On 26 January 2017, SAFE issued the Notice on Further Improving
the Reform of Foreign Exchange Administration and Review of
Veracity and Compliance (the
Nei Bao Wai Dai
The Notice has further eased the restrictions on Onshore
Securities for Offshore Loans (commonly referred to
"Nei Bao Wai Dai"), by allowing the
funds raised through Nei Bao Wai Dai to be directly or indirectly
repatriated to China, for utilisation in debt and equity
investment, etc. within China. Nei Bao Wai Dai refers specifically
to security or guarantee provided by an entity incorporated in PRC
while both the borrower and the beneficiary (e.g. the lending bank)
are incorporated and operate outside of China.
Pursuant to the previous Provisions on the Foreign Exchange
Administration of Cross-border Securities promulgated by SAFE in
2014 (the "2014 Provisions"), the
repatriation of loan proceeds of Nei Bao Wai Dai for use in lending
and equity investment and securities investment etc. within China
was restricted without the approval of SAFE. The Notice suggests
that loan proceeds raised through Nei Bao Wai Dai (the
"Borrowings") can now be repatriated
into China for use in funding certain debt or equity investments,
but it remains unclear the extent to which such Borrowings can be
used for other forms of investment.
The 2014 Provisions include the following, as examples of
restrictions on repatriation of Borrowings:
where the Borrowings are used to
acquire the equity of a non-PRC target company, of which over 50
percent of the assets are located within the PRC;
where the Borrowings are used to
repay/refinance the debt of the borrower or any other non-PRC
company, while the monies originally borrowed are transferred,
directly or indirectly, back to the PRC in the form of equity or
where the borrower uses the
Borrowings to make advance payments for trade in goods or trade in
services, and the payment time is more than one year before the
time of delivery of the goods or services and the amount of the
advance payment exceeds USD 1 million and 30 percent of the total
price of the sales and purchase agreement.
We will update you once SAFE provides further guidance on
whether any of the above restrictions will now be wholly or
partially lifted in light of the Notice.
Other main points under the Notice include (a) allowing foreign
entities in free trade zones to settle transactions in foreign
currency; (b) expanding the scope of settlement of domestic and
overseas foreign currency loans; and (c) strengthening the
compliance and verification regime for outbound payments.
The Notice sends a clear signal that the Chinese government is
strengthening the restriction of outflows of foreign currency while
welcoming the inflows of the same.
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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