The State Administration of Foreign Exchange (the “SAFE”), the main authority in charge of foreign exchange control in China, announced last week that they will crack down on fake overseas M&A deals in order to curb capital flight.
China maintains strict control over all types of foreign exchange transactions that take place across its borders. During outbound M&A transactions, before consideration can be remitted to foreign recipients, all Chinese domestic investors are required to go through a verification process with qualified commercial banks in order to prove the authenticity of the transaction. The SAFE will now urge such banks to strengthen this process to prevent domestic companies from moving assets overseas via fake outbound investments.
We do not consider this a sign of Chinese government tightening outbound investment, the government expressed that genuine overseas M&A deals will continue to be supported. It is, however, possible that the enhanced verification process may increase the workload of commercial banks and slow down the already lengthy verification process, and even cause possible delay in payment. Companies involved in M&A deals with Chinese buyers may need to consider these possibilities when estimating the transaction timeframe and designing the transaction structure.