China: China’s New Foreign Exchange Control Rules Offer Improved Regulatory Transparency for Equity Financing Deals

Last Updated: 6 December 2005

By Z. Alex Zhang and Patrick H. Hu

SAFE—Circular 75

The State Administration of Foreign Exchange of China ("SAFE") has issued new rules, effective as of November 1, 2005, on foreign exchange registration concerning equity financing transactions through offshore "special purpose companies" ("SPCs") and their onshore investment in China. This new set of rules (commonly referred to as "Circular 75") is significant in that the SAFE regulators have willingly considered the relevant comments from the foreign venture capital and private equity investors as well as domestic emerging companies that seek foreign funding to finance their onshore operations. Such comments were voiced in reaction to the two sets of rules the SAFE issued earlier this year.

In January and April 2005, the SAFE issued Circulars 11 and 29, respectively, seeking to tightly control the cross-border flow of capital and assets through financing arrangements between Chinese entrepreneurs and foreign investors. Under these two earlier Circulars, Chinese residents who wished to establish or hold (directly or indirectly) shares in an offshore company by contributing domestic assets or equity interests to the offshore company were required to obtain prior approval by the relevant authorities and register with the SAFE. However, due to the lack of corresponding rules by other relevant government authorities, the absence of detailed SAFE registration procedures, and the lack of clear guidance from the SAFE, it was difficult for Chinese entrepreneurs to follow these two Circulars when engaging in foreign equity financing deals. Although the SAFE’s earlier intent was to establish a system to track the cross-border flow of assets and capital for foreign exchange control purposes, Circulars 11 and 29 in fact adversely affected many venture capital investments through such offshore-onshore arrangements, discouraging foreign investors and Chinese entrepreneurs alike.

In light of the serious concerns raised earlier by the foreign and domestic parties, SAFE officials made efforts to address such concerns by soliciting comments on the drafts of Circular 75. Compared to Circulars 11 and 29, which are no longer being enforced, Circular 75 is a positive development because it reasonably balances regulatory control and investment needs. Many are pleased that Chinese regulators were attentive to the negative impact caused by Circulars 11 and 29; as a result, foreign equity investors who are seriously pursuing deals in China have generally welcomed Circular 75.

Parties Affected by Circular 75

Circular 75 applies to "domestic resident legal persons" and "domestic resident natural persons." It defines "domestic resident legal person" as any enterprise legal person, institutional legal person, or other economic organization duly established in China. This generally includes corporate entities organized under the laws of China. Further, Circular 75 defines "domestic resident natural person" as any natural person who holds a Chinese resident card, passport, or other lawful identification, or any natural person who does not have Chinese resident status but habitually resides in China due to reasons of economic interest. These domestic resident legal persons and natural persons, who are collectively referred to also as "domestic residents" throughout Circular 75, must comply with Circular 75 if they engage in transactions that fall within the scope of these new rules. Although the definition of "domestic resident legal person" is relatively clear, the definition of "domestic resident natural person" could cause difficulties in both implementation and compliance. Based on this relatively broad definition, "domestic resident natural persons" could include (i) Chinese passport holders who are also permanent residents of another country, and (ii) foreigners who work or do business in China on a regular basis. Therefore, it is advisable for those who are concerned to seek further clarification from the SAFE if they intend to engage in the type of offshore-onshore transactions as defined in Circular 75.

Transactions Affected by Circular 75

Circular 75 primarily targets transactions where Chinese domestic residents directly set up or indirectly control offshore SPCs for the purpose of raising offshore equity financing (including convertible debt financing) with domestic assets or legal interests. In recent years, this type of offshore-onshore arrangement, whereby the offshore SPCs raise foreign capital to fund early-stage onshore operations, has been the popular structure among foreign venture capital investors and Chinese domestic entrepreneurs who plan to have initial public offerings outside China (mostly in Hong Kong and the U.S.). Similar structures were also used in the recent NASDAQ IPOs involving operating assets inside China that were owned or controlled by such offshore SPCs.

