What Is China’s ODI Initiative?
Most investments out of China are made by the Chinese government under the Belt and Road Initiative. However, nearly USD 200 billion per year is also invested abroad by private enterprises through Outward Direct Investment.The project builds on the historic trade routes that once connected China to the West, namely: (i) the routes associated with Marco Polo, (ii) the routes travelled by Ibn Battuta to regions under Muslim governments, and (iii) the maritime expedition routes of Ming dynasty admiral Zheng He.
“Belt” is short for the Silk Road Economic Belt, referring to the proposed overland road and rail routes through landlocked Central Asia along the historic trade routes of the Western Regions.
“Road” is short for the “21st Century Maritime Silk Road,” referring to the Indo-Pacific sea routes through Southeast Asia to South Asia, the Middle East, and Africa.Some estimates describe the Belt and Road Initiative as one of the largest infrastructure and investment projects in history, covering more than 68 countries. Along the Maritime Silk Road, which already carries more than half of the world’s container traffic, deep-water ports are being expanded, logistical hubs are being developed, and new inland transport routes are being created.Examples of Belt and Road Initiative projects include infrastructure investments in ports, skyscrapers, railways, roads, bridges, airports, dams, coal-fired power stations, and railway tunnels.
ODI and Wealth Management Opportunities
Portfolio managers, trustees, funds, and banks should note that billions of dollars leave China each year and are available to be placed with the wealth management industry in Switzerland, Singapore, Luxembourg, and other jurisdictions.
Certain privacy structures are not reported back to China, for example: a Professionally Managed Investment Entity held by an SPV non-participating custodial institution; a nominee or agent arrangement held by a custodial institution; or an Active NFE.
Chinese applicants establish a privacy structure by completing the relevant template or form, signing it, and having their signatures attested by local witnesses. The ODI funds are then transferred into the privacy structure.
How to move ODI funds out of China
An ODI project is filed in the name of the structure (e.g. AB Construction) with the National Development Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM).
The project is then registered with a state-approved foreign exchange bank in accordance with the requirements of the State Administration of Foreign Exchange (SAFE).
Privacy is maintained as there is no registration of the privacy structure for tax purposes or with a beneficial owner register. The structure is excluded from local and cross-border reporting under the Common Reporting Standard (CRS).
The structure allows the client to retain complete control while providing privacy.
Asset protection is facilitated through this privacy framework.
The structure is established in a reputable onshore European jurisdiction, regarded as just and fair in the interpretation and enforcement of trusts.
China’s Outbound Investment Rules
With the encouragement of the Going Global Strategy and the Belt and Road Initiative, Chinese enterprises have increasingly implemented Outbound Direct Investment (ODI). In 2004, China introduced ODI regulations under an approval-based system. In 2014, the regime shifted to a filing-based system, under which most ordinary ODI projects require filing, while approval is needed only in special cases. In 2018, the framework was further refined, introducing additional sensitive sectors and a supervision system classifying projects as Encouraged, Restricted, or Prohibited.
When investing abroad, a Chinese company must comply with regulatory requirements under Chinese law. The investor must apply to the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) or complete a filing, depending on the project. Once the procedural steps are completed, the project must be registered with a State-approved foreign exchange bank in accordance with State Administration of Foreign Exchange (SAFE) requirements.
At the NDRC level, the procedure depends on the investment amount, whether the investment is direct or indirect, and whether the sector is classified as sensitive. Investments exceeding USD 300 million require submission of a project report. Non-sensitive direct investments generally require an application, while non-sensitive indirect investments do not. Projects involving sensitive sectors require approval regardless of size.
MOFCOM follows a similar approval and filing framework, depending on the type and sector of investment. Finally, the investment must be registered with a SAFE-authorized foreign exchange bank, submitting documents including the foreign exchange application form and the company’s business license bearing the unified social credit number.
China’s 2018 ODI Rule Changes
New measures relating to approval and registration procedures with the NDRC came into effect in March 2018. The reform broadened the scope of the NDRC rules to include investments made both directly and indirectly through offshore controlled companies owned by Chinese entities or natural persons.
Order No. 11 expanded the outbound investment regime to cover investments carried out indirectly by Chinese investors through their controlled overseas entities. Chinese investors must submit a project report to the NDRC prior to closing any outbound investment of USD 300 million or more conducted through their controlled offshore subsidiaries.
