The State Administration of Foreign Exchange (“SAFE”) promulgated on 19 November 2012 the Notice on Further Improvement and Adjustment on the Foreign Exchange Administration Policies of Direct Investment (Hui Fa  No. 59, the “Notice”).The Notice aims to improve the foreign exchange administration on direct investment in China, and abolishes and/or adjusts certain foreign exchange administrative mechanism in that respect.
The changes reflected in the Notice mainly cover the following issues:
1. Abolishing Certain Administrative Procedures of Direct Investment
- The Notice has abolished verification procedures for the opening of, transmission into and conversion of the funds in certain foreign exchange accounts under the direct investment.Prior to the incorporation of the foreign invested enterprise, the foreign investor is only requested to register relevant information with SAFE’s system before it could open foreign exchange accounts with PRC banks, and the foreign investor may remit foreign exchange funds into China within the registered amount;
- The Notice has abolished the verification procedures for the transfer, purchase and payment of foreign exchange under the direct investment. After a foreign invested enterprise completed its foreign exchange registration with SAFE, it may transfer, purchase and pay foreign exchange directly through PRC banks;
- The Notice has abolished the limit on the inter-city account opening for foreign exchange capital account and asset cashing account.SAFE will conduct overall control on the total foreign exchange capitals received by one foreign invested enterprise, whilst it will not limit the quantity of foreign exchange capital accounts opened by such foreign invested enterprise, nor will it limit the capitals remitted into any single foreign exchange capital account opened by such foreign invested enterprise;
- The Notice has abolished the verification procedures for foreign investors’ re-investment with their earnings legally obtained in China.Hence, the accounting firms may complete relevant capital verification confirmation procedures in respect of the enterprise to be invested based on its foreign exchange registration information.The Notice has also abolished certain registration and verification procedures in respect of the onshore re-investment by foreign invested investment companies;
- The Notice has abolished the existing capital inquiry and confirmation procedures for the capital reduction and capital verification of foreign invested enterprises.
2. Simplifying Current Administration Procedures
- The Notice has reduced the types of foreign exchange accounts under the direct investment.Foreign investor’s special foreign exchange account (for acquisition, margin, investment, fee), foreign investor’s special foreign exchange margin account for biding of land and foreign investor’s special foreign exchange margin account for intellectual property transactions have been abolished;
- The Notice has simplified the procedures for the foreign exchange capital settlement, the procedures for the domestic re-investment by foreign invested investment companies and the procedures for the capital verification and capital inquiry and confirmation of foreign invested enterprises, by requiring less application materials and shortening relevant work periods.
3. Loosening Restrictions on the Fund Operation under Direct Investment
The Notice has loosened the restrictions on the inter-city purchase and payment of foreign exchange and the restrictions on the source and subject of overseas advance.Pursuant to the Notice, a domestic entity may use the proceeds of domestic foreign exchange loans to make overseas advance, and a foreign invested enterprise may make overseas advance to its overseas shareholder (the amount of which may not exceed the aggregate of the profits distributable to such foreign investor but not actually transferred out of China and the profits distributable but not actually distributed to such foreign investor).
The Notice has adjusted in many ways the foreign exchange administration in respect of direct investment, and has abolished 35 administrative verification procedures and simplified or consolidated 14 administrative approval procedures.The adjustments made by the Notice aim to replace the original pre-verification procedures with post-facto registration and filing, to simplify the original administrative procedures and materials, and to strengthen the mechanism of post-facto review and early warning by statistical analysis.It is believed that the Notice would be of great help for the reform of foreign exchange administration mechanism and for the simplification of relevant administrative procedures, and would facilitate the foreign investment and trade in China.