Circular 59 simplifies foreign exchange procedures for foreign
direct investments in China. It also relaxes certain requirements
in relation to outbound investments by Chinese companies. This
development may have a profound effect on inbound and outbound
investments, including greenfield/brownfield projects, growth
capital investments, and mergers and acquisitions.
We believe that SAFE is further relaxing foreign exchange
controls because Circular 59 removed many of the approval
requirements that have been put in place over the course of the
last ten years. Although the changes brought by Circular 59 are
predominately procedural, the elimination of such approvals has two
significant effects. First, transactions can be expedited because
fewer approvals are required. Second, banks in China have increased
influence given its new authority under Circular 59 to review and
process additional foreign exchange transactions directly without
the involvement of SAFE.
In addition, we believe that Circular 59 signals a significant
policy change for SAFE -- it is gradually shifting its focus from
micro-administration to macro-supervision. We also view such
further relaxation to be an indirect response to the notable
decline in the volume of foreign direct investments into China in
the past few months and the Chinese government's further
promotion of outbound investments by Chinese companies.
I. KEY CHANGES UNDER CIRCULAR 59
We summarize below the key changes for (i) foreign investors,
(ii) foreign invested enterprises (FIEs), (iii) foreign invested
holding companies (HoldCos), and (iv) domestic companies:
II. EFFECT ON CROSS-BORDER M&A
SAFE Circular 142,4 which was issued in 2008, infamously
prohibits FIEs from converting their registered capital into RMB to
(i) make equity investments in China (unless their business scope
covers equity investments), (ii) purchase non-self-use real
properties, or (iii) invest in securities (unless otherwise
permitted by law). We believe that the restrictions under Circular
142 have not been lifted or relaxed by Circular 59. Therefore, for
foreign investors who plan to use its existing FIEs in China to do
share acquisitions, funding could still be an issue if the FIEs
have not generated sufficient profits.
Circular 59 further relaxes China's foreign exchange
controls. We believe this is a signal that SAFE is transitioning
its functional role to macro-administration. The simplified
procedures are certainly encouraging for foreign investors and
foreign invested enterprises in China, but the effective
implementation of the circular will certainly take some time.
* China's State Administration of Foreign Exchange
(SAFE) issued the Circular Regarding Further
Improvement and Adjustment of Foreign Exchange Administration
Policy of Foreign Direct Investments (Circular
59) on November 21, 2012. The circular will become
effective on December 17, 2012. Circular 59 includes five
appendices that set forth detailed guidelines for SAFE's local
branches and banks, standard application forms, schemes for data
transition, and a list of rules revoked by Circular 59.
2 Under Circular 59, the rules that are applicable to
HoldCos also apply to foreign invested venture capital enterprises
and foreign invested equity investment enterprises.
3 This permission reiterates the rules issued by SAFE in
June 2012 to promote outbound investments by private companies
(i.e., the Circular on Foreign Exchange Administration Issues
concerning Encouraging and Guiding the Healthy Development of
Private Investment), which were not widely noted.
4 The Circular of Operation Issues Related to the
Perfection of Administration of Payment-Related Settlement of
FIEs' Registered Capital from Foreign Exchange to
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and should not be relied on in that way. Specific advice should be
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