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14 Jul 2019

Shanghai FTZ Releases Groundbreaking Rules on Foreign Exchange Control – FIEs May Use Registered Capital for Equity Investment

On 12 July 2019, the Shanghai People’s Bank of China (“PBOC”) announced the circulation of a revision of the Implementing Rules for Further Reforming Foreign Exchange Administration in the China (Shanghai) Pilot Free Trade Zone (Ver. 4.0) (“Implementing Rules”). Though the issuing authority, the Shanghai branch of the State Administration of Foreign Exchange (“SAFE”), has yet to make the Implementing Rules public, the Shanghai PBOC reported on several key ways in which the Implementing Rules alter the regulatory framework for Foreign-Invested Enterprises (“FIEs”) in the Shanghai Free Trade Zone (“FTZ”). Among the key differences, the most significant and groundbreaking change is that FIEs in the Shanghai FTZ are now allowed to use registered capital to invest in PRC equity. The key differences between the new Implementing Rules and the current rules generally applicable to other areas of the PRC are best appreciated in a side-by-side comparison:

Issue / Rules

Current Nationwide Rules

New Shanghai FTZ Rules

Funds allowed to be invested in PRC equity by FIEs

Only profits, and not registered capital or even foreign debt, can (in local currency, i.e., RMB) be used for further onshore investment, except for  a few kinds of “investment FIEs”.[1]

All FIEs may use capital-account funds (potentially after conversion), including registered capital as well as foreign debt, for investment in PRC equity.

Method for calculating foreign debt quota[2]

Until 2015, only calculated as total investment amount minus registered capital; since 2015 in FTZs and since 2016 nationwide, may instead be calculated according to a financial model based on the FIE’s net assets or capital; since 2017, all FIEs have to make a one-time choice between the two methods when registering new foreign debt.

All FIEs may change from the traditional model to the newer, macro-prudential regulated cross-border financial model (though details are lacking on whether there is a time limitation, whether they can change back-and-forth, etc.).

Filing administrative applications with SAFE[3]

Done only on-site at local SAFE.

Done online.

Foreign debt deregistration


Handled by local SAFE.[4]

Handled by local banks.

Currency for foreign debt

The currency for withdrawing foreign debt, for repaying foreign debt and for the relevant agreements registered with SAFE must all be consistent.

The currencies may differ.

Aggregate transaction volume threshold for cross-border capital pool[5]

USD 100 million.

USD 50 million.

Permissible cross-border loans

No general rules allowing banks to grant loans to foreign entities.

Banks may grant to FIEs trade loans and loans on collateral of non-resident accounts of Shanghai FTZ entities.

Note that the new rules will apply only in the Shanghai FTZ (but an FIE within the FTZ may make an equity investment outside the FTZ), at least at first. Based on the Shanghai FTZ’s historical role as a pilot area, some or all of the rules may soon be adopted by other regions (and sources suggest at least one other FTZ is already preparing to do so) and ultimately even nationwide.

The new rules have major but also multifaceted significance. For example, with all FIEs being allowed to invest capital-account funds in PRC equity, the distinct importance of one function of “investment FIEs”, equity investment, may be diminished. However, a fuller analysis of the above provisions, as well as any not referred to by the Shanghai PBOC announcement, and their ramifications must await an official, full publication of the Implementing Rules, their application in practice and any further official interpretations or guidance.

[1] E.g., investment companies, QFLP funds and foreign invested venture capital enterprises.

[2] The foreign debt quota is the maximum amount of foreign loans (e.g., shareholder loans) that an FIE can borrow. Under the current regulatory regime, an FIE must, when it is set up, decide on its total investment amount and registered capital. The registered capital is the total amount of capital contribution that foreign investors may invest in the FIE while the total investment amount is the total amount that foreign investors may invest including by way of shareholder loans, etc.

[3] This includes registration of import/export entities, registration for PRC individuals participating in stock incentive plans of foreign-listed companies, etc.

[4] With exceptions, including notably Guangdong Province, in which local banks have been handling foreign debt deregistration since December 2018.

[5] This refers to the minimum transaction volume amount that multiple FTZ affiliates of an MNC must have, in the aggregate, to establish a cross-border capital pool for transferring funds in and out of China.

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