Sunday, February 15, 2009

Ruminations 15: Exposure Draft Chinese Overseas Investments Rules

(Pix (c) Larry Catá Backer)

This is another in what I hope to be a month long series of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope is that, built up on each other, the series will provide a matrix of thoughts that together might lead the reader in new directions. Though each can be read independently of the others, they are intended to be read together and against each other.

Every great power is eventually confronted with the issues of the bureaucratization of its interventions into the affairs of other states. This cannot be helped. The Chinese state clearly intends to encourage investment overseas but also means to control that character and scope of that investment--giving itself broad powers to intervene in the development of those investment relationships when it determines that intervention in the best interests of the state. While this approach is not possible under Western constructions of the division of public and private power under Western constitutions, it accords with the fundamental conception of the role of the state under the present Chinese constitution.This is particuñarly apparanet in the exposure draft of rules treating its administration of overseas investment recently circulated by the Chinese state and the object my observations here.

This regularization of intervention in the economic and other affairs of states becomes more complex when combined with the emerging systems of global movements of capital. In that context a state must balance its public policy goals, and the protection of its political interests, against the commercial imperatives of financial investment in a sector in which states and private interests compete more or less equally within the territories of host states. This is particularly important in a global context in which overseas investments, whether by public or private entities has come to be regulated by an increasingly complex web of hard and soft law. But such regulation can generate complexities of its own that affect both the internal and external legal regimes of a state.

The Chinese state apparatus has been wrestling with these issues recently. Its outbound investment is relatively small. "The stock of China’s outward FDI is even more geographically concentrated. According to the annual statistics from the Ministry of Commerce, as of the end of 2005, Asia, Latin America and Africa account for 71%, 20% and 3% of the FDI stock, respectively, and the shares for North American and Europe are each below 3%." (Morck, Yeung & Zhao 2007, 6). However it is growing quickly, and especially into developing states. Unregulated investment has produced a number of embarrassments for the Chinese state in recent years. (Backer, October 30, 2008; Backer December 15, 2006; Backer, November 22, 2006; Backer, November 19, 2006). Still, as of the end of 2007, "nearly 7,000 domestic investment entities had established more than 10,000 overseas enterprises, spreading in 173 countries (regions) globally." (Ministry of Commerce, 2007 Statistical Bulletin of China's Outward Foreign Direct Investment, 57)

As China more aggressively projects its power in foreign states, the political dimensions of economic interventions become more pronounced. (Wei He and Marjorie A. Lyles 2008). The Chinese state, as the ultimate stakeholder in Chinese economic activity might determine that its welfare maximization (as stakeholder) requires regulation that might produce investment decisions different from those that might have produced welfare maximization for other, private, actors. Or, put a different way, that the political principles on which the Chinese state is founded includes that understanding that the foreign economic activities of either private or publicly owned enterprises necessarily have a political dimension that makes outbound private investment different in quality from other sorts of investment. (Backer 2008a, 1833-1863).

As such, "the structural transition in China mandates that any sensible economic analysis of firm strategies will have to take institutional, political and social aspects into consideration. Given the visible hands of the Chinese State and the Party in the economy, any micro-level analysis will not be complete without a macro level background. " (Morck, Yeung & Zhao 2007, 26). Early on as Chinese outward investments grew, the Chinese state implemented a system of surveillance of such activity through Statistical System of Direct Overseas Investment in effect as of January 2003 (Ministry of Commerce Circular Shang He Han [2006] No. 66). Paragraphs 1 and 2 provide:
1. Each entity shall seriously and actively implement the Statistical System of Direct Overseas Investment, attach great importance to the statistical work of the outward foreign direct investment, intensify the publicity of the statistical system, continuously improve the quality of the statistical data and strengthen the timeliness and accuracy of data report.
2.The commerce departments at the provincial level shall communicate with the local foreign exchange departments in an initiative and active manner and establish the information exchange and contact mechanism therewith so as to guarantee that the outward foreign direct investment be more comprehensive and complete.
And so, anticipating a growing projection of economic power abroad, and especially into the developing world, the Chinese government has produced an exposure draft of rules treating its administration of overseas investment. The exposure draft is provided in part below (translated from the Chinese by my research assistant Siyu Zai) to illustrate the point:

Procedures for the Administration of Overseas Investment
(Exposure Draft)
Ministry of Commerce, The People’s Republic of China
Chapter 1 Profile
Provision 2
The term “overseas investment” referred to in this Procedure means the establishment, acquisition of ownership, holding power or business management power by enterprises registered in China, through the ways of establishment, merger and acquisition and other means.
Provision 4
The Ministry of Commerce is responsible for the administration and supervision of the overseas investment. Concerning departments on the provincial level are responsible for the administration and supervision of the overseas investment within their administrative regions.

