Following its December 2017 issuance of the Administrative Measures for Outbound Investment by Enterprises (企业境外投资管理办法) (“Order 11”), the National Development and Reform Commission (“NDRC”) of the People’s Republic of China (“PRC”) recently published answers to certain frequently asked questions relating to the enforcement of Order 11 (“NDRC Q&A”). Among other clarifications and changes, the NDRC Q&A lists the sensitive sectors to which Order 11 applies and addresses the previous uncertainty regarding the application of Order 11 by specifically exempting certain types of outbound investments from the NDRC approval requirement. In a welcome sign indicating the significant relaxation of restrictions on outbound Chinese investments, absent the applicability of other rules or regulations, the NDRC Q&A removes restrictions on Chinese investors’ use of offshore capital for outbound investment in real estate, hospitality, and investment funds.
Offshore Capital Carved-Out from NDRC Approval for Selected Sectors
The NDRC Q&A significantly narrows the applicability of Order 11 to outbound Chinese investments in real estate, hospitality, and blind pool equity investment funds/platforms, by introducing the “offshore capital” carve-out: if only offshore capital will be used or raised for these investments (i.e., involving neither any asset or equity investment from, nor any financing or guarantee provided by, any onshore Chinese entity or person), they will not be deemed a sensitive or restricted investment under Order 11, and thus neither NDRC approval nor NDRC filing is required.[i]
This change is particularly good news for those Chinese investors who already hold significant offshore assets and desire to use those offshore assets (without onshore credit support or financing) to make outbound investments in the real estate, hospitality, and investment fund sectors.
Updated List of Sensitive Sectors
In our January 2018 alert on Order 11,[ii] we discussed the non-exhaustive Order 11 list of sensitive sectors and our expectation that NDRC would further clarify the applicability of Order 11. NDRC subsequently promulgated the Outbound Investment Sensitive Sectors Catalogue (2018 Version) (境外投资敏感行业目录（2018年版）) on January 31, 2018 (“Outbound Catalogue”). The NDRC Q&A integrates the list of sensitive sectors under Order 11 and the Outbound Catalogue as follows, and also provides additional guidance and exceptions to the reach of Order 11:
- Real estate. The NDRC Q&A adopts a conservative interpretation of “real estate” by primarily including the following two types of outbound investments: (1) acquisition and/or development of residential or commercial real estate assets (including land zoned for residential or commercial use); and (2) acquisition of, or investment in, real estate companies (including by way of subscription for new shares in an existing real estate company or by investment into a REIT). Note that the NDRC Q&A explicitly excluded from Order 11’s definition of “real estate” the following types of outbound investments:
- investment in property management or real estate agency service businesses;
- construction or acquisition of office properties or staff dormitories for self-use;
- investment in infrastructure development for industry-oriented facilities, such as industrial parks, technology parks, or warehousing/logistics parks; and
- acquisition of a minority stake in a development project by a construction company/contractor for the purposes of securing the construction contract(s) for such project;
- Hospitality. Similarly, the NDRC Q&A narrows the applicability of NDRC approval by excluding the following from the definition of “hospitality”:
- investment in hotel management industries which do not hold/own hotel properties; and
- investment in catering industries which do not involve lodging services;
- Setting up overseas equity investment funds or investment platforms with no specific investment identified at the time of investment (i.e., blind pool funds or fund platforms) (except where a pre-existing approval has been obtained from the relevant financial regulatory authority (other than NDRC) in China);
- Movie theaters;
- Entertainment industry;
- Sports clubs;
- Research, manufacture, & repair of weapons;
- Development & usage of cross-border water resources; and
- News & media.
Implications for Practice
The Chinese government appears to be sending a signal to Chinese investors, particularly large institutional Chinese investors with overseas platforms and assets, that the government will not stand in the way of those investors exercising their business judgement in determining how they will pursue their overseas investment strategy in real estate, hospitality, and the investment fund sectors. Set forth below is a diagram showing a three-step test in order to assist both Chinese investors and their counterparties to identify whether any NDRC clearance needs to be obtained. It is noteworthy that, under step three, the Chinese investor’s investment amount shall include not only their equity funds but also the debt financing raised by such Chinese investor (including through its offshore subsidiaries) from onshore and offshore lenders.
[i] Note that this carve-out only applies to real estate, hospitality, and investment fund sectors, and that outbound investments in other sensitive sectors are still subject to NDRC approval, regardless of the sources of capital.