Last July, the State Administration of Foreign Exchange (“SAFE”) launched a pilot reform in 16 pilot zones (“Pilot Zones”) to liberalize the restrictions on use and conversion of foreign exchange registered capital of foreign-invested enterprises (“FIEs”). On 30 March 2015, the SAFE now published the Circular on Reforming the Administration Measures on Conversion of Foreign Exchange Registered Capital of Foreign-invested Enterprises (Hui Fa (2015) No. 19) (“Circular No. 19”), which will come into effect on 1 June 2015. The Circular No.19 mirrors the measures already implemented in the Pilot Areas and extends them to the whole country. The major changes brought by the Circular No. 19 are as follows:
- Free Conversion of Foreign Exchange Registered Capital into RMB
Under the Circular No. 19, an FIE established in China, may convert, at its sole discretion, the entire or a part of its foreign exchange registered capital into RMB without having to provide evidence for the usage of such funds. Prior to Circular No. 19, except for FIEs registered in the Pilot Zones, their foreign exchange registered capital could only be converted into RMB based on the actual needs of the funds as evidenced e.g. by contracts.
The RMB funds converted from the foreign exchange registered capital of an FIE must be deposited in a special bank account. For any payment of RMB funds from this special account, information such as the recipient of the funds, the purpose of the payment, etc. shall be provided to the bank. Petty cash in the amount of up to USD 100,000 per month can be drawn from such special account without provision of any proof materials. In fact, this means that supervision is just postponed and now no longer exercised at the time of conversion of the foreign exchange registered capital into RMB, but only at the later stage of use of the funds. Still, the new regulations enable FIEs to make use of more favourable exchange rates.
- Use of Registered Capital for Equity Investment
Prior to the issuance of the Circular No. 19, except for FIEs registered in the Pilot Zones, only foreign invested holding companies, foreign invested venture capital enterprises and foreign invested equity investment enterprises in the form of partnerships were allowed to use their registered capital for equity investment. Other FIEs were not allowed to do so. As a result, often foreign investors could not use their existing FIEs such as production FIEs and trading FIEs to establish additional companies or make acquisitions in China, because the only available method of financing was through the existing profits or cash flow of these FIEs. The Circular No. 19 now allows all FIEs established in all places of China to use their foreign exchange registered capital or the RMB converted from their registered capital to make equity investments. This is a major step forward.
- Restrictions on the Usage of the Converted RMB Funds
Please note that the foreign exchange registered capital and RMB funds converted from the foreign exchange registered capital of an FIE are still not allowed to be used for investment in the security market, offering entrustment loans, or purchase of any non self-used real estate. The Circular No. 19 is an important step to further relax restrictions on capital account items of FIEs in China. Although the use of registered capital still is not fully liberalized, such positive signs reflect the Chinese government’s determination to further reduce restrictions on FIEs.