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China – SAFE Circular 13: Good News For FDI?

17 April, 2015


New SAFE Rule On Foreign Exchange Administration For FDI
On February 13, 2015, the State Administration of Foreign Exchange (“SAFE”) released the Notice on Further Simplifying and Improving Foreign Exchange Administration Policies for Direct Investment (Hui Fa [2015] No. 13) (“Circular 13”). Of particular importance, and in terms of inbound foreign direct investment (“FDI”), Circular 13 includes the following key reforms:
(1) Replacement of the foreign exchange registration at SAFE with direct registration at qualified banks;
(2) Revocation of the registration requirement to confirm investment by a foreign investor in the acquisition of an equity interest held by a Chinese party in a domestic entity;
(3) Revocation of the registration requirement to confirm a non-monetary investment by a foreign investor;
(4) Replacement of the registration at SAFE with registration at qualified banks for a foreign investor’s monetary investment (including investment of offshore RMB and foreign currency); and
(5) Replacement of the foreign exchange annual inspection with an annual report on SAFE’s information system by a foreign invested enterprise (“FIE”) or its authorized accountant or bank.
In our opinion, the reforms noted at (1) and (2) above are the most important. The first reform will greatly facilitate foreign exchange transactions involving foreign investors and FIEs, while the second reform will offer the possibility of more flexible arrangements regarding the transaction prices of equity interests in onshore enterprises purchased by foreign investors from Chinese parties.
Highlight One: Complete Revocation Of Foreign Exchange Registration With SAFE
China has stringent foreign exchange controls, and the prior approval or verification of SAFE hasbeen required for a very long time for many FDI-related foreign exchange matters, such as (i) opening various foreign exchange accounts, (ii) the receipt, transfer, payment, and settlement of foreign currency in upfront expenses account, (iii) the increase or reduction of registered capital of an FIE, and (iv) settlement of foreign currency in a capital account for special purposes.
In November 2012, SAFE released the Notice on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment (Hui Fa [2012] No. 59) (“Circular 59”). Circular 59 abolished SAFE’s verification requirement, which applied to most regular FDI-related foreign exchange matters, and replaced this verification with registration of foreign exchange information, pursuant to which qualified banks can directly handle foreign exchange transactions.
In May 2013, SAFE released the Provisions on the Foreign Exchange Administration of Inbound Direct Investment by Foreign Investors (Hui Fa [2013] No. 21) (“Circular 21”). Based on Circular 59, Circular 21 further streamlined FDI-related foreign exchange administration, and implemented a comprehensive registration system for FDI-related foreign exchange matters. It is worth noting, however, that as SAFE reserved the right to accept or decline an application for registration, such registration still amounts to de facto administrative approval by SAFE.
In February 2014, with the authorization of SAFE, the SAFE Shanghai Branch issued the Implementation Rules on Foreign Exchange Administration to Support the Establishment of China (Shanghai) Pilot Free Trade Zone (Shanghai Hui Fa [2014] No. 26) (“Shanghai Circular 26”). According to Shanghai Circular 26, within the Shanghai Pilot Free Trade Zone (the “FTZ”), the registration of FDI-related foreign exchange matters is delegated to qualified banks. This measure effectively removed SAFE’s review and approval of FDI-related foreign exchange registration within the FTZ.
In this regard, Circular 13 continues SAFE’s recent trend of simplifying FDI-related foreign exchange administration and extends the pilot practice under Shanghai Circular 26 nationwide. As a result, upon the implementation of Circular 13, all provisions relating to foreign exchange registration with SAFE under Circular 59 and Circular 21 will no longer be in effect. Foreign investors and FIEs can select qualified banks with which to conduct foreign exchange registration directly, and such qualified banks will administer foreign exchange transactions according to the registration information provided by the parties. SAFE will, therefore, through qualified banks, indirectly supervise FDI-related foreign exchange registration.
As the reform measures under Circular 13 will essentially cancel SAFE’s prior administrative approval of FDI-related foreign exchange matters, it will greatly facilitate enterprises’ operating activities involving foreign exchange transactions and reduce the risks of corruption caused by abuse of power. As a result, these reforms aregenerally considered to be widely welcomed by both foreign investors and FIEs.
Highlight Two: Revocation Of Registration Requirement To Confirm Investment By Foreign Investor Via The Acquisition Of Equity Interest Owned By A Chinese Party
In a transaction between a foreign investor and a Chinese seller wherein the foreign investor purchases an equity interest in a domestic enterprise, a very important administrative formality for both parties is the registration with SAFE in order to confirm the foreign investor’s investment in the equity acquisition (the “Foreign Investment Registration”). Until the official implementation of Circular 13, which is not expected until June 1, 2015, the procedure for Foreign Investment Registration is as follows:
(1) Where payment of the purchase price is in foreign currency only, the Foreign Investment Registration is conducted automatically through SAFE’s operating system upon the bank’s filing of the debiting of the purchase price received in the seller’s onshore bank account;
(2) Where payment of the purchase price (in part or in whole) is in non-monetary form, the target enterprise involved in the transfer of an equity interest is required to conduct the Foreign Investment Registration with SAFE’s local counterpart in the location of the target enterprise.
Currently, the completion of the Foreign Investment Registration is subject to confirmation by SAFE that the registration information is consistent with the transaction information with respect to parties, payment method, amount of payment, etc. Failure to complete the Foreign Investment Registration results in the following adverse consequences:
  Impact on the Seller of Equity (Chinese party) Impact on the Purchaser of Equity (Foreign party)
Failure to complete Foreign Investment Registration The Chinese party cannot use the purchase price received in its onshore bank account or convert the payment from foreign currency into RMB.1 The Foreign party cannot remit out of China or reinvest within China any funds derived from liquidation, capital reduction, transfer of equity, early recovery of its investment or distribution of profits of the target enterprise in which it has invested.2


