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China – Pilot Reform Of Forex Capital Settlement Of Foreign-Invested Enterprises.

12 August, 2014



1. Introduction 

On 15 July 2014, the State Administration of Foreign Exchange (“SAFE”) issued the Notice on Pilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-Invested Enterprises in Certain Areas (国家外汇管理局关于在部分地区开展外商投资企业外汇资本金结汇管理方式改革试点有关问题的通知 ) (the “Notice”), which is expected to bring more flexibility to the business and fund operations of foreign-invested enterprises (“FIEs”) in the 16 pilot areasupon taking effect on 4 August. 

The pilot reform measures as contemplated in the Notice fall in line with a series of recent reforms by the SAFE to the country’s foreignexchange administration over foreign direct investment. More importantly, the Notice takes major steps forward: it brings into play the discretionary settlement of foreign exchange capital of FIEs, paralleling one of the key developments recently unveiled in the China (Shanghai) Pilot Free Trade Zone2, and loosens to a large extent foreign exchange control over domestic equity investment by FIEs.

2. Key Points 

(1) Discretionary Settlement V. Payment-Based Settlement 

The discretionary settlement by an FIE of its foreign exchange capital introduced by the Notice means that a FIE registered within the pilot areas may, at its discretion, settle with a bank up to 100% of the foreign exchange capital in its capital account based on actual business needs.


In comparison, under the prevailing payment-based foreign exchange settlement system, in order to settle foreign exchange capital in its capital account, an FIE must first satisfy the relevant bank of the authenticity of each underlying transaction, as evidenced in most cases by a contract or payment notice issued by the beneficiary. 

According to the Notice, the two settlement systems are both available in the pilot areas and the choice rests with the FIEs. With the discretionary settlement system in place, FIEs are now given greater flexibility in terms of foreign exchange settlement, which leads to the possibility of better fund management and reduced exposure to foreign exchange risk. 

(2) Account Management And Use Of Funds 

The Notice requires that an FIE opens a special account for any RMB funds settled from foreign exchange capital account (“Settled Foreign Exchange Account”) (结汇待支付账户), in which the RMB funds obtained under the discretionary settlement system should be managed separately from those obtained under the payment-based settlement system. 

Under the Notice, the incomings and outgoings of RMB funds settled from foreign exchange capital and deposited into the Settled Foreign Exchange Account are still subject to restrictions, which are similar and comparable to those under the payment-based foreign exchange settlement system. For example, in order to access the RMB funds in the Settled Foreign Exchange Account, an FIE must satisfy the relevant bank of the authenticity of each underlying transaction. 

Moreover, in terms of the use of funds, the Notice requires that the foreign exchange capital of an FIE and its RMB funds settled therefrom may not be used for, among others, disbursement of RMB entrusted loans, repayment of inter-corporate borrowings and RMB bank loans that have been sub-lent to third parties, or purchase of real estate for non-self use purposes (inapplicable to foreign-invested real estate enterprises). 

(3) FIEs To Make Domestic Equity Investment With Settled Foreign Exchange 

Prior to the Notice, China’s foreign exchange rules 3 provided little momentum for domestic equity investment by FIEs: for one, RMB funds settled from the foreign exchange capital of an FIE may not be used for domestic equity investment; for another, in the case of investment-oriented FIEsapproved by relevant authorities, the payments for equity transfer must be made in the original currencies from the capital account to a special domestic re-investment account opened by the investment target, with no foreign exchange being settled in the interim. Further, in relation to such equity investment, banks are authorized to review the authenticity of each proposed fund transfer.


The Notice has pronounced a new regulatory regime that marks a significant turn away from those previous rules. 

For investment-oriented FIEs, in addition to making equity investment via transfer of payments in the original currencies, they are allowed to directly settle its foreign exchange capital according to the actual size of investment and transfer the funds in RMB after settlement to the account of its investment target, provided that such investment is real and compliant. 

For ordinary FIEs, they are allowed to transfer the funds in RMB after settlement to the Settled Foreign Exchange Account opened by the investment target according to the actual size of investment, provided that the target first completes domestic re-investment registration with the local foreign exchange bureau. As such, the use of RMB funds received by the investment target will be subject to the restrictions placed on a Settled Foreign Exchange Account. 

Given the investment targets’ general preference for funding in RMB, these new rules are most likely to benefit and in particular create new opportunities for investment-oriented FIEs such as foreign private equity funds. With easier settlement of foreign exchange capital and less fettered transfer of RMB funds, they are now on a leveled ground with their Chinese counterparts when contending for investment projects in China.


End Notes:


1 The pilot areas include: Tianjin Binhai New Area, Shenyang Metropolitan Area, Suzhou Industrial Park, Donghu National Independent Innovation Demonstration Zone, Guangzhou Nansha Development Zone, Hengqin New Area, Chengdu High-tech Industrial Development Zone, Zhongguancun Science Park, Chongqing Liangjiang New Area, border development and opening-up regions in Heilongjiang Province in which pilot foreign exchange administration reform is carried out, Wenzhou Comprehensive Financial Reform Pilot Area, Pingtan Comprehensive Experimental Area, China-Malaysia Qinzhou Industrial Park, Guiyang Comprehensive Bonded Zone, Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone and Qingdao Comprehensive Wealth Management and Financial Reform Pilot Area.


2 See Notice of the Shanghai Branch of the State Administration of Foreign Exchange on Printing and Distributing the Detailed Rules of Implementation on Providing Foreign Exchange Administration Support for the Development of the China (Shanghai) Pilot Free Trade Zone (关于印发支持中国(上海)自由贸易试验区建设外汇管理实施细则的通知)


3 Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China (外国投资者境内直接投资外汇管理规定) and SAFE Notice on Further Improving and Adjusting the Foreign Exchange Administration Policies on Direct Investments (国家外汇管理局关于进一步改进和调整直接投资外汇管理政策的通知).


4 For the purpose of this article, it refers to foreign-invested investment companies, foreign-invested venture capital enterprises or foreign-invested equity investment enterprises, and collectively, “investment-oriented FIEs”


Jun He 4


Yingling Wei, Partner, Jun He

[email protected]

Man Wang, Jun He

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Wenyao Fu, Jun He

[email protected]


Jun He International Trade Practice Profile in China


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