The SAFE’s primary goal in issuing Circular 75 is to regulate "return investment" from the offshore SPCs into China. As defined in Circular 75, "return investment" refers to the direct investment inside China made by domestic residents through their offshore SPCs, and it includes but is not limited to (i) acquiring or swapping the shares of Chinese shareholders in domestic enterprises, (ii) acquiring domestic assets and using such assets to invest in new foreign-invested enterprises in China, and (iii) increasing the registered capital of existing domestic enterprises. Such return investments are covered by the interim rules on foreign-invested mergers and acquisitions issued in 2003 by the predecessor ministry of the Ministry of Commerce ("2003 M&A Rules"). Therefore, parties involved in such offshore-onshore deals should comply with both Circular 75 and the 2003 M&A Rules, which require following a series of procedures and formalities before the closing and effectiveness of such transactions under the Chinese law.

Another key element in determining whether Circular 75 applies to a particular transaction is the term "control." Circular 75 defines "control" as the "right to operate, receive benefits from or make decisions for the SPC or its domestic enterprise," as such right may be acquired by the domestic residents through share purchase, a trust, nominal shareholding, voting power, a buyback scheme, a convertible bond, or other similar means. This definition of "control" appears to be much broader than the term "control" as it is commonly defined in international M&A deals; therefore, it could subject more domestic residents to the reach of Circular 75 than is necessary. It remains to be seen how SAFE officials, when implementing Circular 75, will exercise their discretion to determine whether "control" exists on a case-by-case basis.

Mandatory Registration

Circular 75 focuses on the registration procedures and documentation formalities required of domestic residents involved in the offshore-onshore transactions described above, i.e., the "offshore investment foreign exchange registration." It requires new filings with the SAFE prior to forming or gaining control by the domestic residents of the offshore SPC and, in addition, requires filings for change (i) upon contribution of domestic assets and equity interests to the offshore SPC, and (ii) upon major change in the capital structure of the offshore SPC resulting from equity financing. Even if any change in the capital structure of the offshore SPC does not involve any return investment, the domestic residents in question must file with the SAFE for such change within 30 days of the change. For those deals completed before November 1, 2005 that fall within the scope of Circular 75, the domestic residents in such deals must complete their registration with the SAFE no later than March 31, 2006.

The required filings will be evidenced in the two registration forms applicable to domestic resident legal persons and domestic resident natural persons, respectively. It is important to complete such filings in a timely manner because failure or delay in obtaining such registration on the part of the domestic residents could affect the foreign exchange registration required of the relevant domestic entity involved in the same deal. In addition, after completion of the required registrations, the domestic residents may then make payments to the offshore SPC for the purposes of profit and dividend distribution, liquidation, share transfer, or decrease in capital.

Remittance of Profit Back to China Is Required

Circular 75 permits, but does not require, the domestic residents to transfer the funds raised offshore for use inside China, based on the plan for use of proceeds set forth in the business plan or investment documents. However, profits, dividends, and foreign exchange income resulting from capital change that a domestic resident may receive from an SPC must be remitted back into China within 180 days. Further, the remitted profits or dividends may be deposited into a foreign exchange currency account or settled in the Chinese currency. Also, foreign exchange income resulting from capital change in the offshore SPC may, upon verification and approval by the SAFE, be either reserved in a special capital account or settled in the Chinese currency upon verification and approval by the SAFE. It is worth pointing out that the requirement for the return remittance of such offshore income will apply to the domestic residents but not foreign investors who are not otherwise deemed "domestic residents."

A Major Step Forward

The issuance of Circular 75 was a major step forward by the SAFE in providing regulatory guidance to venture capital, private equity, and capital market deals involving Chinese entrepreneurs and their operating assets in China. Therefore, one hopes that implementation of Circular 75 will be more transparent, and the relevant Chinese domestic residents should fully comply with Circular 75. While it is expected that SAFE officials will come up with specific implementing procedures at least internally in order to process registration applications, structures and closing schedules in current and future deals involving Chinese domestic residents should be adjusted in accordance with the procedures and formalities set forth in Circular 75. Further, all offshore-onshore deals to which Circular 75 applies will also have to comply with all other relevant Chinese laws, regulations, and rules governing foreign investment transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.