China simplifies foreign exchange policies for cross-border investments

The State Administration of Foreign Exchange (SAFE) recently issued the Notice on Further Simplifying and Improving Direct Investment-Related Foreign Exchange Administration Policies (Notice), which takes effect on 1 June 2015.

The three key reforms introduced by the Notice are:

1. Inbound Direct Investments Exempted from SAFE Approval

Direct investment into China will no longer require separate SAFE approval. Instead, investors may transfer funds by filing a foreign exchange registration with qualifying Chinese banks.

2. Filing Requirement Removed for Overseas Re-Investments

The SAFE will no longer require overseas enterprises established or controlled by domestic investors to complete foreign exchange registration procedures when re- investing abroad.

3. Use of Foreign Exchange in Domestic Equity Purchases Simplified

Where a foreign-invested enterprise (FIE) is created by a foreign investor purchasing equity in a Chinese company with hard currency, the FIE must employ an accounting firm to perform capital verification and registration procedures. Failure to do so prohibits (a) the seller from converting the foreign currency into Renminbi, or otherwise using the funds in China; and (b) the buyer from using income generated by the company in China, or converting it into foreign currency for repatriation.

The Notice removes the above capital verification requirement, and allows FIEs to register foreign currency investments with the SAFE directly. This will simplify the creation of FIEs, the conversion of foreign exchange, and overseas investors’ repatriation of profits.

By simplifying certain uses of foreign exchange, the Notice facilitates access to, and the application of, capital in cross-border transactions. This is consistent with China’s overall policy of supporting Chinese companies to “go abroad”, as well as the gradual relaxation of inbound investment rules. The Notice also makes it easier for Chinese and foreign parties to collaborate on multi-directional ventures such as the establishment of a joint venture in China to sell goods into the overseas market.

Jesse T H Chang (Managing Partner, jthchang@TransAsiaLawyers.com)

Dylan Wu (Associate, dwu@TransAsiaLawyers.com)

Paul Kossof (Associate, pkossof@TransAsiaLawyers.com)

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