China Loosens FDI-Related Foreign Exchange Controls

China's State Administration of Foreign Exchange (SAFE), the central authority that monitors the flows of foreign exchange into and out of China, promulgated the Circular on Further Improving and Adjusting Foreign Exchange Administrative Policies on Foreign Direct Investment (Circular No. 59) on November 21, 2012. With effect on December 17, 2012, it replaces more than 30 approval requirements with simpler registration procedures, streamlines many administrative procedures for foreign exchange transactions and relaxes some restrictions on the utilization of funds used for foreign direct investment (FDI). The changes resulting from it include the following:

Registrations Instead of Approvals

As most foreign investors in China are aware, in the context of Chinese administrative procedures, "approvals" are usually distinguished from "registrations." Approvals, which are similar in nature to permits or licenses, allow their recipients to engage in certain economic activities which are closely controlled by the State. To obtain an approval, it is usually necessary to submit a detailed application to the relevant government organ and then wait for some period of time, which can be weeks or even months long, for that government organ to review and issue (or deny) the approval. Registrations, on the other hand, are filings which are made in relation to economic activities that are generally allowed by PRC law, but still supervised and regulated by a responsible government organ. For most registrations, forms are completed and filed, and there is usually no lengthy waiting period or uncertainty about being able to proceed with the activity that is the subject of the registration. Consequently, from a business perspective, changes from approval requirements to registration procedures are always very welcome in China.

Circular 59 provides that the following foreign exchange transactions, which previously required approvals from SAFE, may now be done upon the completion of registration procedures with banks which have been given access to SAFE's online data systems:

• The opening of FDI-related foreign exchange bank accounts for start-up costs, investment capital, asset realization (for asset sales) and security deposits
• The use of foreign exchange income of a foreign investment enterprise (FIE) for reinvestment or increase of registered capital
• The conversion of the registered foreign debt of a FIE into registered capital
• Remittances of start-up costs for outbound investment by domestic enterprises (companies which are not FIEs)

Location and Number of Accounts

FIEs are now permitted to open foreign exchange bank accounts outside their registered places of business and to open more than one foreign exchange bank account.

Equity Acquisition of Domestic Enterprises

Equity acquisitions of domestic enterprises made with cash consideration are no longer required to be registered directly with SAFE since they are now automatically registered on SAFE's online system when the bank processes the incoming payment in China. However, equity acquisitions of domestic enterprises made with non-cash consideration still need to be registered directly with SAFE as before.

Re-investment by Foreign-Invested Holding Companies

Foreign-invested holding companies, venture companies and equity investment companies no longer need to register their investments with SAFE. Similarly, the enterprises in which they invest are also no longer required to register them with SAFE, unless they are made in conjunction with other investments from foreign companies.

Outbound Financing

In relation to outbound financing, domestic enterprises were previously only permitted to make loans to wholly owned subsidiaries or shareholding enterprises which were legally established abroad, and the funds that were loaned were required to be "self-owned" (not borrowed), sourced from a foreign currency pool approved by SAFE or purchased in RMB. FIEs are now permitted to provide their overseas parent companies with financing equivalent to the aggregate of their distributed but unremitted profits and their proportion of undistributed profits. In addition, FIEs are now allowed to use their foreign exchange loans in China to provide overseas lending.

Capital Verification and Confirmation Formalities

Accounting firms are now permitted to submit materials online when undertaking capital verification and confirmation procedures with SAFE. In addition, the reduction of capital in FIEs by foreign investors is no longer subject to a confirmation process at SAFE.

Further Implications

The replacement of the aforementioned SAFE approvals with registrations will likely place more responsibility on the banks which provide foreign exchange services in China, since they will be reviewing documentation and reporting information for the registrations to SAFE. Since many banks tend to be risk adverse in China, it would not be surprising if they are initially cautious and conservative in their performance with some of these tasks.