On 21 November, 2012, the State Administration of Foreign Exchange (SAFE) promulgated the Notice on Further Improvement and Adjustment on the Foreign Exchange Administration Policies of Direct Investment (Hui Fa [2012] No. 59, the Circular 59), which became effective on 17 December, 2012.  

 

The Circular’s main aim is to improve the investing environment in China, by removing and simplifying some of the relevant administrative procedures and increasing their efficiency. In total, the Circular eliminates 35 administrative approvals and simplifies another 14. After these amendments, registration procedures will be more common than time-consuming administrative approval procedures and banks will be responsible for some procedures based on the information provided by SAFE. Even though the reform is mostly procedural, the Circular will be very significant because of the extension of changes and the general lessening of the investing and foreign exchange controls they entail.

The Circular is mainly a response from the authorities to the recent decline of foreign investment into China. Between January and October 2012, foreign investment amounted to USD 91.736 billion, down by 3.45% year on year, according to the Ministry of Commerce. However, the Circular also fosters Chinese outbound investment overseas, as some of the measures affect the investment by domestic companies abroad.

  

 

Replace approval formalities with registration formalities for account opening for foreign currency accounts for preliminary expenses, foreign currency capital accounts, asset realisation accounts, security deposit accounts, banks shall complete account opening formalities for account opening entities in accordance with the registration information of such entities filed with SAFE.

 

(1) Cancel former special foreign currency accounts of foreign investors (acquisition type, guarantee type, investment type and expense type).

(2) Cancel former special accounts for foreign currency security deposit for bidding of land-use-rights by foreign investors and special accounts for foreign currency security deposit for property rights transactions by foreign investors.

(3) Clarify that security deposit accounts shall include special accounts for overseas remitted security deposit and special accounts for domestic remitted security deposit.

(4) Clarify that asset realisation accounts shall include domestic asset realisation accounts and overseas asset realisation accounts.

(5) Abolish the limit on the inter-city account opening for foreign exchange capital account and asset realisation account. SAFE will conduct overall control on the total foreign exchange capitals received by one foreign invested enterprise, whilst it will not limit the quantity of foreign exchange capital accounts opened by such foreign invested enterprise, nor will it limit the capitals remitted into any single foreign exchange capital account opened by such foreign invested enterprise.

 

(1) Abolish the approval procedures for foreign investors’ reinvestment with their earnings legally obtained in China, i.e. capital reserve, surplus reserve, undistributed profits, profits, capitals obtained from equity transfer, capital reduction, liquidation and advance recovery of investment, as well as registered foreign debt (including interest). As a result, the accounting firms may process capital verification and certification formalities in accordance with the foreign exchange registration information of the foreign invested enterprises invested by such foreign investors. 

(2) Abolish the approval formalities for fund transfers for the onshore investments made by foreign invested holding companies and approval formalities for onshore transfer of foreign currency profits, dividends and bonuses to the foreign invested holding company. Banks could process afore mentioned onshore fund transfer formalities upon examination and verification of supporting documents. 

(3) Abolish the capital verification and certification formalities for the investments purely made by foreign invested holding companies.

(4) Foreign invested venture capital enterprises and foreign invested equity investment enterprises shall apply the same foreign currency administrative guideline of foreign invested holding companies.

 

Where a foreign investor fully pays the consideration for such equity transfer in cash, upon duly filing with the bank, the confirmation registration for capital contribution for the foreign investors’ acquisition of equity of domestic entities will be automatically completed through SAFE’s administrative system. In case, the consideration is made in non-monetary form, the domestic entities whose equity is acquired by the foreign investors shall file confirmation registration for capital contribution before SAFE.

 

The Circular has abolished the approval formalities for foreign exchange purchase and overseas payment by foreign investment enterprises for capital reduction, liquidation, payment of proceeds from advance recovery of investment to foreign investors, abolished the approval formalities for preliminary expenses of overseas investments remitted overseas by domestic organisations, abolished the approval formalities for foreign exchange purchase and payment for transfer of commodity housing in China by overseas individuals and domestic branches and representative offices established by overseas organizations. Upon duly filing with SAFE, banks shall process the formalities for foreign exchange purchase and overseas payment with the registration information in SAFE system.

 

Circular 59 has loosened the restrictions on the inter-city purchase and payment of foreign exchange and the restrictions on the source and subject of overseas advance. Pursuant to Circular 59, a domestic entity may use the proceeds of domestic foreign exchange loans to make overseas advance, and a foreign invested enterprise may make overseas advances to its overseas shareholder. Nevertheless, the amount of which may not exceed the aggregate of the profits distributable to such foreign investors but not actually transferred out of China and the profits distributable but not actually distributed to such foreign investor.

 

Circular 59 has abolished 35 approval procedures in relation to the foreign exchange administration and has simplified or consolidated 14 administrative approval procedures. It is undoubted that the promulgation of Circular 59 is aiming to promote the CNY internationalisation and reform the foreign exchange administration mechanism, which would definitely facilitate the foreign investment and trade in China. However, in practice, the filing procedure will also be regarded as an alternative of administrative permission. It will take time to examine whether Circular 59 does simplify the foreign exchange administration procedure or not. 

 

by Garrigues