September 01, 2011

Interim Measures for the Supervision and Administration of Overseas State-Owned Assets of Central State-Owned Enterprises and for the Administration of Overseas State-Owned Property Rights of Central State-Owned Enterprises

Individual Income Tax Law of the People's Republic of China (2011 Revision)
Issuing Body: Standing Committee of the National People's Congress
Issuing Date: June 10, 2011
Effective Date: September 1, 2011

Regulations on Implementation of the Individual Income Tax Law of the People's Republic of China (2011 Revision)
Issuing Body: State Council
Issuing Date: July 19, 2011
Effective Date: September 1, 2011

Numerous Chinese enterprises have invested some of their profits abroad since China joined the World Trade Organization in 2001, among them China's state-owned enterprises (SOEs), which have become a global economic force as a result of their capital strength and policy support from the Chinese government. Those SOEs, however, have suffered some large—and highly publicized—losses on risky investments, prompting the State-Owned Assets Supervision and Administration Commission (SASAC), the ministry-level agency that oversees non-financial SOEs, to issue regulations for the supervision of overseas investment by non-financial SOEs under SASAC's direct control (Central SOEs). SASAC released the Interim Measures for the Supervision and Administration of Overseas State-Owned Assets of Central State-Owned Enterprises (SOE Asset Administration Measures) and the Interim Measures for the Administration of Overseas State-Owned Property Rights of Central State-Owned Enterprises (SOE Property Rights Measures) on June 14, 2011. Both sets of overlapping rules took effect on July 1, 2011.


SASAC, which was established by the State Council, took over responsibility for overseeing Central SOEs from the Ministry of Finance in March 2003. SASAC plays a hugely important role, acting as the sole shareholder for approximately 120 Central SOEs, almost all of them conglomerates based in Beijing, with dozens or even hundreds of subsidiaries. (Local counterparts of SASAC oversee other, local SOEs.) As of the end of 2010, the total assets invested overseas by China's SOEs amounted to RMB1 trillion (around US$157.48 billion).

To encourage state-owned enterprises as well as other businesses to invest abroad, The Chinese government has implemented a variety of policy measures. Despite the overall success of China's so-called "going abroad" strategy, Central SOEs have suffered some major losses as a result of a perceived lack of experience with foreign investment, poor internal management, and a lack of risk-control systems. China Aviation Oil Singapore, for example, lost US$550 million on ill-placed bets on oil prices in 2004, while China Railway Construction lost US$63.89 million this year on light-rail projects in Saudi Arabia.

While SASAC is clearly strengthening its oversight of foreign investments through the SOE Asset Administration Measures and SOE Property Rights Measures—with more regulations likely to follow—SASAC officials have said these rules are not meant to impede investments abroad by China's capital-rich SOEs.

Clarification of Roles and Responsibilities

Both the SOE Asset Administration Measures and the SOE Property Rights Measures emphasize that Central SOEs are responsible for administration of their overseas subsidiaries and assets, and if losses are incurred as a result of insufficient oversight, the head of the SOE or responsible personnel shall be held accountable. In addition, the rules say Central SOEs should review and examine all material investments by their overseas subsidiaries and establish sound supervisory and risk-control systems. Where material losses are incurred by overseas subsidiaries, Central SOEs should investigate or assist SASAC in investigating the cause. The rules likewise require Central SOEs to coordinate with SASAC in dealing with incidents or emergencies that occur abroad.

The rules provide that SASAC's role is not to micromanage SOEs or individual investments but to formulate relevant regulations and oversee investigations, thereby guiding Central SOEs to build sound risk-control systems, investigate overseas losses that do occur, and hold responsible personnel accountable.

Administration of Overseas Investments

For overseas investments by Central SOEs or their major subsidiaries, a feasibility study and due diligence must be performed to evaluate the target's financial status and business capabilities. This requirement is expected to make Central SOEs more prudent in choosing outbound investments.

Central SOEs, like other Chinese companies that invest abroad, must obtain approval from or file with certain government authorities. Central SOEs and their major subsidiaries must fulfill an additional application procedure at SASAC for any major outbound investment, in accordance with Article 7 of the SOE Asset Administration Measures, though SASAC has not provided any applicable regulations establishing conditions that must be met to receive approval or for filing. Existing rules, which were issued by the Ministry of Finance and other agencies, date back to 1999, so SASAC is likely to formulate new regulations under its own name. Meanwhile, it seems as though SASAC may be vested with broad discretion in interpreting these conditions.

