MOFCOM issued a Notice on Foreign Investment Management: this removes certain administrative items (such as change of legal address and name) from the list of approvals required from MOFCOM for FDI and delegates to provincial MOFCOM the authority to issue a letter of confirmation for foreign-invested projects with a total investment value under US$300 million (an increase to the previous threshold of US$100 million) in the encouraged category of “Catalogue of Industries for Guiding Foreign Investment”.

Chinese authorities are trying to ease administrative burdens on foreign investors’ business in China and, at the same time, to regulate FDI more from a national security and anti-monopoly angle. The 125 Plan underlines this when it states that “the ‘soft’ environment (policy, culture, regulatory) for FDI should be improved and the legal rights and interests of foreign investors protected”.

Outbound Chinese equity investments - understanding the regulatory approval process

November 2011, Jeremy Pooley

This article first appeared in Mining Journal

Virtually all outbound equity investments by Chinese companies will require the prior approval of competent regulatory authorities in China before they can complete. The process for obtaining these approvals can be protracted but is reasonably transparent. The application procedure and the time limits for accepting or rejecting applications are set out in published regulations, and the responsibility for determining the economic and technical feasibility of the project rests solely with the Chinese investor. It is though important for all parties to a Chinese outbound equity investment to understand the approval process and the impact that it will have on the timing of the proposed transaction.

Overview of key approvals

A Chinese company making an equity investment in an overseas mining company will typically need to obtain the approval of:

  • the National Development and Reform Commission (NDRC)
  • the Ministry of Commerce (MOFCOM)
  • the State Administration of Foreign Exchange (SAFE)

State-owned enterprises (SOEs) may also need to obtain the approval of the State-owned Assets Supervision and Administration Commission (SASAC). In addition, the particular circumstances of an investment can result in other approval requirements - for example, an investment in a uranium mining company may need to be authorised by the Chinese Ministry of Science and Technology.


Earlier this year NDRC took steps to loosen significantly its scrutiny of outbound investment by Chinese enterprises. As a result of these changes:

  • central level NDRC approval is now required only for investments of $300 million or more (resources sector) or $100 million or more (non-resources sector) - these thresholds are ten times higher than those set out in the previous NDRC regulations published in 2004
  • provincial level NDRC approval is required for all investments below the thresholds mentioned above (save for investments below these thresholds made by an SOE directly controlled by SASAC, where only a filing with NDRC will be required)
  • central level NDRC or State Council approval is required for certain “special projects”, irrespective of the amount of the investment

The approval of NDRC is usually the determining factor in satisfying Chinese regulatory requirements. If NDRC approval is obtained, then the other Chinese authorities are likely to follow.

NDRC has five business days in which to determine whether or not to accept an application; it will not accept an application which is incomplete. If NDRC accepts an application, it must then approve or reject the investment within a further 20 business days. In practice, applications made through provincial level NDRC tend to be processed more quickly than those made through central level NDRC.

The Chinese investor should be encouraged to seek NDRC pre-approval - this is likely to expedite the final approval process, unless the definitive agreements contain terms that are materially different from those in respect of which pre-approval has been obtained. Pre-approval is usually sought after a heads of agreement has been signed.


After obtaining NDRC approval, the Chinese investor will need to seek the approval of MOFCOM. MOFCOM is responsible for administering and supervising overseas investment, and its approval will always be required in some form for investments in overseas mining companies.

The MOFCOM regulations were amended in 2009, with the effect that fewer transactions are now subject to central level MOFCOM approval than was previously the case. The current position is broadly as follows:

  • Central level MOFCOM approval will be required for investments:

    of $100 million or more; or

    in a country which has not established a diplomatic relationship with China, or in certain other countries or regions specified by MOFCOM from time to time; or

    which are spread over multiple countries or regions; or

    involving the establishment of an overseas “special purpose company”
  • Except where central level MOFCOM approval is required for one of the above reasons, provincial level MOFCOM approval will be required for investments:

    in any sector of between $10 million and $100 million; or

    in the energy / minerals sector; or

    which need to attract capital from within China

For investments in the energy and minerals sectors, MOFCOM is required to consult with the relevant overseas Chinese consulate.

MOFCOM has five business days in which to determine whether or not to accept an application. After accepting an application, it must approve or reject the investment within a further 15 business days (excluding the consular consultation).

Certain applications requiring central level MOFCOM approval will be subject to a preliminary examination by provincial level MOFCOM, in which case up to an additional ten business days will need to be factored into the timeline.


After obtaining NDRC approval and MOFCOM approval, an application will need to be made to SAFE for the transmission of foreign currency funds out of China. This is usually the last step in the approval chain. There are no clear criteria for obtaining SAFE approval, although it is generally considered that if a full set of approvals has been obtained from NDRC, MOFCOM and (where applicable) SASAC then it is a straightforward process to obtain SAFE approval.

In practice, SAFE approval is usually obtained within two weeks.


As a matter of prudence, it would be usual to include SASAC approval as a specific condition precedent in any significant investment by a major Chinese SOE. The notification to and, if required, consent of SASAC should be completed before application is made to NDRC.

Future reform

The Chinese authorities (including NDRC, MOFCOM, SAFE, tax and customs authorities) are currently drafting comprehensive national legislation to consolidate existing regulations on outbound transactions, which will then be discussed at legislative authority level.

Any future reform is likely to seek to maintain a balance: on the one hand, the need for regulatory approvals can be expected to remain a key pillar of China’s strategy of monitoring and managing outbound investments - not least to ensure that China’s vast foreign currency reserves are appropriately deployed; on the other, there is a recognition that the requirement for approvals adds an uncertainty and complexity to negotiations which can disadvantage the Chinese party, and therefore that there is potentially a need for further legislative evolution. The trend towards simplification and relaxation of the approval regime can therefore be expected to continue, but within a legal and regulatory framework that retains its emphasis on supervision.

Recent Developments in LNG Market and Opportunities for PRC Players

November 2011, Fei Kwok

This article first appeared in Marine Money

An Overview of Current LNG Market

After more than 60 years of effort by innovative industrialists, liquefied natural gas (LNG) has become one of the dominant clean fuels in the global energy market. By the end of 2010, there were 12 LNG producing countries and 11 LNG importing countries. In 2011, however, the number of LNG producing countries increased to 18 and the number of LNG importing countries increased to 25, with Qatar alone supplying 26 per cent of the LNG traded globally.

Asia is a major destination for LNG exports. In 2010, Asia consumed 70 per cent of the LNG exported. According to a recent report, 60 per cent of global LNG exports in 2011 was taken up by buyers in Asian countries, among which Japan remains the most important market, absorbing 50 per cent of the LNG sold to Asia. Korea and Taiwan are currently the other two leading Asian LNG buyers. Each competes for LNG supplies and has been more successful than China and India because of their ability to afford relatively high LNG prices. China has increased its long-term LNG SPAs from one contract in 2004 to twelve by the end of 2010, although since 2010 Chinese buyers have been focusing on scooping up LNG spot cargoes.

Outlook for LNG Business

It is widely agreed in the LNG industry that Asia will contribute most to the growth of LNG demand in the next decade. Demand from the US will continue to decrease due to relatively subdued economic activity and such demand is likely to be sufficiently met from domestic shale gas output. By comparison China, Singapore and India will ramp up their LNG demand by 10 per cent by 2020. New entrants to the LNG import market such as Thailand, Vietnam, Bangladesh and the Philippines and other developing countries in Asia will represent additional LNG demand over the same period.

China will in the medium term overtake Korea to become the second largest LNG buyer in the region. Its demand for LNG by 2020 could be in the range of 320 to 400 billion cubic metres. To meet such growth in demand, China has accelerated its development of LNG receiving terminals, LNG carriers and other associated downstream facilities. The state-owned oil majors are also active in acquiring upstream gas assets in a bid to secure future supply.