Chapter 2 Approval
Provision 5
The Ministry of Commerce and concerning provincial departments exercise the authority of approval over enterprises’ overseas investments. The Ministry of Commerce sets up “Overseas Investment Administrative System” to apply electronic application. Enterprises which are approved will be granted Chinese Enterprises Overseas Investment Certificate. …
Provision 6
Enterprises which invest under circumstances listed below ought to submit application according to the Provision 11 under this Procedure, and to apply for approval to the Ministry of Commerce according to the Provision 12 under this Procedure:
i. Investment in a country that does not have diplomatic ties with China;
ii. Investment in a country or region where the level of risk is high;
iii. Investment in which the Chinese parties’ amount of investment is over a hundred million U.S. Dollars;
iv. Investment in the field of cross-border infrastructure construction;
v. Establishment of overseas companies with special objectives

Provision 8
… Enterprises are responsible for their own economic technical feasibility. The Ministry of Commerce and the concerning provincial departments will not approve the investment if it fits into one of the following circumstances:
i. Jeopardize China and the host country’s sovereignty, security and public interest;
ii. Violate either domestic or overseas law and regulation;
iii. May cause China to violate international treaties that China has signed;
iv. Involve the technology and goods that are prohibited from import or export.
Provision 9

In respect to the approval of energy and mineral investment provided in Provision 7, the concerning provincial departments should seek opinions from entities of overseas trade; In respect to other investments, the concerning provincial department may seek opinions from entities of overseas trade.

Chapter 4 Overseas Investment Activity
Provision 25
Before obtaining approval from the Ministry of Commerce or concerning provincial department, enterprises must not sign any legally binding documents with parties abroad.

Chapter 5 Administration and Service
Provision 26
The Ministry of Commerce is responsible to execute inspection and instruction upon concerning provincial department and the administration of the overseas investment conducted by central enterprises’ headquarters.
Provision 27
The Ministry of Commerce, together with relevant departments, establishes and improve the guidance for overseas investments, promoting and service system, and reinforces public service.
The Ministry of Commerce publishes the Overseas Investment Countries (Regions) Manual to help enterprises be familiar with the investment environment of host countries.
The Ministry of Commerce, together with relevant departments, publishes the Overseas Investment Country and Industry Guide Index to guide enterprises to appropriately tailor their investment to host countries.
The Ministry of Commerce assists enterprises to overcome difficulties and solve problems through the intergovernmental bilateral and multi-lateral trade or the investment cooperation system.
Provision 28
Overseas business organizations provide service for enterprises’ overseas investment, and (these organizations also) assists the Ministry of Commerce and concerning provincial departments with the administration of overseas investment.
Provision 29
The state encourage relevant industry chambers and associations located within China to bring their professional advantages in rendering service for enterprises’ overseas investment, (while also) play a coordinative and self-disciplinary role. Enterprises ought to support the work of industry chambers or associations.
Provision 30
After obtaining the approval of overseas investment, enterprises process relevant procedures in foreign exchange, banks, Customs, or foreign affairs while holding this certificate. These enterprises also enjoy relevant national policy support.
Provision 31
Where enterprises have not completed legal procedure or the domestic procedure listed in the Provision 30 of this Procedure within two years since the day the certificate was issued, the original approval document and the certificate will be lapsed / void automatically. If the enterprises need to further execute overseas investment, they must turn to the original department where the certificate was issued.
Provision 32
The Certificate must not be counterfeited, altered, traded, leased, borrowed or transferred in any other forms. The modified, void, or revoked Certificate ought to be returned to the department issuing the Certificate.

