Highlights:

1. Following two important circulars regulating outbound investments made by central State-owned enterprises (SOEs) issued in the middle of 2011, SASAC issued a new circular on 18^th March 2012 to provide further elaborations on certain specific requirements and to further enhance the supervision on SOEs’ outbound investments.    
2. Among other supervisory measures lately adopted by SASAC, central SOEs will no longer be allowed to engage in outbound investment projects falling outside their corresponding core business areas unless SASAC gives it a greenlight.   

MAIN ARTICLE

Recent years have witnessed an accelerated pace of expansion by Chinese enterprises towards the overseas market.  Among those participants in this “gold rush” movement, central State-owned enterprises (“Central SOEs”) often play a significant role by getting involved in the most ambitious and high-profile cases.  According to  statistics published by the State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”), the aggregate turnover attributable to outbound investments by Central SOEs during the period between January and November 2011 reached RMB 3.4 trillion Yuan;[1] however, it has been reported that several giant Central SOEs have suffered huge losses in this outbound investment fever.

Circular No. 26 and Circular No. 27

For years, apart from the Interim Measures on the Administration of Title Registration for Overseas State-owned Assets issued in 1992 and the Interim Measures on the Administration of Overseas State-owned Assets issued in 1999, there had been a lack of manageable rules according to which a standardized supervisory procedure over Central SOEs’ outbound investments could be carried out.  The situation did not change until SASAC issued the Interim Measures on the Supervision and Administration of Overseas State-owned Assets of Central SOEs (“Circular No. 26”) and the Interim Measures on the Supervision and Administration of Overseas State-owned Equity Interests of Central SOEs (“Circular No. 27”) on 14^th June 2011. Circular No. 26 sets forth a framework of a supervisory and control regime regulating outbound investment projects made by Central SOEs from the stage of initial decision making process to the subsequent project management and operation; while Circular No. 27 stipulates how the equity interests under the outbound investment projects shall be managed and monitored by Central SOEs and SASAC.

Interim Measures on the Supervision and Administration of Outbound Investments by Central SOEs (Circular No. 28)

While the framework of the supervisory system set out under Circular No. 26 and Circular No. 27 lays down filing and approval requirements, the particular details of certain requirements involved in the system remained unclear. As a result, SASAC subsequently issued the Interim Measures on the Supervision and Administration of Outbound Investments by Central SOEs (“Circular No. 28”) on 18^th March 2012 to fill some loopholes and to enhance the certainty and transparency of the supervisory system. Circular No. 28 came into force on 1^st May 2012. 

Highlights of Circular No. 28

• Outbound investment management policies of Central SOEs

While Article 6 of Circular No. 26 requires every Central SOE to establish its own outbound investment management policies, the Circular is silent on what components such management policies should contain.  In response to this, Circular No. 28 provides that the outbound investment management policies of a Central SOE shall consist of certain items and shall be filed with SASAC for record.

• Annual outbound investment plan

Circular No. 28 requires that each Central SOE shall come up with an annual outbound investment plan, which should be submitted to SASAC for review within a prescribed time period.  However, the Circular does not specify a precise timeline when such submission is required to be made.  The Circular provides that an annual outbound investment plan shall include the following information:

(i)             The aggregate investment amount, sources of funding and financing structure; and

(ii)            general information of key investment projects (including their backgrounds, business activities, shareholding structures, locations, investment amounts, financing proposals, time periods, risk analyses, rates of return, etc.).

• Filing of “key investment projects” in core business areas

A “key investment project” belonging to the core business of the Central SOE, regardless of whether it has been included in the annual outbound investment plan of that Central SOE, is required to be filed with SASAC.  SASAC may raise an objection against a key investment project by issuing a written opinion to the Central SOE.  For key investment projects not included in the annual outbound investment plan, the filing has to be made upon the completion of the internal decision making process of the Central SOE in respect of such projects.  Circular No. 28 defines a “key investment project” as a project invested in by a Central SOE or its direct or indirect subsidiary, which is subject to the decision of the highest investment decision making body of the Central SOE in accordance with the internal outbound investment management system of that Central SOE.

• Approval of investment projects in non-core business areas

Circular No. 28 makes it clear that, in principle, Central SOEs are not allowed to engage in outbound investment projects falling outside their corresponding core business areas.  In the event that such an investment is needed under special circumstances, Central SOEs should submit an application to SASAC for its approval.  SASAC will review the proposed investment from the perspective of the necessity of the investment, its influence on the development strategy and core business of the Central SOE, and the investment capacity and risk management of the Central SOE.

Comments

Circular No. 28 constitutes an indispensable part of the supervisory and control system over Central SOEs’ outbound investments set out by Circular No. 26 and Circular No. 27.  With more details regarding the rules set out under Circular No. 26 and Circular No. 27 being ascertained and revealed, it is expected that the whole outbound investment approval process for Central SOEs will become more transparent and predictable.