A number of new LNG liquefaction projects will start production in the next few years, such that, in the longer term, total output will be sufficient to meet the global growth in LNG. However, in the medium term, the expiry of a number of existing contracts and the delays in the start-up of new LNG liquefaction projects is expected to lead to a gap between LNG demand and supply and so may exert added pressure on the already high LNG price in Asia.

Some LNG experts predict a shift from the long-term and inflexible LNG trading model to a short-term and relatively flexible model. It is believed that such change will arise from a combination of the following three factors:

  • the increased number of players in the LNG business has led to more competition;
  • the market is overshadowed by a pessimistic view of global economic environment; and
  • the LNG price in Asia will continue to represent an attractive premium over the LNG price achievable in the Atlantic Basin.

In view of this outlook, both LNG sellers and buyers have adopted wait and see strategies and prefer medium or short-term LNG purchase contracts. As a result, spot cargo trade seems likely to remain popular. More LNG trading houses will be established in trading hubs such as Singapore to capitalise on the rapid development of the LNG spot cargo business.

Opportunities for PRC Players

China will need to increase its natural gas supply to 450 billion cubic metres according to the preliminary report of its 12th five-year plan. It is estimated that China’s LNG supply will increase from 5 per cent of its total gas supply from today to 16 per cent by 2020. The long-term LNG contracts China has secured are able to provide up to 2.85 million tonnes of LNG per annum to the domestic market. It was reported that secured LNG supply to China will be increased to 30 million tonnes per annum by 2015.

The three state-owned oil majors (PetroChina, Sinopec and CNOOC) have invested heavily in developing LNG receiving terminals. Currently, CNOOC and its partners own and operate three LNG receiving terminals and have another six under construction. PetroChina and its partners own and operate two LNG receiving terminals and have another two under construction or planned. Sinopec is slightly behind, with four LNG terminals under construction or planned.

The rapid growth in LNG importation and the development of LNG receiving terminals in China offer many exciting opportunities for international and domestic companies. LNG importation will also encourage the onshore LNG trade. Recently Shenergy, a leading utility group, has included LNG as one of the products which can be traded via its oil products exchange. After registering with the exchange, city gas companies, suppliers to gas-fuel vehicles and other small/medium LNG marketers will be able to participate in LNG trading. According to statistics recently published by CNOOC, the use of gas-fuel vehicles will increase substantially in the next few years. By the end of 2011, approximately 500 LNG vehicle refill stations will be introduced in China, the number will be doubled next year and increased four-fold by the end of 2013.

As many as 12 LNG receiving terminals are to be built in China in the next five years. Work and financing needs arising from the development work are sufficient to keep EPC contractors, engineering companies, manufacturers, design institutions, and banks busy for a while.

To transport and store the quantity of LNG that has been contracted by PRC companies, more LNG ships and storage tanks are to be built. According to various industry studies, by 2020 China will own more than 20 LNG carriers and up to 93 LNG storage tanks.

CNOOC is in discussion with GDF Suez to charter a floating LNG storage and regasification unit, which may become the first FSRU parked along the Chinese coast.


Despite the overwhelmingly positive outlook for LNG business opportunities in China, a number of constraints and challenges may dampen the optimism promoted by industry forecasts.

In China, the natural gas price is heavily regulated and subject to a series of guide prices set by the relevant regulatory authority according to its use. Such a pricing system leads to a constant mismatch between the price of LNG and the retail gas price. Recently, the central government extended the VAT exemption granted to the major LNG importers by an additional ten years. Different views on how the VAT rebate should be calculated (under the extended exemption system) between the tax authorities and the industry may diminish the positive impact which would have been made by such an extension. According to Mr Mao Jiaxing, a Chinese expert, the reform of the gas pricing system in China will happen, but its pace and progress will be subject to the reform of the petroleum products pricing system.

Currently, all PRC LNG receiving terminals in service are controlled by a handful of companies. Although no written rules restrict third party access to these terminals and the capacity of these terminals is not always fully utilised, other national, regional or international companies find it virtually impossible to gain access to and secure capacity at these terminals. Some regional players such as city gas companies or non-state owned energy companies plan to build their own receiving terminals. However, they have found it challenging to identify suitable sites and to obtain approvals and financing for their proposed developments.

Technical standards for LNG downstream facilities in China are not developed in a consistent manner. Some standards were developed over ten years ago and are urgently in need of revision. The fast-track development mode adopted by Chinese companies may lead to long-term environmental and quality concerns. The industry has seen a great shortage of experienced and properly trained staff to ensure safety management and proper operation of the LNG carriers and LNG receiving and regasification facilities.


There is no doubt that the development of the LNG industry and the increase of LNG use in China offers many opportunities to international and domestic companies. However, uncertainties about gas price reform, trends in long-term and short-term LNG prices and the availability of sufficient LNG supplies in the medium term may slow the progress of the LNG business in China.

The market is calling for a more open and transparent regulatory environment. This would permit a market-oriented pricing system, encourage healthy competition and lead to continuing innovation in technology, whilst promoting a long-term sustainable development of the LNG industry in China.

Asset management business in China 'in a nutshell'

November 2011, Lynn Yang, James Zhang, Ai Tong


Compared to the growing income investment, retirement and insurance needs of increasingly affluent Chinese nationals, China’s mutual fund industry has been largely stagnant over the past three years due to stock market volatility and increasing competition. However, China is still viewed as a key area for the future growth of the asset management industry. In particular, media sources have speculated that China’s mutual fund industry will continue to witness rapid growth over the long term with the value of assets under management (AUM) of the securities investment fund management companies (FMCs) potentially set to triple to RMB 6 trillion within five years. It is also worth noting that alternative investment schemes which provide either higher returns (with equally high levels of risk) or extremely conservative allocations have taken market share at the expense of the FMC offerings in recent years. With this trend set to continue, it is critical for foreign investors to understand properly not only the public fund industry but also the alternative investment opportunities in order to formulate a robust strategy for investment in China’s asset management sector.

This briefing provides an overview of the key features of major types of asset managers in China and key regulatory issues required to establish an asset management business in the China.


Current Chinese law does not provide a crystal clear definition of the term “asset management.” Based on separate pieces of legislation, only limited categories of regulated institutions in China can offer certain kinds of asset management products, act as professional service providers and manage clients’ funds in the investment of publicly traded stocks, bonds and other underlying assets.

Generally speaking, depending on the nature of their activities, asset managers (i.e. the product launchers) and their relevant products may fall under the supervision of different regulators in China. For example:

  • the China Securities Regulatory Commission (CSRC) (the Chinese securities market regulator) is responsible for supervising and regulating the launch of securities investment funds (SIF) by FMCs and asset management schemes by securities companies;
  • the China Banking Regulatory Commission (CBRC) (the Chinese banking market regulator) is responsible for supervising and regulating the relevant investment trusts managed by trust companies and banks’ wealth management products; and
  • the China Insurance Regulatory Commission (CIRC) (the Chinese insurance market regulator) is responsible for supervising and regulating the insurance asset management companies.

Foreign investment in the Chinese asset management market is generally restricted. China’s commitments to the World Trade Organization do not permit foreign funds / asset managers to provide cross-border fund/asset/investment management services direct to clients in China. The establishment of, or the participation in, the asset management industry in China by foreign investors is normally subject to stringent qualification requirements and foreign ownership restrictions.

Fund management companies

Setting up (or investing in) an FMC is the primary route for foreign investors to participate in the Chinese fund management business. As of 30 June 2011, 66 FMCs in China manage more than 900 funds with a total AUM of approx. US$ 370 billion.

FMC is regulated and supervised by CSRC. It can launch and manage SIF products for subscription by public investors and manage such funds’ investment in the securities market (similar to mutual funds in the USA). In order to provide flexibility for the FMCs to broaden their business models and develop distribution channels outside the bank-dominated retail market, CSRC has also gradually allowed FMCs to manage enterprise annuities and multi-client segregated account business, known locally as Yi Dui Duo, for institutions, corporations and high net worth individuals.

An FMC is a limited liability entity with a perpetual term of operation in which the foreign equity investment must not, by law, exceed 49 per cent.

