Beijing Bans “False” Foreign Investment by Private Enterprise

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China’s central government has launched a ban on “false” foreign investment by private companies, as part of efforts to control cross-border capital flows.

The new “Private Enterprise Foreign Investment Operating Conduct Standards” (民营企业境外投资经营行为规范), requires that private companies “actively apply for filing or approval” when making overseas investments, while also prohibiting “the use of false foreign investment to illegally obtain foreign exchange, transfer assets or engage in money laundering.”

The Standards were jointly formulated by six central government agencies, including the All-China Federation of Industry and Commerce, the Ministry of Commerce, the Ministry of Foreign Affairs, the National Development and Reform Commission and the People’s Bank of China.

The move followings the stepping up of capital controls a year ago, that triggered a precipitous drop in Chinese outbound direct investment throughout the course of 2017.

With respect to investment targets, the Standards require that private enterprise “strengthen supervision and management of overseas branch organisations with respect to fund allocations, financing, equity an other rights transfers; refinancing and guarantees, and prudently undertake high-leverage investment, and standardise overseas financial derivative product investment activities.”

Heightened regulation of foreign investment activities is slated to expand from private companies to state-owned enterprise.

Meng Wei, spokesperson for the NDRC, said that the Commission is currently working with relevant departments to research and draft the “State-owned Enterprise Foreign Investment Operating Conduct Standards” (国有企业境外投资经营行为规范) which will be released as early as possible.

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