Chapter 6 Sanction
Provision 33
As to enterprises who provide false application materials or who misrepresent themselves in filling the application forms, the Ministry of Commerce and concerning provincial departments (will) dismiss (their application) and (will) not grant acceptance to any overseas investment application from these enterprises within one year; Where enterprises obtain approval of their overseas investment by providing false materials or other illicit means, the Ministry of Commerce and concerning provincial departments may revoke relevant documents.
Provision 34
Enterprises violating this Procedure may not enjoy relevant national policy support.
Provision 35
Concerning provincial departments, which fail to execute approval and to execute supervisory and administrative functions according to this Procedure, may be criticized, reprimanded publicly or suspended approval authority by the Ministry of Commerce.
Provision 36
Relevant personnel at the Ministry of Commerce, who fail to perform duty or who abuse their power, will receive administrative sanction.

The draft reveals both an encouragement and control of overseas investment that is worth careful study. The Chinese state clearly intends to encourage investment overseas but also means to control that character and scope of that investment--giving itself broad powers to intervene in the development of those investment relationships when it determines that intervention in the best interests of the state. While this approach is not possible under Western constructions of the division of public and private power under Western constitutions, it accords with the fundamental conception of the role of the state under the present Chinese constitution. Two provisions are particularly relevant:

Article 11. The non-public sectors of the economy such as the individual and private sectors of the economy, operating within the limits prescribed by law, constitute an important component of the socialist market economy.The State protects the lawful rights and interests of the non-public sectors of the economy such as the individual and private sectors of the economy. The State encourages, supports and guides the development of the non-public sectors of the economy and, in accordance with law, exercises supervision and control over the non-public sectors of the economy.
Article 17. Collective economic organizations have decision-making power in conducting independent economic activities, on condition that they accept the guidance of the state plan and abide by the relevant laws. Collective economic organizations practise democratic management in accordance with the law, with the entire body of their workers electing or removing their managerial personnel and deciding on major issues concerning operation and management.
The provisions are meant to provide state oversight to the overseas investment of Chinese enterprises in businesses abroad, including the acquisition of equity interests in foreign enterprises. From a number of perspectives this makes sense for the Chinese state: (1) the need to ensure that overseas ventures do not become a means by which Chinese citizens siphon wealth out of the country, (2) the effort to control the allocation of resources among the various parts of a multinational enterprise based in China to ensure that Chinese resources are not transferred out of the country, (3) the need to ensure that Chinese private economic policy is coordinated with Chinese state policy (this is particularly relevant with respect to economic transactions between Chinese enterprises and states with which China has no relations), and (4) make it easier for China to monitor compliance with international obligations by its private enterprises.

However there are a number of areas where the proposed rules might require further review. First, Provision 2 might be over broad. It appears to apply to all registered companies in China. But to the extent that this may reach foreign enterprises which registered interests in China the provision would seem to interfere with the sovereign rights of other states to manage their own enterprises. It is clear that China ought to have the power to manage the operation of (and register) foreign companies with respect to their business in China and with their utilization of Chinese assets and property. But it is quite another thing to seek to control these enterprises' activities outside of China. At a minimum that might appear to violate Chinese principles of non-interference.

Second, Provision 4 might produce ambiguity. At a minimum it might generate conflict between the Ministry of Commerce and Provencal administration. Unless there is a certain discipline in the division of authority, it is possible that contests for control could result and the rule of law weakened. That, of course, would tend to produce a result contrary to the Chinese Constitution ("All state organs, the armed forces, all political parties and public organizations and all enterprises and undertakings must abide by the Constitution and the law. " Constitution, art. 5) and should be avoided to minimize the possibility of arbitrary (and thus lawless) action by officials who may not understand the limits of the law with respect to their power. It might be useful to revise the Provision 4 so that all applications must be made to the Ministry of Commerce, using the system described in Provision 5, but giving the Ministry the power to delegate decisions to provisional officials in its discretion. Alternatively, a division of authority between the Ministry Commerce and provincial offices might be made on a sector basis (for example requiring all outbound investment targeting natural resources to be made at the Ministry and outbound investment for the purpose of establishing a garment factory might be directed to the provinces). Another alternative might be to divide approval authority on the basis of the amount of outbound investment contemplated. Thus, for example, all proposed outbound investment greater than 8,000,000 RMB might be required to be made at the Ministry while smaller investment requires could be processed in the provincial offices. Whatever division is made, all officials should be made aware and the rules distributed among the industrial and commercial sectors.

