In January 2017, China’s foreign exchange reserves fell below USD 3 trillion to hit a 5-year low. In the same month, the State Administration of Foreign Exchange (SAFE) of China released a Circular on Further Promoting the Reform of Foreign Exchange Administration and Improving the Verification of Authenticity and Compliance (《国家外汇管理局关于进一步推进外汇管理改革完善真实合规性审核的通知》) (Circular Hui Fa [2017] No. 3) (Circular 3) to aim at boosting capital inflows and curbing capital outflows.

The main content of Circular 3could be divided into two parts: the first part sets out some provisions to facilitate transaction and investment, while the second partaims at strengthening the compliance and verification regime for capital outflows. We set out below some of the more salient points of Circular 3 for your consideration.

Measures on facilitating transaction and investment

Among others, a noteworthy measure on facilitating transaction and investment provided underCircular 3 is the relaxation of the restrictions on the repatriation of loan proceeds of overseas loans guaranteed by Chinese domestic entities (such transaction is typically called the “NeiBaoWaiDai” (內保外貸)structure, i.e. offshore borrowings based on onshore guarantees/securities) allowing such overseas loan proceeds to be remitted into Mainland China for domestic use.

According to the previous Provisions on the Foreign Exchange Administration of Cross-border Securities and its Implementation Guidelines promulgated by SAFE in 2014 (collectively the “2014 Provisions”), without the approval of SAFE, the offshore loans borrowed under the NeiBaoWaiDai structure are not allowed to be repatriated back to China, no matter whether the inbound remittance is conducted by ways of lending, equity investment or securities investment by the offshore borrower. Such restriction has now been relaxed under Circular 3 and offshore borrower may remit the offshore loan proceeds into Mainland China by cross-border lending to domestic entities or equity investments.

Having said that, there are some uncertainties on the interpretation of Circular 3. The 2014 Provisions also set out some behaviours which would be deemed as using offshore loan proceeds for domestic lending or equity investment. For example, under the 2014 Provisions, loans borrowed under the NeiBaoWaiDai structure are not allowed to be used to acquire the equity of a non-PRC target company, of which over 50 percent of the assets are located within the PRC, as such behaviour would be regarded as using the offshore loan proceeds for domestic equity investment. It is unclear whether such restriction may also be relaxed pursuant to Circular 3. We will update the readers once SAFE provides further guidance on whether any or all restricted behaviour set out in the 2014 Provisions will be wholly or partially lifted in light of Circular 3.

Apart from the liberalised measure on NeiBaoWaiDai, Circular 3 also sets out some measures to facilitate transaction and investment, which include:

(a) expanding the scope of settlement of exchange for domestic loans in foreign currencies (i.e. to convert the loan proceeds in foreign currencies into RMB). Settlement of exchange is allowed for domestic loans in foreign currencies with background of export trade in goods. That being said, domestic company is not allowed to repay such loan by purchasing foreign exchange from its own fund but could only uses funds collected from export trade in good; and

(b) allowing foreign institutions to make settlement of exchange through their domestic foreign exchange accounts in pilot free trade zones.

Measures on strengthening the compliance and verification regime for capital outflows

Given the pressure of stabilizing the foreign exchange market, Circular 3 also imposes several measures to tighten capital outflows, which include:

(a) requiring domestic company to receive and pay in foreign currency for trade under the principle of “exporter receives foreign currency as exporter, importer pays foreign currency as importer,” and timely settlement of receipt of proceeds in foreign currency, unless otherwise stipulated by SAFE;

(b) administrating continuously the outward remittance of foreign exchange profit. According to Article 7 of Circular 3, if the outward remittance is more than 50,000 US dollars, a set of documents (e.g. board resolution, original of tax filing form and audited financial statements etc.) would be required to be submitted to the bank for review. In addition, it is now clarified that only after losses from previous years have been duly made up can profits be remitted out;

(c) strengthening the authenticity and compliance verification of outbound direct investment; and

(d) requiring that the total outstanding balance for offshore lending provided by a domestic company (in RMB and any foreign currency) shall not exceed 30% of its equity on its audited financial statement for the previous year.


The measures imposed under Circular 3 are in line with recent measures taken by the PRC authorities to encourage inbound investments and capital inflows. In particular, we expect that the liberalised measure on NeiBaoWaiDai may “encourage” PRC issuers/borrowers to remit onshore the proceeds from offshore loans. Investor shall also be reminded to be cautious about the strengthened measures and regulation under the Circular and adjust your outbound investment plans where necessary. We will continue to keep you posted on these regulatory practices and update you on new developments.