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28 Oct 2019

Groundbreaking Changes in Foreign-Exchange Control over Cross-Border Transactions

On 23 October 2019, the State Administration of Foreign Exchange (“SAFE”) promulgated the Circular of the State Administration of Foreign Exchange on Further Promoting Cross-Border Trade and Investment Facilitation (《国家外汇管理局关于进一步促进跨境贸易投资便利化的通知》) (“SAFE Circular”), effective as of the same date. This represents just one of a series of reform measures being taken by SAFE to facilitate cross-border trade and foreign investment. SAFE’s spokesperson and chief economist recently remarked that the “reform would endow banks and foreign trade enterprises with more autonomy”.[1] The SAFE Circular itself implements rule changes that eliminate numerous restrictions and requirements, and simplify others, for cross-border or foreign-currency trade and investment, especially pertinent for foreign-invested enterprises (“FIEs”). This Newsletter briefly highlights significant rule changes and their implications.

1. FIEs May Use Registered Capital for Equity Investment

  • Previously: FIEs generally were not allowed to make equity investments in the PRC using funds from their “registered capital”; they could only do so using their operating profits in RMB obtained within the PRC.[2]
  • SAFE Circular Changes: All FIEs may use any capital-account funds (either the original currency or RMB after conversion), including registered capital as well as foreign debt, for investment in PRC equity. Such equity investment will be deemed “domestic reinvestment by foreign investors”, and the target companies must carry out reinvestment registration and open certain accounts with banks to receive such investment funds.[3]
  • Implications: In effect, a foreign investor may use any FIE it owns as a holding company for equity investment across the PRC—it no longer needs to meet the requirements and go through the procedures to establish an investment FIE.

2. FIEs May More Freely Convert and Use Foreign Capital-Account Funds

  • Previously: Funds in a company’s “domestic assets realization account”[4] could be used for a very limited set of purposes, mainly consisting in the following: for working capital for operations within the company’s business scope; if in foreign currency, then transferred to one of several possible accounts for use corresponding to those accounts (i.e., the overseas special account for granting loans, the domestic special account for reinvestment or the special deposit account for security of obligations); and other expenditures approved by SAFE. Moreover, as just mentioned, capital-account funds in the “special deposit account”, whether remitted from overseas or from within the PRC, could only be used as security for obligations, not for any other payment purposes.
  • SAFE Circular Changes: The above restrictions on the use of funds from domestic assets realization accounts have been eliminated, so the holders (including FIEs) of such accounts may use such funds for any (otherwise permissible) purpose, and they no longer need to file supporting documents to prove the purpose. Furthermore, funds in the above-mentioned special deposit accounts may be converted to RMB for use as domestic capital contribution and consideration for investments, in addition to the previous sole use.
  • Implications: The elimination of these restrictions should reduce uncertainty and domestic sellers’ reluctance over receiving foreign payment, rendering cross-border equity transactions less exceptional.

3. FIEs in Pilot Zones Are Subject to Less Stringent Evidentiary Requirements for Foreign-Exchange Settlement and Payment

  • Previously: If an FIE did not provide certain evidentiary support for the authenticity of foreign-exchange settlement and payment transactions, banks were required to reject applications for converting all foreign currency in a capital account, as a lump sum, into RMB.
  • SAFE Circular Changes: In pilot zones,[5] FIEs meeting certain requirements are permitted to convert capital-account funds, foreign loans and proceeds from overseas public share offerings into RMB for domestic payment without filing evidentiary materials to banks. Banks may, however, still request that certain evidentiary materials are filed after the conversion.
  • Implications: The change better accords with the reality of transactions, e.g., difficulties in obtaining certain evidentiary materials before applications for foreign-exchange settlement and payment have to be made, and thus makes such business run smoother.

4. FIEs May Be Able to More Efficiently Carry Out Foreign Debt Registration and Deregistration

  • Previously: Since 2016, a PRC company (including an FIE) may borrow foreign debt up to a certain “quota”,[6] in connection with which it had to “register” with SAFE for each foreign debt agreement (“foreign debt registration”). More generally, borrowers were required to carry out foreign debt deregistration with their local SAFE branch within one month after repayment of each foreign debt.
  • SAFE Circular Changes: In the above-mentioned pilot zones, once a PRC company (including an FIE) is given a debt quota by SAFE, the company may conclude and execute further foreign debt agreements without making further foreign debt registrations, provided its total foreign debt does not exceed the quota. In addition, borrowers may now apply to banks (instead of local SAFE branches) to carry outforeign debt deregistration, and although they must still do so after the repayment of each foreign debt, the time limit of one month is eliminated.
  • Implications: These changes should reduce the time and cost of a PRC entity’s foreign financing.

The above are in fact only some of the changes brought about by the SAFE Circular (others include releasing other restrictions on cross-border trade, simplifying foreign exchange settlement and payment formalities and eliminating requirements to even open certain accounts), which itself is just one of a sizable series of measures being undertaken by SAFE, itself just one of the authorities reforming the PRC regulatory landscape for the benefit of cross-border trade and investment.[7] China is thus advancing in leaps and bounds towards realizing equal treatment for domestic and foreign investors.


[1] See, e.g., XinHua news article at http://www.xinhuanet.com/english/2019-10/26/c_138503459.htm.

[2] So-called “investment FIEs” (notably including foreign-invested investment companies, Qualified Foreign Limited Partner investment funds and management companies, and foreign-invested venture capital enterprises) were the exception, being allowed to use their registered capital to make equity investments in the PRC, but the threshold for establishing an investment FIE has been relatively high, e.g., having total assets of at least USD 400 million during the year before the application for establishing a foreign-invested investment company plus having established an FIE within the PRC with paid registered capital of more than USD 10 million.

[3] Further, of course, foreign investment in any form is still limited in certain sensitive industry sectors as set out in the so-called “Negative Lists”, i.e., the Special Administrative Measures on Foreign Investment Access and the Special Administrative Measures on Foreign Investment Access in Pilot Free Trade Zones. For details, please see our Newsletter on the New Negative Lists.

[4] The “domestic assets realization account” refers to an account of a PRC entity or individual for receiving a payment from a foreign buyer in a transaction for the sale of equity, shares or other interests.

[5] The pilot zones comprise 18 FTZs, including those in Shanghai, Guangdong, Tianjin, Zhejiang, Fujian, Liaoning, Henan, Hebei, Chongqing, Sichuan, Yunnan, Jiangsu.

[6] The foreign debt quota is calculated in one of two ways (certain FIEs able to elect between the two, other PRC companies limited to the first): (1) equal to the company’s capital or assets times its cross-border financing leverage ratio times the macro-prudential regulation parameter (where the cross-border financing leverage ratio cannot exceed 2); (2) equal to the difference between the company’s total investment amount and registered capital.

[7] See also, e.g., our Newsletters on the Foreign Investment Law, New Negative Lists, Groundbreaking FX Rule Changes in Shanghai FTZ, and Shanghai Explores Further Measures Opening Up to Foreign Investment in Various Sectors.

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