Recently, China's Ministry of Commerce announced at a press conference that China's outward non-financial direct investment (ODI) in the first 11 months was 8,145RMB400 million, up 18. year-on-year4%。ODI is back to pre-pandemic growth levels.
According to data from the United Nations ** and Development Conference (UNCTAD), by the end of 2022, Chinese mainland accounted for the third largest proportion of ODI stock in the world, second only to the United States (20%) and the Netherlands (8%). (Image below).
At present, China has become an important ODI overseas investment country in the world.
Hong Kong is the first choice for ODIChina's Ministry of Commerce, the National Bureau of Statistics and the State Administration of Foreign Exchange recently released the 2022 Statistical Communiqué on China's Outward Foreign Direct Investment, revealing some details of ODI activities. Official statistics record the initial geographic destination reported by the investment company. According to official figures, by the end of last year, 58 percent of Chinese mainland ODI stock was invested in Hong Kong, China, and another 21 percent in the British Virgin Islands and the Cayman Islands. At present, when enterprises implement the filing of ODI OFDI, they need to provide the final place of investment. Hong Kong is the only city in the world that combines China's advantages and global advantages, with a relaxed tax system and friendly investment mechanism, and has natural unique advantages, making it the first choice for most Chinese companies to go overseas. In the OFDI practices we have come across, the vast majority of enterprises have not completed the global layout at one time, but have taken Hong Kong as the first port of their overseas business for preliminary planning and investment. In the early stage of overseas planning, we will take Hong Kong as a starting point to make the layout according to the business model of the enterprise, the layout of overseas entities, bilateral agreements between countries, dividends, compliance and other considerations. When there is a certain growth in business and investment demand, it is more practical for enterprises to invest abroad with a Hong Kong company.
It can be said that Hong Kong is an indispensable link in the chain of OFDI.
Global distribution of ODI in China
Referring to another set of China Global Investment Tracker (CGIT) data released by the American Enterprise Institute, in the first half of this year, the geographical distribution of final investment destinations for China's ODI has changed significantly compared to before the pandemic, with more investment going to East Asia, South America and Sub-Saharan Africa, which account for 77% of China's total ODI, up from 31% before the pandemic. By comparison, only 16% of investments have been made this year in Europe, North America and Australia, down from 53% before the pandemic. (Image below).
The development trend of ODI in China
China's record ODI reflects the challenges facing the domestic economyThe argument is that de-risking pressures from China's partners are causing domestic firms to shift production overseas, negatively impacting China's employment and economic growth.
In fact, the adjustment of the international order is indeed leading to changes in the geographical distribution of China's ODI, but China's ODI is not replacing domestic investment, but rather supplementing domestic production. ODI has increased the complexity of China's exports, which has enabled the domestic economy to increase productivity, help alleviate the pressure brought about by the adjustment of the international order, and enable producers to better adapt to foreign consumption trends and catch up with developed countries faster. This coincides with China's promotion of the development of "domestic and foreign trade integration".
Different from the previous perception, China's overseas scenario has shifted from goods and services to technology, brands, and investment and industries. Another set of data from UNCTAD shows that from 2017 to 2022, compared with the United States, the European Union and the rest of the world, China's ODI stock also grew the fastest. It is foreseeable that the development space of China's ODI, from scene to volume, is quite huge and exciting. (Image below).
Challenges for Chinese companies ODI
"Going global" is a buzzword for Chinese companies, but there are quite a few challenges for Chinese companies to implement ODI.
1) Bid threshold.
At present, ODI (overseas direct investment) refers to the investment behavior of domestic enterprises and organizations through establishment, mergers and acquisitions, equity participation, etc., with the core purpose of controlling the operation and management rights of overseas enterprises after the approval of relevant departments. According to the existing laws, regulations and policies, the supervision of overseas investment is mainly jointly supervised by four ministries and commissions, including the Ministry of Commerce, the State Administration of Foreign Exchange, and the State-owned Assets Supervision and Administration Commission.