Trust companies

Trust companies incorporated in China can offer on a private placement basis “Collective Investment Schemes” (CIS), being unit trusts, to “qualified investors”. Such funds managed by trust companies can invest in various underlying assets (including publicly traded stocks, other securities, equity and real estate).

This CIS structure is subject to supervision by CBRC and constitutes an alternative to the SIF structure of CSRC-regulated FMCs. This structure in practice may be referred to as a “sunshine hedge fund” asset management structure or “sunshine private equity” (in Chinese: 阳光私募, Yang Guang Si Mu).

Currently Chinese law imposes a very strict foreign ownership restriction on trust companies. Specifically, the shares held by a single foreign investor in a Chinese trust company may not exceed 20 per cent and the aggregate foreign shareholding is capped by law at 25 per cent.

Significantly, trust companies have the right to engage “third-party investment advisers” for providing advisory services and assisting them in their CIS securities investment business. Recently, some foreign asset management companies have been exploring opportunities to set up a third-party investment adviser with the purpose of indirectly participating in the Chinese market through contractual arrangements with Chinese trust companies.

Securities companies

Subject to supervision by CSRC, a fully-licensed Chinese securities company may also launch collective asset management schemes through private offerings.

Foreign investors are now permitted to hold no more than one third of the total equity interest of a Sino-foreign securities joint venture (Securities JV), while a securities company with a foreign stake of less than 25 per cent is still considered as a domestic one. Up until now, only a handful of foreign investors have made investments in Chinese securities companies. Various media sources have speculated that CSRC may consider raising the ownership cap on foreign investment. However, it remains unclear if and when CSRC will liberalise foreign investment in a Securities JV.

Compared to a fully-licensed domestic securities company, a Securities JV remains restricted to limited areas of business. It is generally prohibited not only from engaging in Chinese A-share brokerage and trading but also from tapping into the asset management business. There is speculation that CSRC might consider allowing Securities JVs to engage in a broader range of business (including asset management business), though so far no specific timeline has been mentioned.

Insurance asset management companies

Traditionally, insurance asset management companies (Insurance AMCs) in China only provide asset management services to their insurance group companies. With a view to widen the investment functions of such insurance asset managers, CIRC now regards Insurance AMCs as professional third party asset managers, whose responsibilities are to manage funds entrusted to them by principals. Foreign investors are permitted to make equity investment in Insurance AMCs but the aggregate foreign shareholding is capped by law at 25 per cent.

In addition to the reform on the establishment of Insurance AMCs, CIRC has also liberalised investment restrictions on insurance funds managed by Insurance AMCs (Insurance Funds) and provided greater flexibility in asset allocation. Through a series of regulations issued in recent years, CIRC has not only specified the ratio of Insurance Funds in new asset categories such as the real estate market, unsecured corporate bonds and unlisted companies, but also increased the maximum allowed exposure of Insurance Funds in infrastructure projects and equity investment.

Commercial banks

Commercial banks in the PRC are generally prohibited from dealing in securities or entering into commodity future transactions. However, by complying with specific regulations, commercial banks may become indirectly involved in certain types of securities trading or derivative transactions by offering wealth management products to retail clients in China.

Due to stock market volatility combined with pervasive market uncertainty in the past three years, bank wealth management products have been one of the major beneficiaries of investors seeking liquidity management.

Capital inflow and outflow

The Qualified Foreign Institutional Investors regime (QFII) under Chinese law refers to a market opening mechanism that allows foreign investors to invest in the Chinese capital markets while China’s capital accounts are not fully opened to the global market.

Foreign fund companies, insurance companies, securities houses, commercial banks and other asset management companies (including foreign pension funds, trust companies, charity funds, and sovereign investment funds) can qualify to be a QFII after approval by CSRC. Based on CSRC’s approval, the China State Administration of Foreign Exchange (SAFE) will allocate a quota to a qualified QFII for its investment in China up to a maximum of US$ 1 billion. The QFII’s scope of permitted investment covers all RMB denominated securities and financial instruments, including stocks, bonds and warrants traded publicly, SIFs, stock index futures and other instruments permitted by CSRC.

The Qualified Domestic Institutional Investors regime (QDII) creates a parallel regime to the QFII whereby qualified Chinese financial institutional investors are permitted to invest in overseas capital markets, by either using foreign currency already held by the participating inventors or by raising RMB funds from Chinese individuals and institutions.

Chinese commercial banks, trust companies, FMCs, securities companies and insurance companies may qualify to become QDIIs. Each category of QDII is required to meet certain qualification standards as set out by its relevant regulator. The investment scope of a QDII differs depending on the categories in which it falls into.

It is also worth noting that, other than QDIIs, Chinese sovereign wealth funds (such as China Investment Corporation, National Council for Social Security Fund and SAFE Investment Company) are key players in investment into overseas markets.

This capital outflow regime provides opportunities for foreign financial institutions to act as investment managers and advisers for, and distribute their financial products to, qualified Chinese onshore investors. Together, QFII and QDII establish a two-way channel for capital to flow in and out China for financial investments via major institutional investors.


For the purpose of this briefing, China means the People's Republic of China which excludes Hong Kong and Macau Special Administrative Regions and Taiwan.

Investing in Water Projects in China

July 2011, Tom Luckock

Chinese water continues to attract a growing class of investors. No longer is it the preserve of a few dedicated niche water developers. In recent years, we have seen increased levels of activity from infrastructure investors, Japanese trading houses and insurers as well as the traditional developers. This trend will continue as the Chinese Central Government places even greater pressure on municipal authorities to increase water treatment levels and as China grapples with increasing supply shortages.

Norton Rose Group has advised foreign investors on more than 20 PRC water treatment, water supply, desalinated water (desal) and waste water treatment projects over the last 18 months. There is no standard road map for closing these deals and water continues to be a highly fragmented, localized investment with different regimes, documentation and structures applying in each city. However, similar risks tend to emerge.

In this article we explore the current market, the delivery models and documentation and highlight some of the challenges for foreign investors in the sector.

Water infrastructure investment in China

China has made significant inroads into developing and modernising its urban water infrastructure. However, continued investment remains a priority of the PRC Central Government. Between 2006 and 2010, there was an estimated 700 billion RMB in investment (both public and private funding) in the water sector across China. It is expected that this figure will increase to 2 trillion RMB by 2015 in line with the objectives of the recently adopted Twelfth Five Year Plan. Foreign investment will be an important source of funding, but the role for foreign players will continue to be secondary to the role played by dominant local players like Beijing Capital, Beijing Enterprises, Chongqing water.

Three asset classes, three risk profiles

There are three key classes of water infrastructure open to foreign investors: wastewater treatment; water treatment; and desal, and each offers a slightly different risk profile. Water distribution and supply is also open to foreign investors, but generally, investors will only consider supply assets where necessary to secure water supply for a water treatment plant and we have not covered supply assets in this article.

Wastewater treatment projects continue to be the mainstay for most PRC water portfolios. These projects involve the treatment of waste water produced by Chinese industrials which is then discharged into the river or the municipal water system. Investment in wastewater treatment offers a 25 to 30 year long term income stream under take and pay conditions at a return on investment of around 9 per cent to 15 per cent. The tariff and regulatory regime for these projects is established and there is a well trodden path for foreign investors into the sector.

Desal opportunities are occasional and recent years have only seen key project developments in Qingdao, Caofeidian and Tianjin. China is cautious around the energy efficiency and cost of desal (desal product water tends to be about 4 to 8 times more expensive to produce than other treated water) and as a result, Chinese authorities have not developed a strong regulatory framework to support the sector. On the one hand the regulatory vacuum means there is less certainty around aspects of a desal project, such as the need for a concession agreement and the regulation of tariffs, on the other hand it means there is less scrutiny over the cap on investment returns that is applied by the authorities to projects. Yet despite the uncertainty, desal projects still offer the same long term 25 to 30 year offtake as a waste water treatment, although on occasions the offtaker may be an industrial consumer, rather than a municipal water utility.

