20 June, 2013

On 10 May 2013, the State Administration of Foreign Exchange (the "SAFE") promulgated the Provisions of Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China (Hui Fa [2013] No.21, the "New Provisions") (外国投资者境内直接投资外汇管理规定). The New Provisions have come into effect since 13 May 2013. In this article, we summarize certain major changes under the New Provisions which are worth noting.

1. General : Foreign Exchange Registration vs Foreign Exchange Approval

Foreign exchange transactions in foreign direct investment now require SAFE registrations rather than SAFE approval. The remittance pre-establishment expenses and other funds to China for purpose of preparing the establishment of a foreign invested enterprise ("FIE"), establishment of a FIE in China, and increase of registered capital of a foreign invested enterprise in China, etc. are now permitted subject to registrations with SAFE.

2. Opening of Bank Accounts

Once the registration is completed, the foreign investor may open an pre-establishment expense account (前期费用账户), a capital account (资本金账户), an asset realization account (资产变现账户) and other accounts for direct investment in China directly with the relevant bank in the PRC.

3. SAFE Approvals Simplified

In the past, opening of foreign exchange accounts required approvals of SAFE and the process could be time-consuming. Under the New Provisions, the bank are authorised to open bank accounts for applicants as long as registration with SAFE is completed. Previous SAFE approval requirements for opening of specific account for asset realisation proceeds (资产变现账户) and specific account for proceeds from offshore lending (境外放款专用账户) were abolished. Banks may handle these transactions based on the registration with SAFE.

4. Use of Foreign Exchange by FIE for Permitted Purpose

A FIE shall comply with relevant provisions on foreign exchange administration in terms of foreign exchange settlement and use of foreign exchange. A FIE shall use its foreign exchange and the RMB funds converted from foreign exchange for genuine self-use purposes which are within its business scope.

Previous filing requirements for certain foreign exchange settlement transactions have been uplifted. With regard to foreign exchange requirement of FIEs for overseas payment which are not expressly within the current permitted categories of SAFE, the banks are now authorised to sell foreign exchange to satisfy these transactions insofar as they are used for genuine self-use purposes which are within the FIE's business scope, subject to duly examination by the bank and completion of SAFE filing through electronic systems on an item-by-item basis.

5. Outward Remittance Procedures

A FIE which needs to remit foreign exchange to overseas as a result of capital reduction, liquidation, pre-end-of-term recovery of investment and profit distribution, etc. may purchase foreign exchange and make outward remittance with the relevant bank after completion of corresponding registration. The previous SAFE approval requirements are now dispensed with. A Chinese purchaser of equity interest in China may, after completion of corresponding registration with SAFE, remit funds to the seller abroad.

Conclusion

We have noted that the reform of foreign exchange administration system was deepened, and the administration of foreign exchange over direct investment in China was simplified and streamlined. We may expect that with the implementation of these New Provisions, foreign investors and FIEs would find their operations in China more effective and convenient.

For further information, please contact:

Machiuanna Chu, Partner, Deacons

machiuanna.chu@deacons.com.hk

Hellen Lu, Deacons

helen.lu@deacons.com.hk