On April 8th, 2015, China’s State Administration of Foreign Exchange (“SAFE”) released the SAFE Circular Reforming the Administration of Foreign Exchange Capital Settlement by Foreign-invested Enterprises (Hui Fa  No.19) (the “Circular”). The Circular is a reflection of the reforms implemented in the SAFE Circular on Several Issues with respect to the Establishment of Pilot Projects to Reform the Administration of Foreign Exchange Capital Settlement by Foreign-Invested Enterprises in Several Areas (Hui Fa  No. 36) (“SAFE Circular 36”), which was a pilot program that intended to introduce its measures nationwide. The Circular will come into effect on June 1, 2015 and will supersede the Circular of SAFE’s General Affairs Department on Relevant Operating Issues Concerning the Improvement of the Administration of Payment Settlement of Foreign Exchange Capital by Foreign-Invested Enterprises (Hui Zong Fa  No.142) (“SAFE Circular 142”) and the Supplementary Circular of SAFE’s General Affairs Department on Relevant Operating Issues Concerning the Improvement of the Administration of Payment Settlement of Foreign Exchange Capital by Foreign-Invested Enterprises (Hui Zong Fa  No.88).
The Circular’s specific reforms are as follows:
Foreign-invested Enterprises Given Full Discretion to Settle Foreign Exchange to Make Domestic Equity Investments
Foreign-invested Enterprises are Allowed to Settle Foreign Exchange on a Discretionary Basis
The Circular allows foreign-invested enterprises to settle foreign exchange with banks on a discretionary basis for their domestic equity investments. Following settlement, such foreign-invested enterprises may place the settled RMB funds into a settlement exchange account. Funds from such settlement exchange account may be used to for discretionary payments by the foreign-invested enterprise for their domestic equity investments.
Certain Restrictions Remain on the Use of RMB Funds Obtained through Foreign Exchange Settlement
The Circular still restricts the use of the RMB funds obtained through foreign exchange settlement in several means as set forth in SAFE Circular 142, even if the foreign-invested enterprises may have the option of the payment exchange settlement or foreign exchange settlement on a discretionary basis. Specifically, the Circular sets forth a “prohibited list.” Under this list, foreign-invested enterprises are prohibited from directly or indirectly using RMB funds obtained from foreign exchange settlement for purposes outside of its business scope, for investment in securities, to grant RMB entrusted loans, to repay inter-company debt or to purchase non-self-use real estate.
In addition, the Circular instructs banks not to conduct RMB settlement of a foreign-invested enterprise’s foreign exchange on a one-time basis or to pay all RMB in the foreign exchange settlement account without receiving true copies of required certificates from such foreign-invested enterprise.
The Circular also simplifies the foreign exchange settlement and use of RMB settled funds for a foreign-invested enterprise’s other investment projects. However, since local banks responsible for conducting settlement have differed in their implementation of SAFE Circular 36, it remains to be seen whether various local banks will immediately implement the terms set forth in the Circular.