Foreign Exchange Regulatory Policies Series: Part I

Introduction

Introduction

With the continuous acceleration of economic globalization, cross-border payments under the current account transactions in China are basically freely convertible. At present, China has not deregulated the control of the capital account, however under the condition of effectively controlling risks, China has been easing the restrictions on cross-border capital transactions step by step and will gradually realize the convertibility of the capital account. In recent years, the State Administration of Foreign Exchange had released several major reform documents on various topics, such as the trade in goods and services under the current account, and foreign debts, cross-border guarantees and direct investment under the capital account. It can be seen that China’s foreign exchange policy is on a trend of orderly liberalization. Against the background of the new legal regime on foreign investment which is established on the basis of the "Foreign Investment Law", future developments of China’s foreign exchange regulatory policies will aim to further facilitate cross-border trade and investment. We will continue to advise our readers and clients of any further developments on the relevant foreign exchange laws, regulations and policies as they happen. Please stayed tuned for more articles in this Foreign Exchange Regulatory Policies Series.

Recently, the restriction on foreign-invested enterprise using foreign exchange capital funds for reinvestment has been repealed in China (the “New Policy”). The purpose of this article is to briefly introduce the history of the regulatory policy regarding the foreign-invested enterprise using foreign exchange capital funds to conduct reinvestment and to summarize the specific content of the New Policy, as reference for readers.

Before the New Policy, foreign-invested enterprise using foreign exchange capital funds for reinvestment was classified and regulated based on the nature of business of the foreign-invested enterprise, namely, foreign-invested enterprise whose main business is to conduct investment (hereinafter referred to as “Foreign-invested Holding Company”) and foreign-invested enterprise whose main business is not to conduct investment (hereinafter referred to as “Non-Investment FIE”). Details are as follows:

With a view to further push forward the reform regarding expanding the scope of opening-up, further optimizing the policies and measures for foreign exchange management and further facilitating cross-border trade and investment, the State Administration of Foreign Exchange issued the Notice of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment (Document Number: Hui Fa [2019] No. 28, which came into effect on January 1, 2020, hereinafter referred to as “Notice No. 28”). The main content of Notice No. 28 is as follows:

1.      Cancelling the Restriction on Reinvestment with Foreign Exchange Capital Funds by Non-Investment FIE

Non-Investment FIE would be allowed to use foreign exchange capital to conduct domestic equity investment subject to meeting the following requirements:

a.      Not be in violation with the Negative List[1]

Foreign investment shall be in compliance with the existing special management measures for entry of foreign investment (hereinafter referred to as “Negative List”). The Negative List refers to the special management measures that are adopted for the entry of foreign investment in specific industries, which will indicate areas where investment is prohibited or restricted for foreign investors.

b.      Invested projects are real transactions and in compliance with laws and regulations

Invested projects being real transactions and in compliance with laws and regulations are the core consideration when the foreign exchange authorities examine the equity investment with foreign exchange capital funds. In practice, the foreign exchange authorities usually require the foreign-invested enterprises to provide the proof of the rationality of the invested projects’ existence from the commercial perspective, the existence of certain relationship between the invested projects and the business activities of the foreign-invested enterprises and other relevant documents to ensure the authenticity and compliance of the invested projects. As such, purely “speculative” equity investment transactions may be rejected by relevant authorities based on the above considerations.

2.      Clarify the Procedures for Different Ways of Conducting Investment

3.      Restrictions on the Use of Foreign Exchange Capital Funds Have Not Been Released

Previous restrictions on the use of foreign exchange capital funds still remain in effect after Notice No. 28 came into effect. Unless otherwise specified, foreign exchange capital funds must not be used for:

l  Expenditure beyond its business scope or expenditure prohibited by PRC laws and regulations;

l  Securities investment or investment and wealth management products other than principal-protected products issued by banks;

l  Extending loans to non-affiliated enterprises; or

l  Constructing or purchasing real estate not for self-use (unless it is a real estate enterprise).

We, Jia Yuan Law Offices strive to provide the best quality service to our clients and will remain at your disposal for any further updates or clarifications as may be required in relation to the foreign exchange regulatory policy or any other matters on investment in China.

[1] “Negative List” refers to Special Management Measures for the Market Entry of Foreign Investment (Negative List)(2019 Version) (Order No. 25 of the National Development and Reform Commission and the Ministry of Commerce which came into effect on July 30, 2019) and Special Management Measures for the Market Entry of Foreign Investment in Pilot Free Trade Zones (Negative List)(2019 Version) (Order No. 25 of the National Development and Reform Commission and the Ministry of Commerce which came into effect on July 30, 2019).

[2] Currently, China carries out the policy on voluntary settlement of the foreign exchange capital funds of foreign-invested enterprises. The foreign exchange capital funds may be settled via banks based on the actual operating needs of the foreign-invested enterprise. Such RMB funds obtained by the foreign-invested enterprise from the voluntary settlement of its foreign exchange capital funds shall be managed under the “account for foreign exchange settlement pending payment”.