Water treatment projects are not structured under take and pay arrangements and the offtake of water is structured through short term supply agreements with individual consumers. To date, the sector has attracted limited foreign capital. Many foreign investors remain concerned about the will of the local government in second tier cities to set uniform tariffs that pass the full cost of water onto consumers and many infrastructure investors’ internal investment criteria also require a long term offtake to be in place. Yet for investors satisfied with the local tariffs and who can get comfortable with the market risk around demand for water within a project’s catchment area, water treatment offers potential for greater upside than waste water treatment and desal projects. This is because unlike waste water treatment and desal, returns on investment are not capped and so increased profit from efficient operation and construction and any increase in the numbers of consumers in the catchment area, passes directly through to the investor.

Project structure and documentation

PRC water projects are usually delivered using Build Operate Transfer (BOT) or Transfer Operate Transfer (TOT) delivery models with projects awarded through a tender process. Typically, the concession agreement will be entered into with the municipal authority, or a local finance or construction bureau of the municipal authority. Under PRC law, the term of the concession cannot extend beyond 30 years. As a result, a concession term will normally be for 25 to 30 years with an obligation to return the project to the local water utility or joint venture partner at the end of that term. The municipal authority will provide broad policy support for the project during the concession term, however its commitment will fall short of standing behind the obligations of the local water utility, as PRC government authorities are not permitted to guarantee an investor’s return.

For desal and waste water treatment the project company will have a long term offtake in place with the local water municipality. Generally, the minimum guaranteed offtake volume that the local water utility will assume, is set at around 80 per cent of the capacity of the plant. However, for many projects the minimum guarantee may fall away part way through the concession term, by which time the project company should have repaid its debt and have a reasonable picture of the supply of influent water. For water treatment there is no guaranteed offtake and the investor will need to enter into short term purchase agreements on terms approved by the authorities with local consumers. Under these short term arrangements investors take market risk on demand from consumers and they will also in practice, assume a degree of risk on supply of water from the local reservoir. Supply risk cannot be passed through to the end consumer as the project company must guarantee 24 hour supply of treated water. However, the local municipality will normally accept an obligation in the concession agreement to step in to guarantee supply in the event of local shortages.

Plants are constructed on a multi contractor basis, generally with different contractors responsible for the plant, equipment, effluent and influent pumps and pipes. Chinese financiers and investors do not demand a single contractor to wrap construction risk for the entire project and so projects can be delivered more cheaply on this basis, with up to 10 contractors contracting directly with the project company. The project company needs to manage contractor interface risk, particularly in respect to delays, because the municipal authority and sometimes the land resources bureau can (but will not always) impose liquidated damages for delays in construction. Liability for liquidated damages can be passed through to contractors, but because the contractors will generally not have strong balance sheets, liability ultimately rests with the project company. However, apart from risks around delay liquidated damages, investors generally take limited construction risk on the projects, because under the tariff calculation formula most construction cost overruns can be passed through to the water utility offtaker as an increase in the tariff.

The vast majority of water projects are financed by local banks with light documentation, low security and low interest rate arrangements. Typically finance will be provided on a non recourse basis, for an 8 to 12 year tenor secured by a limited security package which may only be a pledge over project receivables combined with bank account controls. Gearing levels tend to be around 20/80 for RMB debt reducing to 33/66 if funding is in forex and the borrower is foreign invested. There are some signs, however, that Chinese bank lending is being reined-in and at the same time, some PRC banks are becoming cautious around projects with certain local water utilities. Foreign bank exposure to the sector remains limited. However, there are signs that some foreign banks are considering the sector.


In most countries, water tariffs for desal and waste water treatment projects will be determined through a competitive bidding process with oversight from an industry regulator. In China, the determination of tariffs is not transparent and this has led to a wide variance in tariffs across cities and provinces (we have seen tariff variances of up to 200 per cent for similar projects in different locations).

For wastewater and desal the tariffs are calculated on a project by project basis, based upon the costs of the project plus a reasonable rate of return for the investor. At the same time, the tariff should be benchmarked against other plants in the local area and against the tariffs submitted by other bidders for the project. Ultimately, the authorities aim to ensure that the tariff is set so that the investors return on investment is within a range of 9 to 13 per cent.

The initial tariff will be determined based upon the cost of the project set out in a feasibility study report that is submitted by the project company as part of its bid for the project. This tariff is applied to water treated during the initial commissioning period which normally lasts for around 6 months while the project is inspected and tested by the authorities. At the end of the commissioning period, the tariff will be adjusted based upon the actual construction cost for the project.

It is important that investors understand the tariff calculation process, as projects can be structured to minimise the impact of the investment return caps. Some investors put in place service agreements with the project company to extract service fees from the project (which are not calculated within the investment return cap). Many local developers will also extract additional revenues through their affiliated construction contractors who build the project.

For water treatment plants, the local municipalities apply a uniform tariff for water that applies to all water treatment projects in the city. The tariff varies depending upon the class of consumer, with industrial consumers paying significantly more for their water than residential consumers. The tariff is broadly determined based upon the production costs for the most inefficient plant in the city (which plant will generally be an older, state-owned water treatment plant). As a result, unlike for waste water treatment and desal, a water treatment investor is incentivised to operate efficiently, as cost savings pass through to the investor’s bottom line.


Probably the key risk facing investors in the water sector is around receivables. In the PRC, local governments and in turn local water utilities, receive limited direct funding from the Central Government. They are reliant upon profits from the sale of land, the issuance of municipal bonds and a to a more limited extent local tax revenues to fund new projects. At the same time, the wastewater treatment charges that form part of the water utility bill for end consumers, rarely covers the full cost of treatment.

Given this, investors need to understand the local water utility’s source of funding, the amount of the local water treatment fee, collection rates and levels of non-revenue water as all of these factors will feed into the likelihood of facing receivables issues. Importantly, if the full cost of waste water treatment is not passed through to end consumers, then investors need to understand whether there is provision for payment of the balance of the tariff from the local government’s budget.


Chinese water projects involve a unique set of risks and opportunities and each class of project involves a slightly different risk profile. Investors need to take the same precautions that they take for water in other parts of the world, but Chinese projects also involve a degree of local risk which means it is important to understand and adapt to the local regulatory framework (or lack of it).

Compulsory auto insurance market likely to welcome foreign players

October 2011, Lynn Yang, Ai Tong


For a long time, China has been recognized as one of the largest car markets in the world. Motor insurance already accounts for more than 70 per cent of the total non-life insurance premiums in China. However, existing legislative restrictions in the Chinese auto insurance market have effectively blocked foreign invested insurers (insurers incorporated in China by foreign insurers with foreign ownership being 25 per cent or more) from tapping into this market. This legal hurdle is expected to be lifted shortly once the State Council gives its approval to a recent proposal submitted by China Insurance Regulatory Commission (CIRC).

The current legal hurdle

Pursuance to Measures on Compulsory Motor Vehicle Accident Liability Insurance (《机动车交通事故责 任强制保险条例》), only domestic Chinese property and casualty insurance companies, approved by CIRC, are qualified to carry out the business of offering compulsory motor third party liability (MTPL) insurance. Foreign invested insurers are prohibited from entering into this market though they may underwrite optional commercial auto insurance. The prohibition on foreign invested insurers’ access to MTPL business limits their ability to develop downstream commercial networks capable of reaching individual clients, since the majority of clients would not normally use two insurers (one for compulsory insurance and one for vehicle insurance) to cover the same vehicle.

In practice, we have seen several alternative structures that were developed for foreign invested insurers to become indirectly involved in the MTPL business. One commonly used structure is through strategic cooperation between Chinese insurers who are qualified to underwrite MTPL insurance policies and foreign invested insurers. Under this cooperation model, Chinese insurers are only responsible for the issuance of MTPL insurance policies while foreign invested insurers will act as the client facing primary contact, carrying out the sales of the MTPL and other optional policies, providing after sale services, settling claims etc.