For this purpose, “control” is broadly defined as the direct or indirect ownership of 50% or more of the voting rights of another company, or the ability to direct its operations, financial, human resources, or technical affairs.
Approval no longer constitutes a condition precedent to the validity of the investment agreement. Instead, it is an enforceable regulatory requirement that may be incorporated into the transaction’s closing conditions.
New sensitive sectors likely to be restrictedFollowing a sharp increase in outbound investments and related capital outflows, certain sectors have been classified as undesirable and included in the catalogue of sensitive sectors. These include hotels, real estate, film, and sports. The gambling industry is prohibited.
ODI Projects the Government Supports
ODI projects that support Belt and Road construction and infrastructure connectivity among neighbouring countries and regions are encouraged. Projects that promote the export of superior production capacity, high-quality equipment, and technical standards are also supported.Investment cooperation with overseas high-tech and advanced manufacturing enterprises is to be strengthened, including the establishment of overseas research and development centres.
Participation in the exploration and development of overseas oil, gas, mineral, and other energy resources is encouraged, subject to prudent assessment of economic benefits.Agricultural cooperation with other countries should be expanded, promoting mutually beneficial investment in agriculture, forestry, herding, fisheries, and related sectors.
Overseas investment in commerce, culture, logistics, and other services should be promoted in an orderly manner. Eligible financial institutions are supported in establishing overseas branches and service networks.
China’s Prohibited ODI Investments
Chinese enterprises are prohibited from undertaking overseas investments that endanger or may jeopardize national interests or national security. Such prohibited ODI projects will not obtain approval or a record-filing notice from the Commerce Bureau or the Development and Reform Commission.
These include: Export of core military technologies and products without state approval. Use of technologies, processes, or products that are prohibited from export by China. Investments in the gambling or pornography industries. Projects prohibited under international treaties concluded or acceded to by China. Any investment that endangers or jeopardizes the interests or security of the state.
China’s Restricted ODI Investments
I. Exceptions (subject to approval by the competent overseas investment authority for the first three items):
- Investments in sensitive countries, including those with no diplomatic relations with China, those affected by war, or those restricted under bilateral or multilateral treaties concluded by China.
- Investments in real estate, hotels, film studios, entertainment, sports clubs, etc.
- Establishment of offshore equity investment funds without specific underlying industrial projects.
- Use of outdated production equipment that does not meet the technical standards of the destination country.
- Failure to comply with the environmental protection or energy consumption standards of the destination country.
- Property management and real estate agency businesses.
- Construction or acquisition of properties for self-use (e.g. offices, employee dormitories).
- Industrial infrastructure projects such as industrial, technology, or logistics parks.
- Construction enterprises acquiring minority stakes to secure construction contracts.
- Uncompleted projects already approved or duly filed.
- Projects not involving domestic assets, onshore financing, or guarantees.
- Hotel management businesses without property ownership.
- Restaurants without lodging services.
- Approved or duly filed uncompleted projects.
- Projects not involving domestic assets, onshore financing, or guarantees, with all capital raised overseas.
- Funds or platforms without domestic asset involvement, onshore financing, or guarantees, and fully funded overseas.
- Funds or platforms established by domestic financial institutions with prior regulatory approval.
Moving Funds Out of China - Privately
The 2018 measures leave certain issues unresolved. Without approval from the competent Chinese authorities, investors cannot enter into legally binding agreements unless the counterparty accepts that closing is conditional upon such approval. Even where only registration is required, the investor must first obtain a record-filing notice from the NDRC.
In-progress monitoring
During an outbound transaction, the NDRC may require the investor to submit written reports on “material events.” However, Order No. 11 does not define what constitutes a material event.
Post-investment reporting
Order No. 11 introduces a transaction completion reporting requirement. A report must be submitted within 20 business days following completion of a construction project or the closing of an equity or asset transaction.
Process overview
Apply for ODI and file with the NDRC and MOFCOM. Register and place the funds with a State-approved foreign exchange bank. Establish a company owned by an SPV custodial institution and transfer the funds to the company. The structure is not reported back to China under CRS or exchange-on-demand mechanisms if the company qualifies as a Professionally Managed Investment Entity owned by an SPV custodial institution managed from Svalbard.
