In Chinese securities law, an indirect investment refers to a company purchasing bonds, shares of a company, or other exchangeable securities in anticipation of obtaining a return on investment. The activity is deemed an investment in securities because it typically involves making a purchase from a range of securities. Such transactions may be restricted in China if they involve foreign persons.

A key distinction between indirect investments and direct investments is that the former only entails the right to receive a stream of income and perhaps the right to vote stock, and indirect investors lack the right to determine how the funds invested are utilized or to make management decisions. Indirect investments are also flexible, allowing investors to back out at any time to optimize their returns. For instance, indirect investors often withdraw due to political events or concerns about sustaining losses, and the People’s Bank of China may even liquidate their indirect investments to tighten or loosen monetary policy.

Despite both types of investment aiming for returns on investment, there are substantive legal differences between direct and indirect investing under Chinese law. An investor is deemed a direct investor if the owner and controller of the funds are the same person or entity, where there is a unity of property title and managerial control. In China’s economy, this approach is used heavily in the manufacturing industry, where physical capital is essential. On the other hand, an investor is deemed an “indirect investor” if there is a weakened link between the ownership of the funds and control over how they are used, meaning that there is a separation of property title and managerial control. Such investors are merely seeking passive investment returns, and therefore do not need to have direct control over the underlying assets.

Further Reading

See our comprehensive resources on China’s Foreign Investment Law. and an overview of FDI regulation in our Foreign Investment Law FAQ.

Relevant Laws

Foreign Investment Act of China (& Administrative Regulations)

Translation Guide

See: 间接投资