Chinese foreign exchange regulations restrict the activities of
foreign companies in China. To ease these restrictions, the State
Administration for Foreign Exchange has introduced various new
regulations over the past few months. Most importantly, from 1 June
2015 entities owned by foreign investors will be allowed to freely
convert foreign exchange in their capital accounts into RMB and
also use that money for making equity investments in China. We
expect these regulations to bring relief to many multinationals
when financing their activities in China. We therefore recommend
that clients investigate the benefits offered by the new
As part of a continuing process of new foreign exchange control
regulations, the State Administration for Foreign Exchange (SAFE)
recently issued two particularly noteworthy regulations: Circular
13 and Circular 19. Both circulars will enter into effect on 1 June
2015 and provide foreign-invested enterprises (FIEs) more
flexibility in the conversion and use of foreign exchange capital.
The new regime was piloted in the Shanghai Free Trade Zone in 2013
and in various other pilot areas last year.
Under Circulars 13 and 19, certain administrative procedures
will no longer be performed by SAFE, and trimmed-down versions of
those procedures will be carried out by authorised banks. As a
result, SAFE will only indirectly supervise foreign exchange
transactions. We recommend that clients involve their banks in
analysing how their business may benefit from the new
The main features of the new regime for FIEs are:
FIEs will be allowed to convert their foreign capital into RMB
whenever they want. Compared to the current regime, which only
allows FIEs to convert foreign capital for specific payment needs,
Circulars 13 and 19 enable FIEs to better manage currency
In contrast with the current regime, FIEs will be allowed to
use RMB converted from foreign capital to make equity investments
in China. Although certain investment conditions remain unclear
– including whether Chinese companies need to register with
SAFE prior to receiving RMB investments from FIEs – this is a
significant step forward in enabling multinationals to structure
equity investments through their Chinese FIEs. Under the current
regime, regulatory barriers often force multinationals to invest
through offshore vehicles.
The use of RMB converted from foreign capital will nonetheless
remain restricted. For example, converted RMB cannot be used to
fund activities outside the FIE's scope of business or for
investments in securities or real estate.
Circular 13 will abolish the SAFE verification of purchase
price payments. This removes one of the restrictions that currently
make it hard to agree on purchase price adjustments in M&A
transactions in China. Other restrictions will however continue to
exist, most importantly the need for MOFCOM approval.
Although Circulars 13 and 19 will allow FIEs to settle foreign
exchange capital without requiring supporting documents for the
conversion, those documents still need to be provided when using
the converted RMB. For each payment out of the RMB capital, the
bank must review the supporting documents to ensure the
payments' authenticity and compliance.
Circulars 13 and 19 do not apply to foreign exchange loans
extended to FIEs.
Circular 13 was released by SAFE on 28 February 2015 as Notice
on Further Simplifying and Improving Foreign Exchange
Administration Policies for Direct Investment. Circular 19 was
released by SAFE on 8 April 2015 as Notice on Reforming the
Administration of Foreign Exchange Capital Settlement of
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.
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