Reform of Foreign Exchange Control in Foreign Direct Investments5
- SAFE’s reform to liberate foreign exchange control
- Registration system adopted to replace approval system in foreign exchange sector
- Voluntary settlement of capital account piloted in special areas
- Optimistic expectation of further relaxation of foreign exchange control in future
In China, direct investments mainly refer to foreign direct investments (“FDIs”) and outbound direct investments (“ODIs”). The State Administration of Foreign Exchange (“SAFE”) (or its local branches) is the competent authority in charge of regulatory control of foreign exchange in direct investment sector.
Over the years, SAFE had always adopted strict regulatory controls of foreign exchange and complicated approval formalities in direct investment sector. Until July 2009, SAFE carried out significant reform and liberated the control of foreign exchange in ODIs. However, the same reform did not happen in FDIs at that time.
It might seem overdue, but such reform in FDIs became inevitable along with changes of China’s cross-border balance of payment. In late 2012, SAFE released a rule initially liberating foreign exchange controls in FDIs. In May 2013, SAFE enacted a special rule which explicitly liberates such controls.
The regulatory control of foreign exchange in FDIs has been changed from approval regime to registration regime which is the most significant reform in history in FDIs. Obviously, SAFE has made up its mind to achieve an objective of streamlining administration and instituting decentralization in the supervision on FDIs.
Foreign investors making investments in China and legal practitioners practicing in FDI sectors may have an impression: there were a large number of complicated and miscellaneous rules and regulations in respect of foreign exchange controls.
Fortunately, SAFE had updated and grouped together such rules and regulations simultaneously when carrying out the reform of foreign exchange controls in FDIs. Such action is reflected in the revocation of a number of old regulations and the promulgation of the following rules:
- Circular of the State Administration of Foreign Exchange on Further Improving and Adjusting the Direct Investment Foreign Exchange Administration Policies (promulgated on 19th November 2012 and taking effect on 17th December 2012); and
- Circular of the State Administration of Foreign Exchange on Printing and Distributing the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors and Relevant Supporting Documents (promulgated on 11th May 2013 and taking effect on 13th May 2013).
The main body of the above rules provides for principles of the reform of foreign exchange controls. Their annexes detail how to register with SAFE and operate foreign exchange affairs with banks.
Along with implementation of the above rules, SAFE no longer requires an approval of foreign exchange affairs. Parties involved in FDIs only need to register the relevant information and changes on FDIs with SAFE. After registration with SAFE, the parties may open foreign exchange accounts with banks and handle foreign exchange affairs in line with the registered information.
- Start-up funds registration
SAFE has revoked approvals of account opening and settlement as well as domestic transfer respecting foreign exchange of start- up expenses and other funds (“start-up funds”) relating to the establishment of foreign invested enterprises (“FIEs”).
SAFE only requires foreign investors to register with it general information on the start-up funds. In general, the start-up funds for each project in which foreign investors contribute should not exceed US$300,000; the relevant foreign exchange account should expire and be closed after six months (exceptions apply). The registered start-up funds can be deemed as share capitals that foreign investors contribute for the follow-up establishment of FIEs.
After registration with SAFE, foreign investors may directly open account with bank as well as remit, settle and transfer the start- up funds via such account. Foreign investors can only open a start-up funds account with a bank at the place where FIEs are to be domiciled.
- Establishment registration
FIEs are required to register with SAFE their general formation information after establishment, especially including shareholders and share capitals.
SAFE has revoked approvals of account opening and settlement as well as domestic transfer respecting foreign exchange of FIEs’ share capitals. SAFE has also revoked restrictions on account opening location and limits to the -number of share capital accounts as well as quota of funds transferred to each share capital account. FIEs may open share capital accounts in places other than where domiciled, and may open more than one account.
After registration with SAFE, FIEs may directly open an account with the bank as well as remit, settle and transfer their share capitals via such account.
- Registration for acquisition of domestic companies by foreign investors
Besides directly and newly setting up FIEs, foreign investors may acquire shares in domestic companies to set up them. As required, FIEs must register with SAFE their conversion from domestic companies after share acquisition by their foreign investors, and include general conversion information, shareholders and share capitals.
For domestic sellers, SAFE has also revoked approvals of account opening as well as remittance and domestic transfer of sales price. In addition, SAFE has also revoked its restriction on account opening for sales price in places other than where domestic sellers are domiciled.
After the registration with SAFE, domestic sellers may open an asset realization account with bank as well as remit, settle and transfer share sales price that foreign investors pay via such account.
- Security funds
SAFE has revoked approval of account opening and funds transfer respecting foreign exchange for security of cross-border transactions and biddings.
However, the general information of concerned parties and securities shall be registered with SAFE. The foreign exchange funds for the purpose of security cannot be settled.
- Change registration
FIEs are required to register with SAFE the following changes in connection with their original registered information:
- general corporation information including, without limitation, company name, business scope, legal representative, and registered address;
- investment information including, without limitation, registered capital, total investment amount, forms of investment, registered currency, investors, and subscripted share capital; and
- merger, split-up, removal.
