Recent developments in control of capital outflow

In the past years and in line with the increasing internationalization of RMB, foreign exchange control in China has been gradually relaxed. Even in relation to capital account items, the State Administration of Foreign Exchange (“SAFE”) had delegated a considerable amount of functions to the banks. However, in recent months it seems that the Government got the impression that there are excessive levels of capital outflow. Also concerns arose because due the expectation that the RMB will be depreciated, a considerable number of cases of short selling RMBs occurred in offshore markets. Thus, in the past weeks, the SAFEs, both at central and local levels, and the People’s Bank of China (“PBOC”) enacted a number of restrictive measures. Below is an overview on the main developments.

1. Restrictions on Cash Outflow under capital account item In the recent past, foreign investors could select qualified banks with which they conducted foreign exchange registrations directly. In particular, on 13 February 2015 SAFE issued a “Circular on Further Simplifying and Improving Policies for Foreign Exchange Administration for Direct Investment” (Circular Hui Fa 2015 No. 13, hereafter: “Circular 13”), took effect on 1 June 2015. At that time, the purpose of facilitating foreign exchange administration procedures for domestic and overseas direct investment still was the priority objective. Therefore, administrative approval items concerning foreign exchange registration were cancelled, the administrative procedures at SAFE regarding equity purchases and capital contributions were simplified and the annual inspection by SAFE was replaced by a reporting system. Before the entry into force of Circular 13 a registration and prior approval by SAFE had been required for most foreign exchange transactions related to foreign direct investment, such as settlement of foreign currency in capital account items. Recently on 29 November 2016, the SAFE Suzhou Branch is reported to have issued an internal circular (“Circular”), which is currently not available to the public. Under this Circular, banks are required to report to SAFE any purchase of foreign currency or payment of foreign currency or RMB abroad which exceeds USD 5 million (inclusive) per transaction and is under the capital account item. Banks shall review the authenticity and compliance of the transaction before they handle the relevant business. Meanwhile, banks in Shenzhen and Fuzhou have all confirmed that they received from their local counterparts SAFE notices with the content similar to the above Circular issued on 29 November 2016. It was also reported that in such internal circular the SAFE tightened controls for all ongoing outbound investment deals involving a capital outflow of more than USD 50 million that have yet to be completed. Payment under these ongoing deals can only be made after the government agencies in charge of the outbound investment have completed their checks of authenticity and compliance reexamination.
2. RMB loans to overseas affiliates Under the Circular Yin Fa 2013 No. 168, it was regulated that a PRC entity may grant RMB loans up to its owners’ equity (i.e. net assets) through a bank in China to its overseas affiliates. Due to the then applicable regulations the lender should file an application with a bank in China which would then report to the PBOC. According to the new Circular Yin Fa 2016 No. 306 issued by SAFE on 29 November 2016, the amount of loans a company operating in China can remit to its offshore operations can only be up to 30% of the Chinese onshore operation’s owners’ equity (i.e. net assets). Further, such RMB loan is subject to the registration with the competent SAFE.
3. Transfer of funds for outbound direct investment by partnership enterprises According to media reports, around 28 June 2016, SAFE Shanghai requested the banks through “window instructions” to tighten the control on outbound direct investment by partnership enterprises as follows:
   • If the source of the fund originates from individuals (except for founders of the fund), the application for registration will be suspended; if such registration is already made and the fund has not been transferred abroad yet, such transfer will be subject to the approval by the PBOC.
   • If the source of the fund is from non-individuals, any transfer which exceeds USD 50 million (inclusive) (including foreign currency and RMB) shall be reported to the PBOC.
4. Tightened foreign exchange control on individuals PRC individuals are granted a foreign exchange quota of USD 50,000 per year. Many have transferred larger sums abroad by borrowing relatives’ quotas. According to media reports, in September 2016, the SAFE Shanghai issued an internal circular to the banks to request the banks to be more alert on this issue and reject the application if necessary.

The recent actions taken by the SAFE seem to be a step back from the policy to promote the overseas usage and the establishment of the RMB as a global reserve currency. However, the recent change stems from the perceived need to take action against the latest depreciation of the RMB against the US Dollar, as well as against excess outflow of funds to overseas. It remains to be seen, how the aforementioned measures will be enforced, how long they will be kept and how they will impact companies doing business in China. For now it seems that the restrictions are aimed to shield the RMB from risks related with unfettered international capital flows, rather than to decelerate or even prohibit international capital flows.