Foreign investment is 13 years wide and tight: what does regulators encourage? Worried about what?

According to data released by the Ministry of Commerce, from January to July 2017, domestic investors added US $57.2 billion in non-financial direct investment to foreign enterprises, down 44.3 per cent from the same period last year. Foreign investment in the real estate industry, culture, sports and entertainment decreased by 81.2% and 79.1% respectively from the same period last year, accounting for only 2% and 1% of the total foreign investment in the same period.

The brake action is guided by the "guidance on further guiding and standardizing the direction of overseas investment" (hereinafter referred to as the "guidance"). Issued by the State Council on August 18, the direction of overseas investment of enterprises is guided and standardized according to the mode of "encouraging development + negative list". It formally defines the three types of overseas investment activities that China will encourage, restrict and prohibit. Restrictions on overseas investment in real estate, hotels, cinemas, entertainment, sports clubs and other fields.

On August 24, 2017, Feng Feng, spokesman for the Ministry of Commerce, explicitly mentioned in his statement on the implementation and implementation of the guidance at a regular press conference: "to ensure the steady development of overseas investment by enterprises, to ensure the smooth progress of the construction of 'Belt and Road Initiative', and to ensure national financial and economic security." We should adhere to the strategic direction of opening up to the outside world, persist in promoting the 'going out' strategy, and adhere to the principle of preventing the risks of overseas investment. "
The proposal of "three guarantees and three unwavering" further clarifies the regulatory thinking of foreign investment. Cui Fan, a professor at the University of Foreign Economics and Trade and a senior researcher at the China and Globalization think-tank, told the Economic Observer that the introduction of the "guidance" has finally led to rules to follow and regulatory ideas to be gradually clarified. On the one hand, it is a further encouragement to "Belt and Road Initiative"; on the other hand, it is to control the risk of capital flight.

In fact, the current brake on foreign investment, as early as the end of last year has opened the prelude.
On November 28, 2016, four ministries and commissions, including the National Development and Reform Commission, said they wanted to strengthen supervision in the field of overseas investment, focusing on the behavior of "individual enterprises or individuals transferring assets through foreign investment channels." they will continue to "implement filing management on all overseas investment transactions, and will strictly examine and approve cross-border investment transactions."
Since then, the situation has gradually changed.

According to data released by the Ministry of Commerce, from January to July 2017, domestic investors added US $57.2 billion in non-financial direct investment to foreign enterprises, down 44.3 per cent from the same period last year. Foreign investment in the real estate industry, culture, sports and entertainment decreased by 81.2% and 79.1% respectively from the same period last year, accounting for only 2% and 1% of the total foreign investment in the same period.

From the first document regulating overseas investment issued by China in 2004, the provisions on the approval of overseas Investment start-up Enterprises, to the promulgation of the measures for the Administration of overseas Investment in 2009 and to the guidance issued on August 18, 2017, China's policy documents on overseas investment have been constantly revised and changed.
Three documents outline the path of changes in the way government departments regulate overseas investment by Chinese companies over the past 13 years: from restrictions to liberalisation to the nearest "spot brake" norms. Behind this, what flashes is the evolution of the main body of Chinese overseas investment, the scale and mode of investment in different stages.

Follow-up to the new rules
The "brake" does not mean that it will stop there.
Two cross-border transactions at a delicate point in time have attracted attention. Just before the "guidance" was issued, on July 28, 2017, Beijing Sanyuan Food Co., Ltd. announced that it had teamed up with Fosun Group to acquire the French health food brand St-Hubert; on August 3, 2017. Nanjing Nangang Iron and Steel Co., Ltd., a joint venture company of Fosun Group, announced that it had successfully completed its holding acquisition of a lightweight company in the German automobile industry.
"the long-term direction of investment facilitation has not changed, and some of the current restrictions on foreign investment will be gradually relaxed in the future." Cui Fan pointed out: on the one hand, more and more overseas investment will adopt the form of filing, which is still the direction of development; however, at present, there is investment risk, and the behavior of enterprises using a large number of levers to take out bank money for irrational investment also needs to be supervised.

