New Regulation to Enforce the “Going Out” Strategy Go back »

2013-05-02 | Nanjing

Some years ago, in spite of the governmental control, one overseas wholly-owned subsidiary of a central enterprise, China National Aviation Fuel (Singapore) Corporation, engaged in the trade of oil-future derivatives (later defined as non-principle project) without obtaining official authorization from relevant authorities, which resulted in enormous losses to the stated-owned assets and property rights (not less than USD 55,000,000). This financial scandal triggered the alert to the central government and urged Chinese leaders to become more concentrating on the overseas investment.

After the issuance and implementation of Interim Measures for the Administration of Overseas State-owned Property Rights of Central Enterprises (hereinafter referred to as “Measures for Overseas Property Rights”) and Interim Measures for the Supervision and Administration of Overseas State-owned Assets of Central Enterprises (hereinafter referred to as “Measures for Overseas Assets”), both effective from July 1^st 2011, the latest pertinent promulgated regulations, Interim Measures for the Supervision and Administration of Overseas Investment of Central Enterprises (hereinafter referred to as “Measures for Overseas Investment”) effective from May 1^st 2012, is another effort by the central government of PRC to strengthen the legal economic management to reduce the risk of stated-owned assets loss overseas.

These not-long “Measures for Overseas Investment” contained in all 18 articles mainly stipulate the ways for improving the control of stated-owned assets by the State-owned Assets Supervision and Administration Commission of the State Council (hereinafter referred to as the “SASAC”).

Pre-investment research and study

In an unveiled report issued together with the above mentioned “Measures for Overseas Investment”, the officials admitted that some of the central enterprises and their affiliates fail to fully perform deep and sufficient research before actual investment.

The “Measures for Overseas Investment” attempts to change this current situation.

Articles 4 and 5 set up the statutory requisites of overseas investment plans and the principles of laying-out. Article 6 clearly puts such plans within the management rules in order to fulfill it in the routine of business operation. Article 7 further requires an overseas investment plan to specify the details on a year basis.

At the end of “Measures for Overseas Investment”, art. 13 restates that a central enterprise shall strictly and effectively conduct a project feasibility study and due diligence.

Prohibition of non-principal business investment with few exceptions

As widely considered, article 10 is the most profound part of the “Measures for Overseas Investment”. It says that “in general rule, a central enterprise shall not make any non-principal business investment outside China. Where an investment is necessary for any particular reason, the central enterprise shall obtain the approval of the SASAC.”

This stipulation comes from the concern that the overseas investments made by most of the central enterprises have not been maturing and there still exists large room to improve the investment risk control as well as taking advantage of the global financial market.

For example, one professional in China Building Material Group Co., Ltd. cited that the central enterprise might probably undertake higher risk in capital contributing to a non-principal business project than in a principal one. And once these concerned risks are out of control, they will lead to the loss of stated-owned assets.

Whether these measures, legislated in principle other than in detail, could be effectively and strictly executed is still under doubt, when considering that the market changes in the twinkle of an eye and when questioning the executive ability of some relevant departments, there is no denying that the “Measures” would promote to a certain extent the globalization of the capital of central enterprises.

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©2013 Picozzi & Morigi Law Firm

Source: ©2013 Picozzi & Morigi Law Firm