Aug 29, 2017
The Office of the State Council of the People’s Republic of China recently issued an opinion, or guidelines, that could substantially change economic investment priorities coming out of China. This is the first time the PRC government has weighed in on permitted outbound investment (aside from simply restricting the pace at which money can flow out of China). These guidelines set out encouraged, restricted and prohibited areas for overseas investment by Chinese entities.
The new guidelines are designed to further promote China’s “One Belt, One Road” initiative by encouraging Chinese entities to invest overseas in particular areas, while restricting and prohibiting them from investing in others. Launched in 2013 under President Xi Jinping, the “One Belt, One Road” initiative was designed to encourage investing in infrastructure projects in hopes of finding more lucrative investments for China’s vast foreign reserves, while creating new markets and opportunities for Chinese companies and individuals.1
Due to the guidelines’ restrictions on certain areas such as investment in real estate and entertainment, the new directive could have a substantial impact on investments in the U.S., where in 2016 alone Chinese invested an estimated $46 billion.2
The new guidelines provide an outline of what areas are deemed “safe” for Chinese outbound investment. Specifically, the new guidelines encourage Chinese overseas investment in areas that would:
The new guidelines place restrictions on overseas investment in areas the PRC government has deemed less safe. The areas that are now restricted include:
Investing in any of these restricted areas will now require the advance approval of China’s foreign investment authorities and, in some cases, may require bilateral treaties to be put in place ahead of any Chinese outbound investment.
Under the new guidelines, the PRC government now specifically prohibits Chinese domestic enterprises from participating in foreign investment in areas the PRC government believes may endanger national or national security interests. As such, Chinese domestic enterprises are now prohibited from investing in the following areas:
While some of the guidance on prohibited Chinese foreign investment is fairly specific, the inclusion of national and national security interest provides a catch-all which allows the PRC government’s inclusion of any area or industry in the prohibited areas category.
The PRC government has intensified its effort to control and guide the flow of Chinese outbound investment. Some aspects of the guidelines can be seen in a positive light, as they aim to ensure investments are made in legal industries that promote not only the interests of China, but also the domestic interests of the recipient country. The tightened oversight and restrictions, however, could have deleterious effects on certain industries in the U.S. and other countries, where seeking Chinese investors had become somewhat of a cottage industry. It will be interesting to observe how the guidelines are enforced going forward. We can expect that the PRC will issue additional guidance as this new directive is implemented.
In the meantime, CKR Law will continue to monitor developments surrounding this guidance. Should you have any questions or desire further insight, feel free to contact our New York-based China Law team, including Partners Jeffrey A. Rinde (firstname.lastname@example.org), Megan J. Penick (email@example.com), Jing Li (firstname.lastname@example.org) and Associate Joy Xiao (email@example.com), at (212) 259-7300.
DISCLAIMER: This article is not intended to provide legal or tax advice, and no legal, tax, or business decision should be made based on its contents.
1J.P., “What is China’s Belt and Road Initiative? The many motivations behind Xi Jinping’s key foreign policy,” The Economist, May 15, 2017, https://www.economist.com/blogs/economist-explains/2017/05/economist-explains-11.
2O’Keefe, Kate, “China Puts Investment Controls In Writing,” The Wall Street Journal, August 19-20, 2017.