On July 15, 2014, the Chinese foreign exchange regulator, the State Administration of Foreign Exchange (“SAFE”) promulgated the Notice on the Pilot Reform of the Management of the Conversion of Registered Capital in Foreign Currencies of Foreign-Invested Enterprises in the Relevant Areas (the “Circular No. 36”). The Circular No. 36 liberalizes the foreign exchange regulation over foreign-invested enterprises (“FIEs”) in 16 designated pilot areas on their conversion and use of share capital paid in foreign currencies. These 16 pilot areas include:

  • Tianjin Binhai New Area
  • Shenyang Metropolitan Area
  • Suzhou Industrial Park
  • Donghu National Independent Innovation Demonstration Zone
  • Guangzhou Nansha Development Zone
  • Hengqin New Area
  • Chengdu High-Tech Industrial Development Zone
  • Zhongguancun Science Park
  • Chongqing Liangjiang New Area
  • Certain parts of the border development and opening-up regions in Heilongjiang Province
  • Wenzhou Comprehensive Financial Reform Pilot Area
  • Pingtan Comprehensive Experimental Area
  • China-Malaysia Qinzhou Industrial Park
  • Guiyang Comprehensive Bonded Zone
  • Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone
  • Qingdao Comprehensive Wealth Management and Financial Reform Pilot Area

SAFE adopts a nationwide strict regime on an FIE’s conversion and use of its share capital injected in foreign currencies since 2008. Generally, after an FIE receives capital in foreign currencies from its shareholder(s), the following restrictions will apply:

  1. For payments for general daily operations, the FIE is required to prove to its bank (under SAFE’s supervision) the authenticity of each underlying transaction before it can convert its foreign currency capital into RMB (renminbi, the Chinese currency) for use in China; and
  2. The FIE is generally not allowed to use its capital in foreign currencies for downstream equity investment, unless it qualifies as (a) a foreign-invested holding company, (b) a foreign-funded venture capital investment enterprise, or (c) a foreign-funded equity investment enterprise, the formation of each of which is subject to strict and onerous approval requirements.

The new Circular No. 36 changes this regulatory regime, on a trial basis, by providing an alternative capital conversion approach for all kinds of FIEs in the listed 16 areas to choose. The differences between such approaches in non-pilot areas and in the pilot areas under the Circular No. 36 can be summarized as follows:

Click here to view table.

The Circular No. 36 reflects the tendency to attract and incentivize more foreign investment in China. It is foreseeable that more foreign investors may consider establishing their subsidiaries in these pilot areas for greater flexibility in their subsidiaries’ downstream investment activities.