Order No.11"), which came into effect on March 1, 2018. In January 2018, the NDRC and some other governmental authorities also issued implementing rules including the Measures for the Record-filing (or Approval) and Reporting of Outbound Investment [1] and the Catalogue for Sensitive Industries in Outbound Investment (2018-year version). [2] In this newsletter, we refer to Order No. 11 and these implementing rules as the "New Rules".

However, the New Rules may be troublesome news for Chinese businesses which intend to make outbound real estate investments.

Real Estate Falls into "Sensitive Industries"

On the face of Order No.11, it is also unclear whether real estate is categorized as one of the "sensitive industries". However, it was generally believed that the NDRC's approval power would extend to the real estate business based on the “catch-all phrase” in Order No.11 [4] while some voices argued that the real estate was not specifically enumerated therein.

Implications on Existing Offshore Money

In the past, if an offshore subsidiary of a Chinese company used its existing offshore funds for outbound investment purposes, and if such Chinese company did not provide any cross-border investment, loan or security in China in relation to such investment, the NDRC process would not be triggered. Under the New Rules, however, so long as the offshore entity is "controlled" by the Chinese investor, the NDRC process will kick in [5] even though only existing offshore money is applied and no cross-border fund flow is involved.

Implications on Insurance Money

Before the New Rules were issued, outbound investment by Chinese insurers were mainly regulated by the China Insurance Regulatory Commission [6]  (the "CIRC") as well as the detailed rules issued by the CIRC. In market practice, the CIRC's approval for the outbound transaction followed by the SAFE's approval for cash flow-out were generally believed to suffice for a Chinese insurer to make outbound investment while the laws at that time were unclear as to whether the NDRC process should be paralleled. Such regulatory uncertainty has been eliminated by the New Rules. Order No.11 clearly provides that the financial institutions should be governed by the NDRC regime. More specifically, without the NDRC process, the SAFE is not permitted to approve cash flows out of China even though the CIRC has granted approval.

Outstanding Questions

1. Offshore Transaction with Target Properties in China

2. Real Estate Debt Financing

Under Order No. 11, the term "outbound investment" means investment activities, as a result of which the Chinese investors ultimately obtain the offshore ownership, control, management right, as well as "other relevant interests". Then, the key question is whether the lenders' interests under the debt financing (e.g., interest) constitute "other relevant interests". On this issue, the New Rules do not offer a clear response.

 

[2] The Catalogue for Sensitive Industries in Outbound Investment (2018- year version) (in Chinese《境外投资敏感行业目录》) was issued by the NDRC on January 31, 2018.

[4] Under Article 13 of Oder No.11, the "sensitive industries" should include restricted industries for outbound investment based on the PRC laws and rules as well as control policies.

[6] CIRC is being replaced with a new Banking and Insurance Regulatory Commission by combining the CIRC and the China Banking Regulatory Commission.