The Chinese government implements the negative list on outbound investment

The Chinese government formally raises the concept of "negative list" on outbound investments by dividing outbound investments into encouraged, restricted and prohibited categories.

On 18 August 2017, the General Office of the State Council published a Notice on the Guidance on Further Guiding and Regulating Outbound Investment (Guobanfa [2017] No.74) (the Notice), which was jointly drafted and proposed by the National Development and Reform Commission (the NDRC), the Ministry of Commerce, the People’s Bank of China and the Ministry of Foreign Affairs, and approved by the State Council.

The Notice represents a formal endorsement of a number of internal guidelines and informal rules introduced by some ministries since November 2016 that are intended to curb “irrational” outbound investment, which are, as described by Mr. Xiaochuan Zhou, the Governor of the People’s Bank of China, during the annual session of the National People’s Congress, “blind” and “over the top”. Against the backdrop of the Belt and Road initiative, the Notice reaffirms that the general regulatory framework for outbound investment is a filing based system with the introduction of a new concept of the Negative List. Outbound investments by Chinese companies are for the first time divided into three categories – encouraged, restricted and prohibited. For any outbound investment in the restricted areas, investors would expect strict scrutiny before any deal can be approved. For any outbound investment in the prohibited areas (ie on the Negative List), no government approval will be granted.    

This can be viewed to some extent as a positive move for outbound investment transactions, as the clear guidance of the Negative List will reduce the regulatory uncertainties for a large number of transactions that do not fall within the restricted or prohibited areas.  

Encouraged outbound investments

The Notice supports Chinese companies with sufficient capabilities and financial means to actively and steadily carry out outbound investments; to promote the developments of “the Belt and Road initiative”; to deepen the cooperation on international production capacities; to lead the export of domestic superior production capacities, high-quality equipment and applicable technology; to enhance China’s competitive advantage on technology research and development and manufacturing capacity; to make up China’s shortage of energy resources; and to promote the quality upgrade of relevant industries in China.

Specifically the following types of outbound investment are encouraged:

  • focus on promoting the outbound investments in infrastructures which are beneficial to the developments of “the Belt and Road” and the interconnection with surrounding infrastructures
  • steadily carry out the outbound investments which can lead the export of superior production capacities, high-quality equipment and standardized technology
  • strengthen the investment cooperation with overseas high-tech and advanced manufacturing enterprises, and establish the R&D centers abroad
  • steadily participate in the exploration and development of energy resources such as oil and gas and minerals on the basis of prudent assessment of economic benefits
  • focus on expanding outbound agricultural cooperation, carry out investment cooperation under the principles of mutual benefits and win-win in the fields of agriculture, forestry, animal husbandry and sideline production and fishery, and
  • orderly enhance the overseas investment in the service fields such as business trading, culture, logistics, support the eligible financial institutions to establish branches and service networks abroad, and carry out businesses according to relevant laws and regulations.

Restricted outbound investments

The Notice restricts the domestic enterprises from carrying out outbound investments that do not comply with China's diplomatic policy of peaceful development, opening-up strategy of mutual benefit and win-win as well as macro-control policies, including:

  • outbound investments in sensitive countries and regions that have not established diplomatic relations with China, or in war, or that need to be restricted by bilateral or multilateral treaties or agreements concluded by China
  • outbound investments in real estate, hotels, movie studios, entertainment, and sports clubs
  • establishment of overseas equity investment funds or investment platforms that have no specific projects
  • outbound investments using backward production equipment that does not meet the technology requirements of the host country, and
  • outbound investments that do not comply with the requirements of the host country in terms of environmental protection, energy consumption and safety standards.

The first three types of outbound investment in the restricted areas are subject to the approval of (instead of a filing with) the NDRC or its local counterparts regardless of the size of the investment.

Prohibited outbound investments

The Notice prohibits Chinese companies from participating in any outbound investments that endanger or may endanger national interests and national security, including:

  • outbound investments that involve the export of core technology and products in the military industry that have not been approved
  • outbound investments that use the technology, process, products that is forbidden to export out of China
  • outbound investments in the gambling industry, sex industry etc.
  • outbound investments that are prohibited by the international treaties concluded or acceded to by China, and
  • other outbound investments that endanger or may endanger national interests and national security of China.

To better implement the Notice, the government will enhance the review of outbound investments in terms of their authenticity and compliance with laws, as well as establish a blacklist for outbound investments based on an information sharing system of government authorities. It is also reported that the NDRC is drafting a new version of the outbound investment administration regulations to reflect the position of the Notice. 

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document. Simmons & Simmons is registered in China as a foreign law firm. We are permitted by Chinese regulations to provide information on the impact of the Chinese legal environment and also to provide a range of other services. We are not admitted to practise in China and cannot, and do not purport to, provide Chinese legal services. We are, however, able to co-ordinate with local counsel to issue a formal legal opinion should this be required.