Chinese foreign exchange regulations restrict the activities of foreign companies in China. To ease these restrictions, the State Administration for Foreign Exchange has introduced various new regulations over the past few months. Most importantly, from 1 June 2015 entities owned by foreign investors will be allowed to freely convert foreign exchange in their capital accounts into RMB and also use that money for making equity investments in China. We expect these regulations to bring relief to many multinationals when financing their activities in China. We therefore recommend that clients investigate the benefits offered by the new regulations.
As part of a continuing process of new foreign exchange control regulations, the State Administration for Foreign Exchange (SAFE) recently issued two particularly noteworthy regulations: Circular 13 and Circular 19. Both circulars will enter into effect on 1 June 2015 and provide foreign-invested enterprises (FIEs) more flexibility in the conversion and use of foreign exchange capital. The new regime was piloted in the Shanghai Free Trade Zone in 2013 and in various other pilot areas last year.
Under Circulars 13 and 19, certain administrative procedures will no longer be performed by SAFE, and trimmed-down versions of those procedures will be carried out by authorised banks. As a result, SAFE will only indirectly supervise foreign exchange transactions. We recommend that clients involve their banks in analysing how their business may benefit from the new regulations.
The main features of the new regime for FIEs are:
- FIEs will be allowed to convert their foreign capital into RMB whenever they want. Compared to the current regime, which only allows FIEs to convert foreign capital for specific payment needs, Circulars 13 and 19 enable FIEs to better manage currency risks.
- In contrast with the current regime, FIEs will be allowed to use RMB converted from foreign capital to make equity investments in China. Although certain investment conditions remain unclear – including whether Chinese companies need to register with SAFE prior to receiving RMB investments from FIEs – this is a significant step forward in enabling multinationals to structure equity investments through their Chinese FIEs. Under the current regime, regulatory barriers often force multinationals to invest through offshore vehicles.
- The use of RMB converted from foreign capital will nonetheless remain restricted. For example, converted RMB cannot be used to fund activities outside the FIE’s scope of business or for investments in securities or real estate.
- Circular 13 will abolish the SAFE verification of purchase price payments. This removes one of the restrictions that currently make it hard to agree on purchase price adjustments in M&A transactions in China. Other restrictions will however continue to exist, most importantly the need for MOFCOM approval.
- Although Circulars 13 and 19 will allow FIEs to settle foreign exchange capital without requiring supporting documents for the conversion, those documents still need to be provided when using the converted RMB. For each payment out of the RMB capital, the bank must review the supporting documents to ensure the payments’ authenticity and compliance.
- Circulars 13 and 19 do not apply to foreign exchange loans extended to FIEs.
Circular 13 was released by SAFE on 28 February 2015 as Notice on Further Simplifying and Improving Foreign Exchange Administration Policies for Direct Investment. Circular 19 was released by SAFE on 8 April 2015 as Notice on Reforming the Administration of Foreign Exchange Capital Settlement of Foreign-invested Enterprises.