For outbound investments by Central SOEs with non-cash assets, a Chinese-qualified appraisal firm shall be engaged to issue an evaluation report, a practice commonly required for inbound and outbound investments. The report must be filed at or approved by SASAC.

Both the SOE Asset Administration Measures and the SOE Property Rights Measures also address the issue of individuals holding title on behalf of Central SOEs. Since Central SOEs or their subsidiaries are making the investment, they should hold title for overseas assets. But in some situations, according to certain foreign laws, title must be held in an individual's name, in which case Central SOEs must determine whether to approve this type of holding structure. If the SOE approves, it must go through formal procedures authorizing the individual to own the assets in trust or as a nominee.

As with the case of China Aviation Oil Singapore mentioned above, where the company lost US$550 million in 2004, many Central SOEs or their subsidiaries are investing in offshore financial derivatives, including futures, options, forwards, and swaps. Article 14 of the SOE Asset Administration Measures directs Central SOEs to enhance their internal management of such investments and requires them to engage in hedging, rather than risk large losses on speculative investments. Moreover, Central SOEs must apply in advance with SASAC for approval of such investments, which is at present very difficult to get.

Another key element of the new regulations focuses on special purpose vehicles (SPVs).

Both the SOE Asset Administration Measures and the SOE Property Rights Measures say Central SOEs must approve the formation of any new SPV, and a written report of this approval must be submitted to SASAC. If SASAC determines that the SPV is not necessary, such approvals will be revoked by the Central SOE.

Administration of Overseas State-Owned Assets

Overseas subsidiaries of Central SOEs must first obtain approval from the Central SOE for any of the following:

  • Changes in registered capital or other entity changes;
  • Plans for equity or debt financing;
  • Any external investment or provision of security;
  • The disposal of material assets;
  • Changes in bank account status; or
  • Annual budget and profit distribution plans.

The Central SOE, in turn, must file such changes with SASAC.

SASAC, rather than the Central SOE, must grant approval if a major subsidiary of a Central SOE transfers any state-owned assets or a stake in a company that will result in the weakening of the Central SOE's shareholding status (i.e., from wholly owned subsidiary to majority ownership, or from majority to minority ownership).

When an overseas enterprise that is wholly owned or controlled by a Central SOE or its subsidiary transfers or receives property, makes a non-cash investment, or undergoes an entity change, a qualified professional agency must be engaged to evaluate the target or targets. The agency's evaluation report must be filed with the Central SOE.

For the transfer of overseas state-owned assets, multiple potential buyers should be invited to purchase the asset, if possible with a bidding process. Payment should generally be made as a lump sum, though installment payments may be allowed if security is provided. Consideration for the transfer of assets should be based on the aforementioned evaluation report, except in the case of a Central SOE undergoing reorganization while the buyer is within the same group as the seller, in which case consideration may be in reference to audited net asset value.

To obtain better knowledge of the operations of its overseas subsidiaries, Central SOEs should require such subsidiaries to report to the Central SOE on a regular basis. When a serious adverse event occurs (such as the freezing of bank accounts, bankruptcy of a bank where the subsidiary holds accounts, material loss of assets, war, or serious sanctions by local regulators), the overseas enterprise must report it at once to the Central SOE. In the event of an extreme impact, the Central SOE must then report it to SASAC.

Since Central SOEs are the responsible parties for overseas subsidiaries, the SASAC regulations require them to bring the management of budget, capital, and Chinese personnel sent overseas under the umbrella of their united management systems and strengthen their daily control over such subsidiaries.


The SOE Asset Administration Measures and the SOE Property Rights Measures signal SASAC's intention to tighten supervision of overseas state-owned assets, with Central SOEs being held more accountable for overseas investment losses. However, as with other government-issued regulations, some important terms such as "material" and "major" are not defined, and we may expect SASAC to issue relevant implementing rules in the near future to create a sound legal framework for protection of overseas state-owned assets.

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