Under the current foreign exchange administration scheme, following (i) the approval of the transaction by the Bureau of Commerce, (ii) the company registration of the target enterprise with the Bureau for Industry and Commerce, and (iii) the foreign exchange registration of the target enterprise with SAFE, the foreign investor must transfer the full purchase price registered with SAFE from an offshore account under the investor’s name to the Chinese party’s onshore account. No adjustment of the purchase price is allowed; otherwise, the Foreign Investment Registration cannot be completed.


As Circular 13 expressly removes the Foreign Investment Registration, we understand that, in theory, this reform means that after the official implementation of Circular 13, a transaction in which a foreign investor purchases a Chinese party’s equity interest in a domestic enterprise will be changed as follows:


(1) the time, amount and method of payment of the transaction purchase price will no longer be linked with the consequences listed in the above chart;


(2) the parties to the transaction may stipulate more flexible payment arrangements and price adjustment mechanisms in the equity transfer agreement. (Price adjustment mechanisms are almost infeasible under the current foreign exchange administration scheme.)


Issues To Pay Attention To


It is worth noting that the above analysis of the impact of the revocation of the Foreign Investment Registration is based on our interpretation of Circular 13. Whether this interpretation will be in line with actual practice remains to be seen following, and subject to, the official implementation of Circular 13, after June 1, 2015.


According to information received from certain local branches of SAFE, there are varying interpretations of the material effects resulting from the revocation of the Foreign Investment Registration. Therefore, it is anticipated that, before the official implementation of Circular 13, SAFE will issue detailed guidelines in order to standardize the interpretations of its local branches and banks regarding the relevant provisions of Circular 13 and its implications. We hope that such guidelines, if issued, will provide clarification and guidance on the issues addressed in the above analysis.


End Notes:


1 Please see the approval principles under Item 1.9 “Registration to confirm foreign investor’s investment in acquisition of equity owned by Chinese party” of the Guideline to Business Operation on Inbound Direct Investment, which is an attachment of Circular 21.

2 Id.


Jun He 4


For further information, please contact:


Yu Zheng, Partner, Jun He

[email protected]


Qiongyue Wang, Jun He

[email protected]


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