Provision 6 lists a number of common sense triggers to registration. All of them tend to touch on sensitive matters of Chinese foreign policy. It might be prudent, though, to create exceptions for activities conducted under approved bilateral investment treaties. This is implied in the text of Provision 27, but it may be useful to make the connection more direct. In a sense, though treaties would qualify as a blanket approval for investment to the extent provided in each treaty. Also, because it is not clear what a high level of risk is (a condition that triggers application obligations), it might be useful for the Ministry of Commerce to be obligated to publish a list a countries presumed to entail such risk so that enterprises would be better able to gauge the need to apply and to make it easier to comply with the law.

Provision 8 sensibly limits the obligations of the state with respect to the economic viability of any investment project. The only role of the state is to determine whether the outbound investment interferes with Chinese foreign policy goals. It is not clear, though, whether the reasons for disapproval listed in Provision 8 are the only legitimate bases for rejection of an application or if the Ministry may base its negative decision on other grounds. If the later is the case, that ought to be made clear. Business operates more efficiently if it understands the rules under which it must operate. Secondly, it is not clear that the Ministry is required to report its reasons in writing and to explain its decision. For rule of law purposes and to ensure that business might more efficiently comply with the policy of the state, it might be prudent to require the Ministry to both state the specific reasons for its reject and to make those available for study.

Provision 9 speaks to an aspect of natural resource exploitation. While the provision usefully requires consultation with overseas trade entities by the provincial departments, it might be wise to require all such approvals to obtain a review from officials in the Ministry of Commerce. The international community has become active in the regulation of natural resource exploitation. There is particular sensitivity to such activities in conflict zones. In that respect, the United Nations and other Organs have sometimes declared embargoes or other measures., for example in the Democratic Republic of the Congo (See, e.g., U.N. Resolution 1807, 31 March 2008). Western governments adhering to the Organization for Economic Cooperation and Development Guidelines for Multinational Corporations (2000) have put in place voluntary requirements that mandate direct compliance by their companies with those acts and require those companies to also require their business partners to adhere. (Backer 2009). It is unlikely that provincial administrators would have the necessary information to avoid compliance issues relating to these measures.

Provision 25 is a key measure. It might be useful to include a provision giving the Ministry the authority to void any such agreement make in violation of the provision and also requiring that the company bear the costs of any liability that results from such breach. This would be in addition to the sanctions described in Provision 33 and 34.

Provision 26 is quite useful. But it may aid both the advancement of rule of law principles and the ability of the Ministry of Commerce to effectively oversee the provincial ministries if the instructions to the provincial departments were in writing and publicly available. Likewise, it might make governing the provincial establishments more effective if the Ministry published a list of measures necessary to comply with the requirements of inspection. For this purpose, it would be useful to ensure that the Ministry and the appropriate level Chinese Communist Party personnel coordinate on the principles and inspections.

Provision 27 sets out an important activity of the Ministry of Commerce. To increase the volume of acceptable investment abroad in ways that might better project state and private economic power abroad, it might be useful for the Ministry to begin to publish periodic simple manuals to help guide business in the proper form and direction of activities abroad. In this work, coordination with the measures and practices of the industry chambers and associations described in Provision 29 would also be useful. This is a function in which the Ministry and the organs of the CCP might usefully work together to reach a unified and harmonious program of instruction.

Provision 30 provides a useful statement of the value of the process of enterprise state coordination. It might be useful, though to ensure that once the certificate is obtained, no further regulatory obligations originating in provincial administration is possible. In this regard the effect of national policy support might be usefully more detailed with the object of increasing the value of economic activity abroad to the state. The importance of the Certificate (see Provision 32) makes this an important consideration. In that connection it might also be useful to specify the legal effect of the certificate so that foreign entities with which the Chinese entity deals may rely on the validity of the certificate in engaging in economic activity or transaction with Chinese companies.