Before the implementation of ODI, enterprises must pass the approval of the four ministries and commissions, build a compliant capital channel for current funds, complete the export of domestic funds in a legal way, and then legally remit overseas funds (profit dividends) to China.
But often businesses get stuck with the following questions:
financially. "Authenticity of funds": the enterprise does have capital contributions, but the capital contribution plan is not clear, and its authenticity is doubted
"Enterprises are mainly concerned about funds, which is often a common problem for many enterprises, and the funds are chaotic, and once there is a review, it is impossible to explain the rationality of their funds
investment objectives.
The purpose of the contribution is not clear":
In particular, the review will focus on some irrational foreign investment tendencies in real estate, hotels, cinemas, entertainment, sports clubs, etc.
Fiscal and tax. "Fiscal and tax compliance": whether the financial statements of the enterprise can withstand scrutiny, whether the financial data is true and reliable, and whether there are any tax defects of the enterprise are important concerns in the review to determine whether the enterprise is able to make sufficient ability to make direct investment;
Architecturally. "Structural compliance": We would advise companies to re-examine whether the current structure is sufficient to support their outbound investment projects before initiating ODI. This involves factors such as the facilitation of cross-border investment, the facilitation of the entry and exit of capital resources, the facilitation of headquarters exchanges, the protection of intellectual property rights, and the performance of corporate compliance value. Once the architecture is in use, but there are changes or major changes in the middle of the process, it can seriously affect the overall ODI implementation.
Identified as an "anomaly":
1. In order to realize the rapid transfer of domestic assets abroad, some investors set up a "shell company" as the main investor to carry out overseas investment, and there is no other business activity in China, resulting in the phenomenon that enterprises established for less than a few months carry out overseas investment activities without any entity operation. The investor may withdraw from the investment project through ** or other means after the funds are successfully exited, so as to achieve the purpose of "quick establishment and quick exit", resulting in the establishment of the investment entity becoming a tool in the overseas investment process.
2. "The mother is small and the child is big", that is, the actual investment scale of some enterprises abroad is much larger than that of the investment entity, and the registered capital of the domestic parent company and the operating conditions reflected in the financial statements of the parent company are difficult to support its overseas investment subsidiaries. Therefore, in the process of project operation and ODI approval or filing declaration, it is recommended to pay attention to the matching degree of financial data such as the registered capital of the investment entity and the total assets contained in the audit report disclosed in the filing form with the business scale of the overseas destination enterprise to be invested.
3. The actual overseas investment projects of some enterprises are far from the main business of their domestic parent companies, and there is no correlation between them.
4. Some enterprises invest in RMB ** abnormally, and are suspected of illegally transferring assets overseas for individuals and illegally operating underground banks. In order to improve the possibility of project landing, it is recommended to focus on: supporting documents to prove the authenticity and compliance of investment funds, such as by providing bank deposit certificates, audit reports, asset appraisal reports, and letters of intent issued by banks containing financing amounts (involving bank financing), etc., to prove the authenticity of investment funds as much as possible. Of course, how to combine and optimize the various supporting materials still needs to be demonstrated on a case-by-case basis based on the property information that investors can disclose and the specific capital needs of the proposed investment project.
2) Regulatory challenges.
Enterprises that "go global" need to be familiar with local systems and rules, and pay more attention to compliance management. However, according to the principle of market-oriented business, enterprises need to make profits when carrying out ODI overseas investment, so there are specific profit requirements for overseas investment projects, and due to information asymmetry and other factors, enterprises face geopolitical, legal, market and compliance risks in ODI overseas investment. In particular, due to the serious erosion of the tax base in various countries and the impact of the epidemic, the attention of foreign investors in various countries has been increasing in recent years, especially for menacing Chinese enterprises. This requires Chinese enterprises to pay attention to regulations and trends such as "financial account compliance", "UBO disclosure and registration", "two-pillar principle", "CRS compliance", "economic substance requirements" and "global minimum tax rate".
*: CBN, **Finance, Interface News, Daqi Finance and Taxation.
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