Another often used structure is for foreign insurers to acquire a minority equity stake of less than 25 per cent in Chinese non-life insurers which are qualified to carry out MTPL business so that the foreign insurers may earn dividends generated from such non-life Chinese insurers’ MTPL business. However, as foreign invested insurers are not permitted to conduct MTPL business, foreign insurers under this shareholding structure may not acquire more than a 25 per cent equity stake in Chinese non-life insurers, otherwise such insurers will be considered as foreign invested insurers which will then trigger the prohibition under the current legal regime.

CIRC’s proposal

Recently, CIRC submitted a proposal to the State Council to allow foreign invested insurers to sell MTPL insurance. According to CIRC’s proposal, foreign invested insurers that wish to engage in MTPL insurance business will be required to meet certain criteria such as profitability, solvency, size of parent companies, etc. This is the first time that Chinese insurance regulators seem likely to open the MTPL insurance market to foreign invested insurers but the exact timing remains uncertain. The underlying reason for the potential liberalization of MTPL business is generally considered to be that CIRC is seeking to tap foreign expertise to help reverse chronic losses in auto insurance and improve the service so as to better protect victims of traffic accidents. This move also gives a positive signal that CIRC respects the lobbying efforts of foreign insurers and their chambers of commerce.

It is anticipated that once the MTPL business is opened to foreign investments, most existing foreign invested insurers will immediately apply to CIRC to carry out this high-profit business. More foreign insurers are expected to consider setting up non-life entities in China to enter into the MTPL market, though they may have to meet high entry thresholds such as a minimum 30-year insurance business history, a 2-year representative office already established in mainland China, total assets in an amount of no less than USD 5 billion etc.

Foreign investors in China may be able to inject shares into Chinese companies in the near future

June 2011, Sun Hong, Jon Perry


On the 4th May 2011, the Ministry of Commerce of the PRC (MOFCOM) promulgated the draft Administrative Measures for Investment by Equity in respect of Foreign Invested Enterprises 涉及外商投资企业股权出资的管理办法 (the Draft Measures) for public consultation. This gives a positive signal that foreign investment into China by the injection of shares may soon become feasible.


Investment into an entity by contributing shares1 held in another entity (Contribution of Shares) is not a new concept in China. The State Administration for Industry and Commerce (SAIC) issued Administrative Measures concerning Registration of Investment by Equity in January 2009 (SAIC Measures) which set out general requirements for investors to invest in a PRC company (either a limited liability company or a joint stock company, the Invested Enterprise) by contributing existing shares held by that investor in another PRC-incorporated company. Local AICs in Beijing, Shanghai and several other cities have also promulgated local rules dealing with the registration procedures related to Contribution of Shares. Although these regulations in theory cover foreign investors and foreign-invested enterprises (FIEs), the application has in practice been primarily limited to PRC domestic investors and domestic companies because the approval of MOFCOM (which is the direct regulator of FIEs) has not been forthcoming for FIEs due to the absence of MOFCOM regulations.

The current regime under the SAIC Measures effectively limits Contribution of Shares to situations where (a) the shares being contributed are shares in a PRC domestic company which is not an FIE; and (b) the Invested Enterprise is a domestic enterprise and not an FIE. Although it is not common in practice, the SAIC Measure should in theory enable an FIE to contribute shares which it holds in onshore companies for its investment in China provided the business of such onshore companies invested by the FIE falls within “permitted” or “encouraged” industries in accordance with the Foreign Investment Industrial Catalogue.

The Draft Measures, once formally promulgated, would allow foreign investors to enjoy the same treatment in doing investment in China by equity, as that available to PRC domestic investors. The diagram below shows the changes that will arise from the new provisions:

Current provisions

Foreign investors in China may be able to inject shares into Chinese companies in the near future - Current provisions


New provisions (draft)

Foreign investors in China may be able to inject shares into Chinese companies in the near future - New provisions (draft)


This would mean that an investor (incorporated either in or outside of the PRC) could use shares which it holds in companies set up in China to invest in another PRC-incorporated company (which could be either an FIE or a domestic company), either in paying up the registered capital of the company upon incorporation or subsequently by subscribing for the increased registered capital. Subject to further clarification by MOFCOM (hopefully in the final version), foreign investors may also use its shares in PRC companies as consideration for the acquisition of shares in other PRC-incorporated companies (please see further below).

  1. Shares used in this article shall refer to equity interests in a limited liability company or shares in a joint stock company, in each case established in China.

Major provisions of the Draft Measures

The Draft Measures set out fairly detailed requirements and procedures in respect of Contribution of Shares concerning FIEs.

Relevant scenarios

The Draft Measures will permit Contribution of Shares in the following three circumstances:

  1. establishing a new FIE,
  2. subscription of increased capital of a domestic company so as to convert it into an FIE, or
  3. subscription of increased capital of an FIE so as to change the shareholding structure of the FIE.

Following the same approach as the SAIC Measures, the Draft Measures are defined to apply to the three typical scenarios as outlined above, which relate to the injection of shares into the Invested Enterprise by investors. Interestingly, Articles 18 and 29 of the Draft Measures indicate (without setting it out explicitly) that a foreign investor may use its shares in a PRC-incorporated enterprise as consideration for the acquisition of shares in another PRC-incorporated enterprise, which effectively makes a share swap structure a possibility. It remains to be seen how MOFCOM will clarify this position when the Draft Measures are officially promulgated.

It should be noted that under the Draft Measures, the shares used for the Contribution of Shares must be shares in a PRC-incorporated company and therefore it will not be feasible for an investor to inject its shares in any entity incorporated outside of the PRC.

Qualification requirements on the shares to be contributed

The contributed shares must be transferable and the investor must have a clean title to them. Contribution of Shares will not be allowed in any of the following circumstances, amongst others:

  1. The registered capital of the enterprise whose shares are being contributed has not been fully paid up;
  2. Shares to be contributed are pledged or frozen;
  3. The constitutional documents of the enterprise whose shares are being contributed impose restrictions on transfer of shares;
  4. The enterprise whose shares are being contributed (if it is an FIE) fails to pass the annual inspection for the preceding year; or
  5. Regulatory approvals are required for the relevant share transfer but such approvals have not been obtained.

Other points worth noting under the Draft Measures

  1. the Contribution of Shares must not lead to the situation where the Invested Enterprise and the enterprise whose shares are being contributed hold shares in each other;
  2. The business scope of the companies which have received foreign investment as a result of the Contribution of Shares must comply with the requirements under the Foreign Investment Industrial Catalogue (currently subject to revision);
  3. The shares to be contributed must be evaluated by a valuer duly incorporated in China;
  4. The aggregate amount of all non-cash capital contribution (including Contribution of Shares and other in-kind contributions) by all shareholders to the Invested Enterprise must not exceed 70% of the latter’s registered capital;
  5. Contribution of Shares must be approved by the provincial MOFCOM in the place where the Invested Enterprise is located, or by central MOFCOM;
  6. If the Contribution of Shares falls within any of the circumstances envisaged under the national security review regime, the relevant foreign investor must fulfil the required application procedures; and
  7. The quotas for foreign debts or import tax exemption entitled by the Invested Enterprise shall be determined by only taking into account the non-equity contributed portion of the registered capital2.

Major approval procedures for the Contribution of Shares

  1. The approval authority of the Invested Enterprise will review application documents and issue a temporary certificate of approval (which will be valid for 1 year from the date when the revised business licence is issued), or as the case may be, issue an in-principle approval (the Preliminary Approval);
  2. By holding the Preliminary Approval, the enterprise whose shares are being contributed shall fulfil necessary approval and/or registration procedures for a share transfer so that the holder of the shares will be changed to be the Invested Enterprise; and
  3. Upon issuance of the revised business licence of the enterprise whose shares are being contributed, the new shareholder (i.e. the Invested Enterprise) must apply to its approval authority for a final certificate of approval.