Provision 33 sets forth a reasonable penalty. It is not clear, however, whether the penalty applies only to the enterprise that violated the rules, or whether it applies to all related companies (subsidiaries, parent companies, and other companies owned by the same shareholders). It seems that the sanction ought to apply only to the company at fault. Otherwise the concept of corporate personalty and specific limited liability as specified in the Company law (2005) would be weakened.

Provision 34. It might be useful to specify a time limit during which enterprises cease to enjoy relevant national policy support. It seems that in keeping with Provision 31, the period ought to be two years.

Provision 35 provides a fair sanction for provincial authorities. But enterprises ought to be able to determine when a provincial authority has been suspended from its authority or otherwise reprimanded or disciplined. It would be useful for the Ministry of Commerce to publish a summary list of such provincial offices and the length and type of discipline, so that enterprises seeking approval for overseas investment may apply to the proper authorities. Coordination with the appropriate Party officials would also be useful and made more effective if specified in the form of a rule.

The outbound investment control rules provide a reasonable framework for the coordination of economic policy within China. It represents potentially a salutary division of authority between the Ministry of Commerce and provincial bodies. It suggests that at this stage in its development, the state and commercial interests ought to work cooperatively to ensure that they do not work against each other by accident. It also provides a means of helping the state ensure that it is meeting its treaty obligations. Most importantly, perhaps, it provides a method through which officials could ensure that outbound investment is made by people and entities who are well schooled in the rules of behavior and cultures of the places to which investment is directed.

For other states organized along the same principles as China, particularly Viet-Nam, Cuba, and perhaps Nicaragua, Bolivia and Venezuela, this approach to international engagement abroad is worth study as an alternative to the usual rhetoric based and anachronistically Stalinist vision of world trade (sadly still the preferred vision in some of those states) and the relationship of public and private power projected from within such states. The suggestion that fiscal and policy discipline is as important for outbound as it is for inbound investment is a useful step in the management of economic activity across borders in the spirit of global values of free investment that benefits both the home and host state.


Larry Catá Backer, Casenote: Rights and Accountability in Development (RAID) v. DAS Air (21 July 2008) and Global Witness v. Afrimex (28 August 2008); Small Steps Toward an Autonomous Transnational Legal System for the Regulation of Multinational Corporations (2009), an earlier version of which can be found at Larry Catá Backer, The OECD Guidelines for Multinational Corporations: Using Soft Law to Operationalize a Transnational System of Corporate Governance, Law at the End of the Day, March 5, 2009.

----------, China and Its African Problem: Anarchy, Natural Resources and the Congo, Law at the End of the Day, October 30, 2008.

----------, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law, Tulane Law Review, Vol. 82(1): 1801-1868 (2008).

----------, China and Neo-Colonialism in Africa: A Warning from South Africa, Law at the End of the Day, December 15, 2006.

----------, The Problems of Being a Great Power: China and Neo-Colonialism in Africa, Law at the End of the Day, Nov. 22, 200.

----------, Multinational Corporations and China: On Multinational Corporations as an Instrument of Globalization and the Projection of State Power, Law at the End of the Day, Nov. 19, 2006.

Randall Morck, Bernard Yeung, and Minyuan Zhao, Perspectives on China's Outward Foreign Direct Investment (Aug. 2007) .

Organization for Economic Cooperation and Development (OECD), Guidelines for Multinational Corporations (2000).

Peoples Republic of China, Ministry of Commerce, 2007 Statistical Bulletin of China's Outward Foreign Direct Investment (September 28, 2008).

----------, Urgent Circular of the Ministry of Commerce on Strengthening the Statistical Work of China's Outward Foreign Direct Investment, Shang He Han [2006] No. 66 .

----------, Procedures for the Administration of Overseas Investment (Exposure Draft)
Ministry of Commerce, The People’s Republic of China (境外投资管理办法, (征求意见稿)2008.

United Nations, Security Council Resolution 1807 (31 March 2008).

Wei He and Marjorie A. Lyles, China’s Outward Foreign Direct Investment, Business Horizons, 2008, vol. 51, issue 6, pages 485-491.

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