In an effort to drive the “Go-Global” strategy and President Xi Jinping’s “One Belt, One Road” initiative, the regulatory agencies made several revisions to the outbound investment regulatory regime. “One Belt, One Road” is an initiative to integrate 26 countries and markets, with a total population of more than 4 billion, for the purpose of trade and commerce. The Ministry of Commerce’s (MOFCOM) revisions came into effect in October 2014. According to the revisions, the outbound investments of Chinese companies must be filed with the relevant authority and approval is only required for investments involving sensitive countries, regions or sectors.
Towards a relaxed filing system
The National Development and Reform Commission of the People’s Republic of China (NDRC), whose approval was required for all outbound investment, announced a set of rules in April 2014. These rules were later amended in December 2014. Under the revised framework, approval requirements for all overseas investment projects were abolished, with the exception of a small number of projects which are subject to special regulations. Filing with central NDRC is required only for projects in which the Chinese investors’ investment exceeded US$300 billion, and projects in which investments are made by centrally administered State Owned Enterprises (SOE). Thus the major deregulation measures have cut miles of red tape. Earlier such investments required pre-notification to NDRC, approvals or filing with both NDRC and MOFCOM, as well as registration with State Administration of Foreign Exchange (SAFE).
Hong Kong – the main stopover for Chinese ODI
The transition from the approval-based system to a filing-based system is bound to inject a fresh jet of momentum into investment outflow from China. Observers estimate that in 2015, for the first time, China’s outbound investment will outpace its inbound investments. It is estimated that the revised regime will help the Outward Direct Investment (ODI) to grow at an annual rate of 10% and more private enterprises will participate. Earlier the ODI was dominated by SOEs, but in recent years private enterprises, in their quest to expand their markets, have increasingly started investing overseas and this trend will further strengthen in the coming years. The majority of the investments, in line with the prevailing convention, will be routed through Hong Kong.
Hong Kong has long reigned as the “gateway to China” for international investors eyeing the mainland markets. In recent times the mainland companies and investors looking for global expansions consider Hong Kong as the preferred channel for their outbound investments. China’s ODI has been rapidly growing since the turn of the century, however it registered a sharp growth post 2005. This was in contrast to the global ODI trend, which took a dive when the financial crisis started in 2008. China’s reformatory policies received a boost when the Chinese government unveiled the “Go-Global” policy in 2000. China became increasingly integrated in the global economy. The outbound investments saw a steep uptick in 2008 when it grew by 110% over the preceding year to nearly US$56 billion. The phenomenal uptrend was caused by two key factors – the financial crisis had lowered the valuation of overseas targets and there was increased liquidity in China aided by the dramatic economic expansion in the preceding years. In more recent years the ODI has remained above US$100 billion. Correspondingly, the number of Hong Kong subsidiaries with mainland Chinese enterprises as parent companies also registered a steady increase.
More Chinese companies will set-up Hong Kong subsidiaries
In 2014, Chinese investors invested in 6,128 overseas companies across 156 countries and regions. China’s outward FDI outflow was ranked third in the world for the third consecutive year – a total of USD116 billion, up 15.5% on a year-on-year basis. The majority of this investment, nearly 58%, flows into Hong Kong. From Hong Kong the investments are directed into other Asian and western economies. According to the Census and Statistics Department of Hong Kong, the number of mainland Chinese companies setting up operation in Hong Kong increased by 12% during the period 2012-14 and reached 957 by end-2014, only behind those from the US and Japan.
Commenting on the evolving scenario and role professional services can play, Jacqueline Low of Hawksford Hong Kong says, “Hong Kong is increasingly gaining traction as a key stopover along the Silk Road for all Chinese outbound investments. Besides its geographic and cultural proximity to the Chinese enterprises, what makes Hong Kong more attractive is the free and competitive market that prevails in the Special Administrative region. It has one of the lowest corporate tax rates, and the corruption free governance and absence of exchange control are further adding to its attraction. Being located in Hong Kong renders these Chinese companies international recognition, enhances their brand value and demonstrates their commitment to expand beyond traditional markets. More importantly, when businesses expand across borders the common law system that is in effect in Hong Kong proves to be advantageous as international partners choose that as a means of dispute resolutions. Professional service providers like Hawksford are able to provide comprehensive services right from incorporation of the companies
. We are familiar with the international business practices and have a good network of professionals, which is an indispensable resource when operating in cross-border scenarios. Hong Kong’s role as the springboard for Chinese outbound investment will further escalate with the recent reforms in ODI regulatory framework. Despite the political unrest that prevailed in 2014, the strong business formation numbers reflect that the business confidence in Hong Kong remained strong. It is a strong endorsement for Hong Kong as a gateway for mainland China investments. We anticipate more Chinese enterprises will set-up Hong Kong entities in the coming years.”