  1. This is linked to the applicable ratio requirements in respect of registered capital and total investment of FIEs. Broadly, this provision effectively means the capability of Invested Enterprises to seek foreign debt financing or to enjoy import tax exemption is reduced because of the Contribution of Shares. This somewhat falls within the regulatory ambits of the State Administration of Foreign Exchange and customs authority.

Impact on market practice

Overall, the Draft Measures represent a very positive regulatory development as far as foreign investments in China are concerned. The coverage of the Draft Measures is reasonably comprehensive and the procedures are also reasonably detailed so as to guide their use. Putting in place a clear MOFCOM regulatory regime in this respect will help foreign investors already in this market to restructure their onshore investments more easily. However, it remains to be seen how the share swap structure will be dealt with in the final version and how efficiently the approval procedures will be operated by the regulatory authorities in practice. In addition, ambiguity and uncertainty may arise in practice given the Draft Measures will be implemented in conjunction with various other existing regulations, e.g. Provisions on the Acquisition of Domestic Enterprises by Foreign Investors, Provisions for the Alteration of Investors' Equities in Foreign-invested Enterprises and the rules specifically governing cooperative joint ventures, equity joint ventures and wholly foreign-owned enterprises.

PRC criminal law to tackle bribery of foreign officials

March 2011, Jim James, Natalie Caton, Ronan Diot, Lindsay Houghton


The huge number of overseas acquisitions of oil, gas and mining assets by Chinese companies has led many legal scholars and officials in China to encourage the PRC government to build a domestic legal framework in order to tackle corruption of foreign officials by Chinese companies. This is seen as improving the country’s commercial reputation and “moralising” the behaviour of its companies. It reflects the spirit of the UK Bribery Act and the United States’ Foreign Corrupt Practices Act (FCPA). Supporters of this development include the Vice-President of China’s Supreme Court and many PRC University professors.

In response to these concerns, on 25 February 2011, the PRC National People’s Congress passed an amendment of the PRC Criminal Law setting out a clear prohibition on the payment of bribes to “foreign officials” and “officials of international public organisations” (the Amendment). The Amendment will come into effect on 1 May 2011.

Amidst recent allegations of bribes paid by Chinese companies to foreign officials to obtain mining or oil licences in certain markets, the Amendment is a welcome move by the PRC government, confirming its willingness to combat corruption both in its own territory and overseas, as evidenced by the increased prosecution and punishment of high-profile offenders1.

However, to some extent the Amendment also stands aloof from the traditional Chinese culture of gift-giving. The PRC authorities will need to devote substantial resources to ensure that the Amendment is effectively implemented and enforced.

  1. For instance, in 2007, the execution of Zheng Xiaoyu, former head of the PRC State Food and Drug Administration and in 2009, the execution of Li Peiying, former chairman of China’s largest airport management company. More recently, in February 2011, Minister of Railways Liu Zhijun was removed from his post on accusations of corruption. In total, China punished 146,517 officials for corruption in 2010.

The Amendment itself

The Amendment consists solely of one additional sub-article to the PRC Criminal Law which reads as follows:

whoever provides property to a foreign official or an official of an international public organisation for the purpose of seeking an improper commercial benefit, will be punished [in accordance with the provisions applicable to commercial bribery].”

An initial observation which can be made is that the Amendment has not been inserted into the “Graft and Bribery” chapter of the PRC Criminal Law which deals with corruption of public officials (where one may ordinarily expect it to be placed) but in the “Crimes against the Order of Socialist Market Economy” chapter, which deals with “commercial bribery”, i.e. the offence of actively bribing non-public officials.

While at first glance the placing of the Amendment in the PRC Criminal Law may appear surprising, it is consistent with China’s obligations under the United Nations Convention against Corruption to prosecute the bribery of foreign officials where the purpose of the bribe is to obtain an advantage in the conduct of international business (see footnote below). Moreover, by stating that the purpose of the bribe should be the receipt of “an improper commercial benefit”, the Amendment itself suggests that an offence will only be committed when the purpose of the bribe is of a commercial nature.

Both companies and individuals can be punished under the Amendment. In accordance with Articles 6 and 7 of the PRC Criminal Law, the Amendment will be applicable to PRC nationals both in the PRC and outside the PRC, and all PRC companies (and their managers) who carry business overseas (including Sino-foreign joint ventures, and wholly foreign-owned enterprises). If the offence is serious, individuals may face criminal detention of between three to ten years, while companies may receive fines, and managers directly responsible for an offence may also face criminal detention of up to ten years.

Unfortunately the Amendment provides little detail on the behaviour that will actually be prosecuted by PRC authorities, or the prosecution thresholds, potential affirmative defences and potential exemptions. In this regard, the one-sentence addition to the PRC Criminal Code compares rather unfavourably to the FCPA’s sixteen page counterpart or the UK Bribery Act. Implementing regulations may soon be passed which should provide guidance and greater legal certainty regarding the operation of the Amendment.

International obligations

The passing of the Amendment also allows China to fulfil its obligations under international treaties, in particular the United Nations Convention against Corruption which it ratified in 2006. The wording of the Amendment is very close to the letter and spirit of Article 16.1 of the United Nations Convention against Corruption2.

In addition, China has been engaged in discussions with the OECD Working Group on Bribery since 2006. It has been a member of the ADB/OECD Anti-Corruption Initiative for Asia-Pacific since 2005. The Amendment provides a clear sign of China’s commitment to enter the OECD and embraces its stance against corruption together with the international community.

  1. Under Article 16.1 of the United Nations Convention against Corruption, “each State Party shall adopt such legislative and other measures as may be necessary to establish as a criminal offence, when committed intentionally or the promise, offering or giving to a foreign public official or an official of a public international organization, directly indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties, in order to obtain or retain business or other undue advantage in relation to the conduct of international business.”

Not all new under the sun

In practice, a number of Chinese companies (such as China Mobile, CNOOC, PetroChina and Sinopec) were already subject to the UK Bribery Act by reason of their activities in the United Kingdom and/or to the FCPA by reason of their status as issuers of US securities. In addition, either as members of China’s Communist Party or as employees of state-owned enterprises, managers conducting business in the name of PRC state-owned enterprises are also subject to very stringent internal regulations on bribery and gift-giving and for these people, therefore, the Amendment merely comes as a confirmation of these duties.

However, the Amendment will empower the Chinese authorities to exercise greater vigilance in monitoring the overseas activities of all PRC companies and PRC nationals when carrying on business outside of China. Unlike the UK Serious Fraud Office or the US Department of Justice, whose ability to investigate Chinese companies is somewhat limited given their location, Chinese authorities will be able to conduct thorough investigations in China when they suspect that an offence may have been committed. Chinese companies are therefore advised to take all necessary measures to ensure they comply with their obligations under the Amendment not only to prevent the risk of criminal sanctions but also to limit the reputational damage resulting from a bribery investigation.

Ensuring compliance

PRC companies will need to adopt processes and compliance systems similar to their Western counterparts to ensure that they and their overseas subsidiaries conduct business in accordance with their obligations under the Amendment. In practice, larger PRC companies have already started to make improvements. An increasing number of foreign companies have noted that PRC companies are paying greater attention to corruption issues in their domestic and overseas business.

For those companies which need to develop their policies and procedures or which still have to put in place compliance and reporting systems, ensuring compliance with the Amendment will involve taking a number of steps. These include:

  1. carrying out an assessment to gain an understanding of both the internal and external risk the company faces;
  2. using this risk analysis to develop codes of conduct for international business and internal “best practice” guidelines on gift-giving, hospitality and entertainment and other sensitive activities (purchasing, dealings with authorities, etc.);
  3. ensuring top level commitment from the company’s board and other management;
  4. conducting regular training on such internal rules and engaging with the employees on the necessity of conducting business in a non-questionable way in accordance with the company’s codes of conduct, policies and procedures;
  5. creating a centralised compliance department in charge of supervising the effective implementation of the internal regulations and the ongoing monitoring of the same as well as providing assistance to local teams faced with bribery “requests” by foreign officials or other ethical dilemmas;
  6. establishing reporting and recording obligations of all dealings with foreign officials and officials of international public organisations;
  7. completing due diligence on entering into and managing international business relationships;
  8. ensuring that the company’s partners, agents, and suppliers are aware of the internal rules and behave accordingly in their dealings with the company;
  9. auditing of anti-corruption policies and procedures.

