CHINESE UPDATE – Outbound Investment — Managing risks and exiting with grace

Executive Summary/Highlights:

China’s outward foreign direct investment (FDI) has increased substantially over the past decade.  At US$111.5 billion in total in 2015, outbound FDI exceeded inbound FDI for the second year running.  Aided by the creation of new / simplified regulatory channels, China’s outbound FDI is expected to grow more than 10% per year for the next five years .  China’s 13th Five Year Plan has also encouraged acquisitions and investments by Chinese investors in a wider range of sectors (e.g. fintech, high-end manufacturing and real estate).

A significant increase in infrastructure investment is also expected following the implementation of China’s “Silk Road Economic Belt” and “21st Century Maritime Silk Road” policy (known as One Belt, One Road or OBOR).  In just the first quarter of 2016, Chinese investors have already made US$3.59 billion of direct investment into OBOR countries (mainly Singapore, India and Indonesia), a 40.2% increase versus the same period in 2015 (according to MOFCOM).

Effecting planning and management of outbound FDI projects is key to allowing investors to managing risks effectively and maximising the protections available.  In particular investors should:

  • engage external advisors at an early stage to help evaluate and navigate the risks associated with outbound investments, which can be factored into the overall investment costs.
  • look to structure investments to maximise the comprehensive protections available under certain BITs in tax favourable jurisdictions; and
  • include an effective deadlock clause with appropriate exit rights in any joint venture agreements to provide for a smooth exit in the event that things go wrong, as well as including provisions dealing with whether technology and service arrangements should survive exit.

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