Doing business with China – will the money from China ever arrive? (Monard Law)
Publication date: 06/11/2020
How long will it take for the money from China to arrive on your accounts in Belgium? This is a question you should ask yourself when a potential Chinese investor offers you to invest in your company, or wishes to take over your business.
In general, any overseas direct investment (ODI) by a Chinese company outside of mainland China is subject to prior approvals from/or registration with three different government authorities: the MOFCOM (Ministry of Commerce), the NDRC (National Development and Reform Commission) and the SAFE (State Administration of Foreign Exchange). Only when the Chinese investor receives an ODI Certificate and a Registration Notice its investment can be remitted out of China.
ODI is defined as an investment by a Chinese domestic company, directly or through an overseas company it controls, to obtain the ownership, control, management or other benefits of a foreign company (regardless whether by ways of financing, providing guarantee, buying assets or acquiring shares etc.).
1. Wide scope of ODI approval/registration
The scope is quite extensive. It covers typical Chinese investment projects in Europe, such as acquisition of the majority shares of an European company, setting up a joint venture company with the Chinese partner retaining majority shares, or newly incorporate a subsidiary in Europe.
2. Approval or registration?
Whether the Chinese company needs to obtain approvals or only registrations are required, depends on the classification of the investment project. If the project is in sensitive countries or within sensitive sectors, approvals are required.
A list of sensitive sectors (and countries) has been published by NDRC. The following sectors are noteworthy: real estate, hotel, cinema, entertainment and sport clubs.
This means if a Chinese investor is considering to buy real estate or a football club in Belgium, it needs to obtain prior approvals before any payment.
This restriction on investments into sensitive sectors came from the “heated buy- buy – buy” actions by Chinese investors of hotel chains, real estates and football clubs in Europe between 2015-2017. Most projects were financed by Chinese banks backed up by mortgages on the assets in China. Due to increased pressure on the Chinese banks to recollect loans, the Chinese government has since 2017 published a series of measures to re-direct Chinese overseas investments. For investments into the afore-mentioned sensitive sectors, it is quasi-impossible to obtain approvals in practice.
3. How long does it take?
The required approval/registration time usually depends on whether the project has to be submitted to the national or local level of the MOFCOM, the NDRC and the SAFE. If they are at the local level, the time also varies on different regions (indeed China is a very large country and different region means a different story!).
In addition, if the Chinese company is a state-owned company (which accounts for the biggest Chinese investors in Europe), this will trigger an additional approval from SASAC (State-Owned Assets Supervision and Admission Commission).
The exact time required for each project will therefore be assessed based on: the estimated investment amount, the investment sector, the level of authority and the region in which the authorities are located.
4. Some suggestions for European companies
We see that, in practice, European companies are not fully aware of the impact of such ODI approval on the timing of their project, and on the certainty of receiving money on the accounts.
In typical acquisition projects, we would recommend our client to negotiate a bank guarantee from the Chinese company, insert a condition precedent in the final documentation, and provide for a reverse breakup fee to cover your costs in case the approval would eventually not go through.
In joint venture projects, we would recommend our client to be involved and closely follow up with their Chinese partner on the approval process. One could also envisage alternative structures to mitigate any impact on the timing, such as having first a vehicle set-up by the European partner, then have the capital increased by Chinese partner after the approval is obtained.
We can certainly help you with a pre-assessment of the impacts of such ODI approval on your project if required.