Chinese Companies on the Investment Trail in Europe - Now a Reality Supported by the PRC Regulators! By Nikolaj Juhl Hansen, Partner, Eversheds Law Firm and China Business Group

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China Has “Matured” and Is Ready to Play Its Part
China made more than USD 52.1 billion worth of FDIs in 2008, a figure some 96.7 percent greater than in 2007. As illustrated by the articles in Børsen on Tuesday, 20 May, and Wednesday, 27 May 2009, Chinese companies that are looking towards Denmark (and Europe) for investments. During a recent trip to Hong Kong and Shanghai I was able to confirm through talks with some of the major investment banks and Chinese companies in the region that there is a huge interest among Chinese domestic companies, private as well as state-owned, towards investing in Europe - including the Nordic region.

Chinese companies have previously tried to invest in Denmark a couple of years ago, but at the time they often struck out early in structured sales processes. To a certain extent this was also caused by the lack of transparency in the domestic PRC approval scheme. As prices in the investment market in Europe have deteriorated in recent times, Chinese buyers (with their often strong cash position) will now stand more of a chance to be considered, and the new FDI approval scheme only further contributes to their chances of success.

New FDI Regulations
Effective May 1, 2009, China’s Ministry of Commerce (MOFCOM) has passed new regulations concerning FDI by domestic PRC companies. The new rules make for a more transparent and comprehensible Chinese FDI system. The new scheme is sure to enhance the competitiveness of Chinese companies in their search for good investments.

The new rules cover the following types of transactions:
a) making offshore investment through setting up of new non-financial companies.
b) acquiring a non-financial company offshore to the PRC or
c) gaining rights to own, control or manage a non-financial company offshore to the PRC.

In a nutshell, the practical essence of the new rules is to de-centralize the approval process, so that now all FDIs below USD 100 million do not need to be reviewed by MOFCOM at the central level. Provincial approval, however, will apply in some 85 percent of all FDI projects. MOFCOM has nevertheless retained the right to review certain “sensitive” projects, including investments made (i) by state-owned companies, (ii) in multiple jurisdictions and/or (iii) in jurisdictions without diplomatic relations with China.

FDIs will still require the preparation of a feasibility study; however, the authorities will only consider major issues such as the (i) bilateral relationship, (ii) national economic security, (iii) international obligations and (iv) fair competition. This is a major down-scaling of the regulators’ ability to control overseas investments.

In terms of the investment process, subsequent changes (e.g., further investment or termination of investments) are subject to a new approval.

As China takes an ever-increasingly prominent place on the world economic stage, the new FDI rules also urge Chinese overseas investors to enhance their compliance with CSR and the host country’s laws. 

Small-Scale Projects
For small-scale projects under USD 10 million the main principle is that only an application form is required to be submitted to the provincial MOFCOM, and a certificate will be granted within three days (and without the more detailed approval process required for projects of USD 10 million and above). This could be an interesting feature in relation to investments in Danish SMEs.

Other New (SAFE and NDRC) Rules Are Also Forthcoming
On 18 May, 2009, the State Administration of Foreign Exchange (SAFE) released new provisions concerning FOREX to be used FDIs by Chinese players. The Provisions were released to promote and facilitate the direct investment activities of domestic institutions.

The provisions expand the scope of resources of FOREX used in FDI projects, and clarify that domestic PRC institutions may carry out foreign investments with capitals originating from various sources including (i) convertible foreign exchange, (ii)  domestic foreign exchange loans, (iii) foreign exchange purchased with RMB, (iv) tangible goods or (v) overseas profits which are earned from foreign investments. In addition, PRC institutions may directly provide commercial loans or financing guarantee to the foreign enterprises which they have invested in.

Further, despite the continuing role that MOFCOM plays at various levels (state, provincial and municipal), the National Reform and Development Committee (NDRC) remains the key FDI approval player, with all natural resources-type outbound investments above USD 30 million or other projects above USD 10 million needing a central NDRC approval. In other cases approval may be sought at the provincial level. There is an obvious overlap and a potential for confusion here, but it has been reported that the NDRC will issue amended regulations soon.

Conclusion
With Chinese companies reportedly showing an interest in companies like Saab and Volvo, and with Denmark’s high-tech industry (including e.g., the renewable energy/sustainability and life-science sectors) being just what Chinese domestic companies would like to invest in, it seems certain that we will soon see Chinese FDIs both  in Denmark and in the wider Nordic/Baltic region. And the new FDI regime will make it easier for Danish sellers to comprehend what the Chinese buyers need to deal with in terms of getting deals approved in China.

www.eversheds.dk

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