Because of the continuing development of global anti bribery laws it is becoming increasingly important for corporations to adopt anti corruption policies and protocols. Not only will these assist to protect corporations, they will also assist with ongoing business operations. There is an increasing trend towards corporations looking more favourably towards doing business with those who have in place appropriate anti-corruption policies. This also extends to mergers and acquisitions which raises an additional ‘angle’ so far as due diligence is concerned. Therefore it is becoming more of a commercial imperative for corporations to adopt appropriate anti-corruption policies and protocols.

As regulators world-wide increasingly exercise extraterritorial jurisdiction and adopt a joined-up approach to tackle corruption, companies can no longer deal with these issues on a country-by-country basis. As a leader in anti-corruption compliance and corporate integrity, our Business Ethics and Anti-Corruption Group operates throughout our international network. Norton Rose has advised many international organisations across multiple industry sectors and geographic regions on all matters relating to compliance and regulation, fraud and corporate governance. We engage closely with a range of external bodies in this field, with whom we have collaborated on a range of initiatives. We have a wealth of expertise and professionals who are able to advise on bribery and compliance issues.

China introduces national review for foreign investments

March 2011, Sun Hong, Zhao Jingjing


On 3 February 2011, the General Office of the State Council issued the Notice on Establishing a Security Review System in respect of Acquisitions of Domestic Enterprises by Foreign Investors (the Notice) which will come into effect as from 5 March 2011. The Notice contains China’s first set of rules implementing a foreign-targeting national security review, a concept initially found in the 2006 Regulation on Acquisition of Domestic Enterprises by Foreign Investors (the 2006 Regulation), then restated in Article 31 of the Antimonopoly Law.

Scope of application

According to the Notice, the security review procedure will apply to foreign acquisitions of domestic enterprises in the following two circumstances: first, where the domestic target is engaged in military or supporting activities, or is located adjacent to critical military facilities, or is otherwise related to national defence security matters; and second, where the foreign investor is likely to obtain legal or de facto control of a domestic target active in economic sectors concerning national security, such as important agricultural production, important energy and resources, important infrastructure and transportation services, key technology and major equipment manufacturing.

The Notice defines the term “foreign acquisitions of domestic enterprises” to include the following types of transactions:

  • acquisition of an equity interest in, or subscription of increased registered capital to, a domestic enterprise so as to convert the domestic enterprise into an foreign-invested enterprise (FIE);
  • acquisition of an equity interest in an FIE from domestic shareholders or subscription of increased registered capital to an FIE;
  • establishment of an FIE which will acquire assets from a domestic enterprise and operate such assets or will acquire an equity interest in a domestic enterprise; and
  • acquisition of assets from a domestic enterprise by a foreign investor which may then be used to establish an FIE operating such assets.1

Foreign investors will be regarded as having acquired legal or de facto control of a domestic enterprise, if (i) the shareholding of a foreign investor (including those of its parent company and subsidiaries), or the total shareholding of several foreign investors, in the domestic enterprise exceeds 50 per cent; or (ii) the voting rights of foreign investors or any other arrangements enable them to have actual control over the decision making and business operations of the domestic enterprise.

  1. Investors from Hong Kong, Macau and Taiwan are considered as foreign investors for security review purposes. It should also be noted that foreign acquisition of domestic financial institutions is not subject to the Notice.

Inter-agency panel mechanism

The State Council will set up a Ministerial Committee, which is to be led by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) and joined by other ministries relevant to a particular transaction, to conduct the security review from the following four aspects:

  • the transaction’s impact on national defence security, including any impact on the products and services required by national defence and the relevant equipment and facilities;
  • its impact on the stable operation of the national economy;
  • its impact on basic social orders; and
  • its impact on key R&D abilities concerning national security.

The review by the Ministerial Committee is conducted in two stages, a general review and a specific review. In the general review stage, the Ministerial Committee will consult the relevant authorities on the impact of the transaction. If no objection is raised by the relevant authorities, the Ministerial Committee will grant approval for the transaction and notify MOFCOM in writing. The general review stage may take as long as 30 working days. Where objections have arisen from the general review stage, the Ministerial Committee will undertake a specific review which may take up to 60 working days. In the event that there is a significant disagreement among different authorities on the impact of the transaction, the Ministerial Committee will submit the matter to the State Council for a final decision. There is, however, no indication as to how long it will take for the State Council to make the decision.

Documentary implications

Article 4(1) of the Notice requires foreign investors to make an application to MOFCOM in respect of their acquisition of domestic enterprises, upon which MOFCOM will determine whether the transaction falls within the abovementioned scope, and if it does refer the case to the Ministerial Committee for review. A literal reading of this would indicate that all foreign acquisitions of domestic enterprises as defined will need to be filed with MOFCOM for the screening. This is not only different from the approaches adopted in existing foreign investment regulations - MOFCOM filings under both the 2006 Regulation and the merger control regimes are limited by capital or turnover thresholds - but it would also run counter to logic as the sheer number of screening requests would make the whole system unworkable.

A more reasonable reading from the businesses’ perspective, we suggest, should be that only acquisitions concerning the specified sectors and satisfying the specified control requirements need to be submitted for MOFCOM’s screening. MOFCOM should then determine whether the economic sector in question is sufficiently “important” to have a bearing on national security - any quantifiable guidance as to how it would measure a transaction’s materiality and propensity for referral will certainly further assist businesses’ self-judgment and reduce the amount of unnecessary applications.

Besides a MOFCOM referral following the foreign investors’ voluntary application, the national security review may also be initiated by proposals from the relevant government authorities, national industry associations, or enterprises operating within the same industry as the target, or within the upstream or downstream industries of the target.

Legal consequences

To the extent that a transaction is found to have caused or to be likely to cause a significant impact on the national security of the PRC, the Ministerial Committee will request MOFCOM and other relevant authorities to terminate the transaction, or to take any other effective remedial actions, including the transfer of the foreign held interests or assets, to eliminate the negative impact of the relevant transaction on national security.


As mentioned in the beginning of this article, the Chinese government has for years had the idea of developing a credible security review mechanism for foreign investments, and for the first time, a framework that is relatively comprehensive in terms of substance and procedural arrangements has been put forward. Having said that, the security review framework embodied in the Notice needs to be fleshed out by more detailed implementing rules and guidelines before it can be operated in a meaningful way.

Several critical aspects of the system still call for clarification. For example, the Notice is vaguely worded as to the circumstances in which a foreign acquisition may be subject to the security review, using unquantifiable terms such as “important”, “key” and “major” to describe the scope of its application. Nor has the Notice provided substantive or formal requirements on how any applications to MOFCOM are to be made. Before any guidance is provided, foreign investments in the specified sectors are all potentially implicated by the Notice. Prior consultation with MOFCOM or its provincial counterparts in respect of the possible application of a national security review is therefore advisable, and security review approval may be incorporated accordingly as an additional condition precedent to the completion of the relevant transaction.

Another important issue about which the Notice is silent is whether or not transactions completed before its commencement would be affected. Though the lack of a clear cut-off date is a common problem in Chinese legislation, it is particularly worth noting here as the Notice gives sectoral regulators and even domestic competitors a right to complain and to propose security review be conducted with respect to any transactions.

How the security review system will be conducted and how it will impact on foreign investments remain to be seen. To dispel the perception of being a protectionist or retaliatory tool, it will be up to the enforcement agencies to promulgate sound review criteria and procedural rules, and to practise those rules objectively and transparently.

Protection of personal financial information in China

October 2011, Gigi Cheah, Chuan Chuan Lai, Hank Leung


China does not have a comprehensive national law protecting the privacy of personal data. The current legal regime is based on a plethora of laws and regulations lacking in coherent implementation guidelines.

