China's overseas investments to be managed, but liability still in question

China's Ministry of Commerce (MofCom) recently published the "Procedure for managing overseas investment", which attempts to decentralize the decision-making process of overseas investments to provincial government. It also divides the scope of liability of Chinese governments (with provincial governments) in companies' overseas investments, and details the procedure how the companies can take advantage of the services by MofCom.

This is perhaps an important step the Chinese government defined its liability in Chinese companies' overseas investments. Unfortunately, the Procedure is only promoted in the MofCom's website, and only covered in the media until the final text is released. I believe many people like me are aware of this as late as it was reported.

I took a look at MofCom's website, and was surprised that the draft was brought for a round of consultation between 7-20 January 2009, but limited to online submissions. In other words, there was no public hearing for the Procedure. So I can only find the submissions by the Commerce offices in Chinese embassies, external trade and investment offices of second-tier cities, the law firms that are dealing with external investments, and others from investment banks and private sectors. No NGOs can give timely comments to the Procedure.

Indeed, this is not the first Procedure in China. Shanghai municipal government pioneered in making the first-ever Procedure in China for its overseas investments last year.

In addition, the procedure is only an administrative order for the governments. It is not yet a binding law. The companies that do not register at MofCom will not be penalized.

Decentralization of decision-making process to provincial governments only allow flexibility, but does not necessarily make them liable and accountable to their investments. How can the central government hold the provincial governments accountable to its investments? Simply by sacking the officials involved?

The investments by "natural person" and financial institutions are not covered in this Procedure. That is, the MofCom is unable to hold the investments of both individual and banks accountable. I expect that these two major loopholes are to be managed by other ministries.

A series of complaints from the Commerce office of an unknown Chinese embassy is worth an attention. One of his comments is that the Procedure cannot stop the misbehaviour of Chinese companies overseas. True, even though Chinese government started to put its promises into black and white, it is still far from holding all the Chinese investments accountable to the world.

Yet, we can understand the intention of MofCom's move, i.e. central government is no longer the sole agent of liability for the Chinese overseas investments. We may have to look upon the other binding and non-binding guidelines, such as CSR guidelines, and loan guidelines of banks.

All in all, it is encouraging that the MofCom is the first government department to be held accountable to Chinese overseas investments, though there are still leeway for them.

For the text of procedure

For the submissions of comments to the draft text

(Note: China's overseas investment also refers to investment in Hong Kong SAR, Macau SAR and Taiwan.)