On 15 July 2014, the State Administration of Foreign Exchange (“SAFE”) published the Circular on Relevant Issues regarding Pilot Reform on Administration of Foreign Exchange Registered Capital of Foreign-invested Enterprises in Certain Areas (Hui Fa (2014) No. 36) (“Circular No. 36”), which came into effect on 4 August 2014. Circular No. 36 liberalizes, to a certain extent, the restrictions on settlement and use of foreign exchange registered capital of foreign-invested enterprises (“FIEs”) in sixteen development zones1 (“Pilot Zones”) in China. We highlight below the changes brought by the Circular No. 36.
- Free Conversion of Foreign Exchange Registered Capital into RMB
Under Circular No. 36, an FIE registered in one of the Pilot Zones may convert, at its sole discretion, the entire or a part of its foreign exchange registered capital into RMB without having to prove the usage of such funds. Circular No. 36 helps FIEs in Pilot Zones to reduce their foreign exchange fluctuation risks since they may at any time convert their entire registered capital into RMB. Prior to Circular No. 36, foreign exchange registered capital could only be converted into RMB based on the actual needs of the funds or for petty cash purposes up to USD 50,000 per time (and 2 times per month). For such conversion, various supporting documents, such as business contracts and invoices, shall be submitted to the bank as proof materials for review.
Nevertheless, according to Circular No. 36, all the RMB funds converted from the foreign exchange registered capital of an FIE in the Pilot Zone shall be deposited in a special bank account. The bank for such special bank account shall be the same bank with which the concerned FIE maintains its registered capital account. For any payment of RMB funds from the special account, information such as the recipient of the funds, the purpose of the payment, etc. shall be provided to the bank. For the processing of each transaction of fund payment, the bank is also required to examine the authenticity and compliance of the proof materials for the previous transaction. Petty cash in the amount of up to RMB 600,000 per month can be drawn from such special account without provision of any proof materials.
In essence, this means that the use of registered capital still is not fully liberalized. Except for petty cash, FIEs still must provide evidence for the intended use. The only advantage by Circular No. 36 is that now the foreign exchange risk can be controlled better.
- Equity Investment by Registered Capital
In China, only foreign invested holding companies, foreign invested venture capital enterprises and foreign invested equity investment enterprises are allowed to use their registered capital for equity investment. Other FIEs are not allowed to do so.
Circular No. 36 allows all FIEs registered in one of the Pilot Zones to use the RMB converted from their registered capital to make equity investment in China (not limited to investment in the Pilot Zones). Such change brought by the Circular No. 36 makes it possible that foreign investors set up an investment vehicle in one of the Pilot Zones and make equity investment in China through such investment vehicle. Under the Circular No. 36, the company to be invested in shall first apply for registration of the re-investment of the FIE with its competent SAFE and then open a special account to receive the RMB funds converted from the registered capital of the concerned FIE acting as the investor for equity investment.
Under PRC law, a company invested by an FIE will not be regarded as an FIE unless the former is located in central and western China. As a result, such company will not have a verified total amount of investment and cannot obtain loans from abroad.
Prior to the issuance of Circular No. 36, the SAFE Shanghai Branch issued on 28 February 2014 the Circular (Shanghai Hui Fa (2014) No. 26) which already provides for the same relaxation of restrictions on conversion and use of foreign exchange registered capital of FIEs incorporated in Shanghai Free Trade Zone. Now Circular No. 36 extends such liberalization to the Pilot Zones. Please note that the FIEs registered in the Pilot Zones shall still use the RMB funds converted from their registered capital within the approved business scope. In other words, such funds still cannot be used for investment in the security market, offering entrustment loans, or purchase of any non self-used real estate.
1 The 16 Pilot Zones are Tianjin Binhai New Area, Shenyang Economic Zone, Suzhou Industrial Park, Wuhan Donghu Innovation Zone, Guangzhou Nansha New Area, Zhuhai Hengqin New Area, Chengdu Hi-tech Industrial Development Area, Beijing Zhongguancun Science Park, Chongqing Liangjiang New Area, Heilongjiang Foreign Exchange Administration Reform Pilot Area, Wenzhou Financial Reform Pilot Zone, Fujian Pingtan Comprehensive Pilot Zone, China-Malaysia Qinzhou Industrial Park, Guiyang Comprehensive Bonded Zone, Qianhai Shenzhen-Hong Kong Modern Service Industry Zone and Qingdao Wealth Management and Financial Comprehensive Reform Pilot Area.