China issues new rule to regulate private companies’ overseas investments and operations

On Monday, China’s National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), Ministry of Foreign Affairs, People’s Bank of China, and the All China Federation of Industry and Commerce announced a rule, for the first time, to regulate private companies’ overseas investments and operations. NDRC and MOFCOM are required to guide POEs in implementation of the new rule.

In the release of the new rule, there are two highlight requirements:

• Privately-owned enterprises (POEs) are required to proactively report their potential overseas investment projects to Chinese authorities and seek approval or filing like state-owned enterprises (SOEs)
• POEs cannot make commitment or undertake financing without obtaining a commitment letter from a Chinese financial institution if they plan to source funding from Chinese financial institutions

It is important to note that at this stage, there is no clarification on:

• How the requirements would affect POEs that have already set up special purpose vehicles and/ or retained funds outside China
• What consequences a POE would face if they do not report their potential overseas investment projects to Chinese authorities and seek approval proactively

As it stands, below are some of the direct impacts on POEs:

• Being regulated in a similar way to SOEs
• Use of funds will be monitored more closely even if the funds do not reside in China
• More difficulty in acquisition of assets and funding of transactions especially if projects fall outside of the POEs’ core business and expertise

We will be keeping a close eye on further developments and aim to keep you apprised. If you have any questions regarding the new rules as it stands, please feel free to contact Wang Yi.