In case of an advance capital recovery proposed by foreign investors, such recovery shall be registered with SAFE. The accumulated recovery funds which have been paid and remitted out of China shall not exceed the amount that foreign investors invested initially.
A de-registration of foreign exchange is required, if FIEs:
- are to be closed due to bankruptcy, dissolution, expiration of duration of operation, merger or split-up;
- have been converted to a domestic company due to foreign investors’ capital withdrawal via capital decrease, share transfer and advance capital recovery, etc.
FIEs may directly purchase from banks and remit out the foreign exchange funds arising out of capital decrease, liquidation, advance capital recovery and distribution of profits after the relevant registration with SAFE.
- Reinvestments registration
SAFE has revoked approval of reinvestment by foreign investors by way of:
- increase of capital being sourced from capital reserves, surplus reserves and undivided profits and registered foreign loans;
- domestic legitimate incomes arising out of domestic profits, share transfer, capital decrease, liquidation, advance capital recovery;
However, the invested enterprises need to register with SAFE for such reinvestment by foreign investors. After registration, the foreign exchange for reinvestment may be transferred to the invested enterprises without SAFE approval.
- Contribution confirmation
FIEs are required to register with SAFE for their foreign investors’ paid-up capital contribution including cash and in-kind payment.
In the event of share acquisition of domestic companies by foreign investors, such registration for paid-up share sales price is also required.
After the capital contribution registration, foreign investors may purchase from banks and remit out foreign exchange funds arising out of FIEs’ capital decrease, liquidation, share transfer, distribution of profits and advance capital recovery, or reinvest in China by using the aforementioned funds.
SAFE has largely liberated its control of foreign exchange in FDIs. However, this does not mean that SAFE already lets matters drift towards supervision on foreign exchange. Actually, SAFE still achieves its supervision through certain special measures.
- Control of foreign exchange accounts
SAFE requires that the concerned parties involved in FDIs open foreign exchange accounts with banks and that all foreign exchange funds be handled through such accounts.
- Control of exchange settlement and conversion
The concerned parties involved in FDIs cannot settle and convert foreign exchange at their wills. They can only settle and convert foreign exchange funds for purpose of self-use with a real use purpose.
- Banks’ obligations of review and registration
Banks shall make sure that the concerned parties involved in FDIs have registered with SAFE for their foreign exchange affairs before opening accounts, depositing, settling and transferring foreign exchange funds for the concerned parties. In the meantime, banks also need to check and review the relevant documents that the concerned parties submit to make sure that all documents are authentic and consistent.
In addition, banks are under obligation to upload and register timely all information in respect of the handled foreign exchange affairs in SAFE’s data system.
- SAFE’s investigation and sanction
SAFE carries out statistics and monitors cross-border balance of payment, settlement and sale of foreign exchange as well as changes of foreign investors’ rights and interests through FIEs’ registration, data information uploaded by banks, annual review of FIEs and random check of foreign exchange related affairs.
In case banks or FIEs violate its rules, SAFE will conduct investigations and impose sanctions on the violators. For banks, SAFE may revoke its delegation and require a pre-approval before banks handle foreign exchange affairs for their clients.
In addition to the above, SAFE has a special authority to adjust control policies on foreign exchange in accordance with its statistics and monitor status.
On 1 October 2013, China (Shanghai) Pilot Free Trade Zone (“PFTZ”) was officially opened up. There are special policies and new rules adopted in the Free Zone, among others, the Opinions of the People’s Bank of China on Providing Financial Support for the Development of China (Shanghai) Pilot Free Trade Zone promulgated and effective on 2 December 2013. Banks were delegated to process the registration and change for foreign exchange under direct investment in the PFTZ. On the premise of ensuring the authenticity of transactions and the complete collection of data, the foreign exchange funds under direct investment in the PFTZ may be settled at will.
To speed up the reform of foreign exchange under direct investment, SAFE released a Notice of the State Administration of Foreign Exchange on Issues Relating to Pilot Scheme of Reform of Administration of Foreign Currency Capital Settlement by Foreign Investment Enterprises in Certain Localities on 4 July 2014, which expanded the voluntary exchange settlement to additional 16 special pilot areas, namely Tianjin Binhai New District, Shenyang Economic Zone, Suzhou Industrial Park, Donghu National Innovation Demonstration Zone, Guangzhou Nansha New District and Hengqing New District, Chengdu Hi-tech Industrial Development Zone, Zhongguancun National Innovation Demonstration Zone, Chongqing Liangjiang New District, Heilongjiang Border Development and Open Foreign Exchange Administration Reform Pilot Scheme Area, Wenzhou Comprehensive Financial Reform Experimental Zone, Pingtan Comprehensive Experimental Zone, China-Malaysia Qinzhou Industrial Park, Guiyang Comprehensive Bonded Zone, Shenzhen Qianhai Shengang Modern Services Industry Cooperation Zone, and Qingdao Wealth Management Comprehensive Financial Reform Experimental Zone. The FIEs in the aforesaid pilot areas may settle their foreign exchange funds under capital accounts at will.
Apparently, the new regime of foreign exchange control already enhances foreign exchange liquidity as well as facilitates and speeds up foreign direct investment progress.