In response to growing consumer awareness and business needs, industry specific authorities in China are stepping up their efforts to develop personal data protection regimes dealing with issues arising from sector specific operations.

In the banking sector, the People’s Bank of China (PBOC) issued a Notice to Urge Banking Financial Institutions to Protect Personal Financial Information (Notice) at the beginning of this year. Banking financial institutions in China (including foreign invested commercial banks) (Banks) are required to observe these rules when collecting, processing and storing personal financial information (PFI) (as defined in the Notice) during the course of their business and while accessing the PBOC’s credit reference system, payment system or other system. The Notice has been in effect since 1 May 2011.

The Notice, among other things, prohibits Banks from storing, processing or analysing outside China any PFI which has been collected in China, or providing PFI collected in China to an offshore entity. This requirement will impact on a Bank’s operations, including offshore outsourcing practices.

We set out below the key requirements of the Notice.

Notice - Key issues

The Notice contains a broad definition of “PFI”

PFI is very broadly defined in the Notice and includes:

  1. personal identity information1
  2. personal property information2
  3. personal account information3
  4. personal credit information4
  5. personal financial transaction information5
  6. derivative information6; and
  7. other personal information acquired or stored in the process of developing business relationships with individuals.

Protection of PFI

The following are the salient provisions of the Notice in relation to the protection of PFI:

  1. Purpose and manner of collection of PFI
    1. PFI should be collected by means which are lawful and fair;
    2. PFI irrelevant to the business transaction in question should not be collected; and
    3. Banks are prohibited from requiring customers to consent to their use of PFI for marketing purposes or sharing of PFI with third parties, as a precondition for establishing any business relationship with them.
  2. Use of PFI
    1. PFI can only be used for the purpose for which the PFI was collected.
    2. Banks are prohibited from:
      1. selling PFI - this is an absolute prohibition and cannot be ratified by customer consent;
      2. providing PFI to any third party unless such provision is required by law or is necessary for the business purpose for which the PFI was initially collected and is with the written consent of the person whose PFI is being provided;
        If the relevant consent is obtained through a standard form contract, the Bank must explicitly describe the scope and circumstances under which such PFI is to be provided to third parties. The potential consequences and risks associated with such consent should be: a) indicated in language that can be easily understood; b) presented in a prominent manner; and c) drawn to the customer’s attention prior to signing the contract.
      3. using PFI for marketing activities of the Bank if the customer to whom the PFI pertains objects to such use;
      4. storing, processing or analysing outside China any PFI which has been obtained in China, or providing PFI to an offshore entity, unless the laws of China or the PBOC provide otherwise7;
    3. Banks may only use PFI acquired from PBOC’s credit reference system, payment system or any other systems for the purposes specified by such systems. This cannot be ratified by customer consent. China has separate rules for the regulation of PBOC’s credit reference system and the use of data collected from such systems. Non-compliance with these rules may attract fines or criminal sanctions.
  3. Security of PFI
    1. Effective measures must be taken to ensure the security of PFI;
    2. An internal control system must be established to assign clearly the level of authority required for business units and persons to have access to PFI to ensure that there is no unauthorised disclosure or use of PFI;
    3. Employees who have access to PFI must provide a written assurance to their employers acknowledging their obligation to protect the confidentiality of PFI; and
    4. Banks must notify the local branch of the PBOC promptly of any instances of security breach or unauthorised disclosure of PFI8.
  4. Business outsourcing arrangement
    Banks are required to examine and evaluate the ability of an outsource service provider to protect PFI before engaging such service provider. The service agreement between the service provider and the Bank must impose obligations on the service provider to protect the confidentiality of the PFI and to destroy the PFI upon termination of the service contract.

Violation of the requirements under the Notice

Violation of the requirements under the Notice will entitle the PBOC to order the relevant Bank to rectify its non compliance and require the Bank to punish the responsible officers.

The judiciary can intervene if the Bank’s violation constitutes a crime9 . It should be noted that any non permitted disclosure (i.e. sale or illegal provision) of PFI will constitute a crime. This requirement only applies to specific industry sectors including the financial sector.

To ensure compliance with the requirements in the Notice, Banks should consider:

  1. raising awareness and educating their employees about the importance of PFI security and confidentiality;
  2. maintaining a logging and reporting system to restrict access to PFI;
  3. reviewing PFI collection practices, consent forms/ standard form contracts, and outsourcing service contracts to ensure compliance;
  4. segregating data to ensure that no data is transferred to third parties or used for other purposes unless prior consent from the data subject has been obtained with respect to such transfer or use; and
  5. assigning a PFI compliance officer to audit internal procedures and to attend to data security breaches in a timely manner.

Our specialist intellectual property and technology team has in-depth experience in advising on all aspects of data protection and privacy issues throughout the Asia-Pacific region. We regularly advise banks and financial institutions on compliance with the complex data protection regulatory framework in China. If you would like further information or have any questions please contact our Norton Rose Asia IPT team.

  1. Personal identity information includes a person’s name, gender, nationality, ethnic group, occupation, contact information, marital or family status, and photographs, etc.
  2. Personal property information includes a person’s income status, immovable property, vehicle, taxes, and amounts paid towards the provident fund, etc.
  3. Personal account information includes a person’s account number, the point of time when the account was opened, account balance, and account transactions, etc.
  4. Personal credit information includes information about a person’s credit card payment, loan repayment, and other information about economic activities which may indicate his/her personal credit status.
  5. Personal financial transaction information includes personal information acquired, stored and retained by Banks in the course of offering intermediary services (i.e. payment and settlement operation, financial management, deposit safe custody services), or generated in the course of business that customers carried out through the Banks with third-party institutions, such as insurance companies, securities companies, etc.
  6. Derivative information refers to consumption preferences, investment intent and other specific personal information gathered by processing or analysing the primary data.
  7. This requirement has caused concern among many Banks, and we understand the Shanghai branch of the PBOC has subsequently issued a notice to the Banks in Shanghai to clarify this specific requirement, stating that, notwithstanding the requirement:
    1. a branch office set up by a foreign bank that does not have any presence in China as independent legal person may rely on its headquarter, other branch offices or affiliated companies located offshore to store, process or analyse outside China any PFI which has been obtained in China provided that a) the customer has given written consent to this arrangement; and b) the aforementioned offshore entities have taken corresponding protection measures to ensure the security of the PFI, and the headquarter of such branch office undertakes corresponding legal liabilities for non-compliance with such security requirement; and
    2. a Bank may provide PFI to its headquarter, parent company, branch offices or subsidiaries located offshore provided a) the provision is for the purpose of serving customer’s business needs; b) the customer has given written consent to such provision; and c) the Bank warrants that the aforementioned offshore entities to whom the Bank has provided PFI shall keep the PFI confidential.
  8. Reporting must take place on the same day of the occurrence of the security breach. If a supervising bank discovers instances of unauthorised disclosure in a subordinate organisation, it must report the incident to the local branch of the PBOC within 7 working days of discovering the breach.
  9. The Seventh Amendment to Criminal Law promulgated in 2009 makes it an offence for employees in certain industry sectors (including financial sector) to sell or otherwise unlawfully provide to third parties the personal data of any citizens obtained in the course of such employees performing their duties. The directors or responsible officers of a company which sells or otherwise unlawfully provides to third parties the personal data of its clients may also be criminally liable.

China Insight contacts

For further information on any of the regulations referred to in our newsletter, please contact:

 BeijingPeter Burrows , Partner
Nigel Ward
, Partner
Tom Luckock
, Partner
Wang Yi
, Partner
Michael Wilton
, Partner
 ShanghaiJustin Wilson , Partner
Lynn Yang , Partner
Sun Hong
, Partner
 Hong KongJim James , Partner
David Stannard , Partner



Yi Wang

Yi Wang

Tom Luckock

Tom Luckock

Lynn Yang

Lynn Yang

Sun Hong

Sun Hong

Jon Perry

Jon Perry

Jim James

Jim James

Hong Kong
Gigi Cheah

Gigi Cheah