Investment in "Belt and Road Initiative" construction is still encouraged. The "guiding opinions" point out: support domestic enterprises with the ability and conditions to actively and steadily carry out overseas investment activities, promote the construction of "Belt and Road Initiative", deepen international capacity cooperation, drive the export of domestic superior production capacity, high-quality equipment, and applicable technology, enhance China's technological research and development and manufacturing capacity, make up for the shortage of energy resources in China, and promote the upgrading of relevant industries in China. "this is a further clarity in the direction." Cui Fan said that before that, due to the uneven foreign exchange balance, local regulatory tightening is inconsistent, enterprises are not clear about this, and lost a lot of investment opportunities.

Regulations on overseas investment are in the pipeline. Gao said that in the next step, the Ministry of Commerce will actively promote legislation on overseas investment and bring the guidance, supervision, standardization, and guarantee of overseas investment into the track of legalization. "the filing system under the principle of negative lists should, in principle, be retained." Cui Fan analyzed that at present, the examination and approval of overseas investment still needs to be further improved. From the country, industry, investment form, investment equipment, technical standards, environmental protection and other restrictions, it is difficult to implement the implementation of the operation, the specific areas are still too vague, the future may be issued a more detailed list and catalogue.

Ni Jianlin, a lawyer at Rongfu Law Firm in Shanghai, often gets calls from clients asking about current changes in overseas investment policies. With the release of the guideline, some clients, who have a wait-and-see attitude towards overseas investment, worry that the restrictions will be stricter.

Ni Jianlin's explanation is, "this is not a new restriction, but a clear restatement of the previous regulatory bottom line, making the foreign investment supervision policy more transparent."
However, the impact of the new rules on some companies and projects will also gradually emerge. On March 16, Wanda terminated its $1 billion acquisition of DCP Group in the United States. DCP Group is a television production company that produces awards for Hollywood in the United States. Wang Jianlin, chairman of Wanda, said that the policies on both sides had changed, so he gave up the acquisition.
Ni Jianlin said that some projects have been delivered breach of contract, the acquisition contract has been signed, but due to the inability of funds to leave the country resulting in delivery default.

Decentralization for more than ten years
From 2004 to 2014, it was generally rated as the "golden decade" of foreign investment policy, also known as the decade of easing and decentralization.

China's overseas investment mainly involves three regulatory bodies: the Project approval of the Development and Reform Commission, the approval of the overseas enterprises of the Ministry of Commerce, and the registration by the safe (examination of foreign exchange, foreign exchange and remittance involved in overseas investment).

The National Development and Reform Commission (NDRC) mainly conducts audits from the perspective of investment projects. From the interim measures for the approval of overseas Investment projects in 2004 to the Circular on decentralization and approval of overseas Investment projects, which was implemented in 2011, the amount of approved investment has been increased from US $30 million to US $300m and US $1 billion.

The Ministry of Commerce shall issue the Certificate of overseas Investment of Enterprises for domestic enterprises intending to make overseas investment. From the earliest provisions on the approval of overseas Investment start-up Enterprises in 2004 to the measures for the Administration of overseas Investment in 2009, for overseas investment of central enterprises below US $100 million and overseas investment of local enterprises under US $10 million, the "substantive examination" of 15 working days shall be untied to a "simple examination" of only three working days.

2014 is seen as the first year of foreign investment policy gains. In this year, a series of documents issued by the Development and Reform Commission, the Ministry of Commerce, and the State Council have successively changed the approval system for overseas investment projects into a filing system.

At the same time, the policy of individual overseas investment is further loosening, and individual direct cross-border guarantee has become a possibility. On 24 May 2013, the Circular on the key work of deepening Economic restructuring in 2013, issued by the Development and Reform Commission, proposed that "steadily promoting the convertibility of RMB capital accounts and establishing a foreign investment system for qualified domestic and individual investors" is considered to be a signal of principle for allowing individuals to invest abroad.

On May 8, 2014, the State Council issued a number of opinions on further promoting the healthy development of the capital market, and also proposed "steadily opening up the domestic capital market for foreign individuals to invest directly in the domestic capital market and promoting the foreign capital market for domestic and individual direct investment in an orderly manner."

In 2015, China achieved blowout growth in the scale of overseas investment. This year, China's foreign direct investment (OFDI) flow reached US $145.67 billion, making it the second largest foreign direct investor in the world for the first time. At the same time, China's foreign investment (ODI) exceeded the amount of foreign (FDI) used. Zhang Xiangchen, deputy representative of the Ministry of Commerce for international trade negotiations, said that statistically speaking, China officially became an exporter of capital in 2015.

It was also in this year that a total of 579 foreign investment mergers and acquisitions were carried out by Chinese enterprises, involving 62 countries and regions. The actual transaction amount reached US $54.44 billion, of which US $37.28 billion, or 68.5 per cent, was directly invested. Mergers and acquisitions cover 18 broad categories of industries, including manufacturing, information transmission, software and information technology services, mining, culture, sports and entertainment.

Private enterprises have gradually become the main force of overseas investment. According to the Ministry of Commerce, the non-public economy accounted for 65.3% of China's foreign investment in 2015, accounting for 75.6% of the amount of overseas mergers and acquisitions, surpassing the state-owned enterprises for the first time in terms of quantity and amount.

Li Donghong, deputy director of the Department of Innovation, Entrepreneurship and Strategy, School of Economics and Management, Tsinghua University, said that many private enterprises are in excess capacity industries, the domestic economy is in a period of economic growth, investment opportunities are reduced, and investment returns are declining. It is an inevitable phenomenon for enterprises to "go out" on a large scale at such a time.

The popularity of foreign investment continued in 2016 and reached an all-time high. According to data from the Ministry of Commerce, in 2016, Chinese investors made non-financial direct investment in 7961 foreign enterprises in 16 countries and regions around the world, with a cumulative investment of 1.13 trillion yuan, an increase of 44.1 percent over the same period last year.

Halberd risk
In the past ten years, the fields and methods of overseas investment of Chinese enterprises have become more and more broad and novel. The investment is getting bigger and bigger, and the frequency is getting higher and higher.

Under the overseas investment boom, the hidden and constantly exposed problems have also been paid more and more attention by the regulatory authorities.

On August 24 this year, Feng said at a press conference, "there have also been some problems in overseas investment by Chinese enterprises, especially since last year, the irrational rapid growth of foreign investment has brought certain risks and hidden dangers to China's financial security and the security of state-owned assets."

At the same time, the great fluctuations in China's foreign exchange reserves also attracted the attention of regulators. China's foreign exchange reserves fell from $3.99 trillion in June 2014 to $3.05 trillion in November 2016, according to safe data. Cui Fan, a professor at the University of Foreign Economics and Trade and a senior researcher at the China and Globalization think-tank, told the Economic Watch that it had fallen by nearly $1 trillion in two and a half years, and that risk prevention and supervision must be imposed.

An entertainment industry source told the Economic Watch that as early as November last year, many overseas projects had pressed the pause button. On November 28, 2016, the news that four ministries and commissions strengthened supervision of foreign investment has turned on yellow lights for many overseas investment projects.

At this time, applications for filing overseas investment in some areas have been restricted. Some overseas mergers and acquisitions in these areas are currently at risk of failing to deliver, Ni said.

"since the tightening of policy at the end of 2016, the topic of overseas investment has also become more and more cautious." Ni Jianlin said that in the past, when overseas investment was hot, the overseas investment clients served by their team poured in, but this situation has declined significantly in the first half of this year.

The introduction of the "guidance" on August 18 this year directly put on the brake on the soaring overseas investment of Chinese enterprises in recent years.

Some overseas investment fund people point out that (SPV) may face stricter examination and approval in the future for "setting up equity investment funds or investment platforms that do not have specific industrial projects abroad." Even some of the projects that have been agreed upon may be broken down by changes.