SAFE Promulgated New Circular to Streamline the Foreign Exchange Administrative Procedures for Foreign Direct Investment

On November 19, 2012, the State Administration of Foreign Exchange (“SAFE”) promulgated the Circular on Further Improving and Adjusting Foreign Exchange Administrative Policies on Foreign Direct Investment (Hui Fa (2012) No. 59) (the “Circular No. 59”). It took effect on December 17, 2012. The Circular No. 59 brings significant changes to the current foreign exchange approval regime for foreign direct investment and delegates the original approval and verification authority of the SAFE for certain items to the banks. We set out below the main changes under the Circular No. 59.

1. Abolishing Certain Foreign Exchange Verification Procedures for Foreign Direct Investment Matters
   
   a) Opening of preliminary expense bank accounts by foreign investors, opening of foreign exchange capital accounts by foreign invested enterprises (“FIEs”), opening of accounts for proceeds from the disposal of assets in an M&A project and opening of accounts for PRC entities to receive deposits in foreign direct investment projects are no longer required to be verified by the SAFE or its local counterparts. The applicants may now open such accounts directly with the banks.
   
   b) Circular No.59 also abolished the verification requirements for (i) capital increase of an FIE by using the legal income of its foreign investor in China (such as capital reserve, surplus reserve and undistributed profits in such FIE) or by conversion of foreign shareholder’s loan; and (ii) re-investment of foreign investors in China by using their legal income in China from profits, transfer of equity interests, capital decrease, liquation and advance recovery of investment.
   
2. Simplifying Registration Procedures for Payment of Equity Purchase Price to Chinese Sellers by Foreign Investors.
   
   a) In cross-border M&A projects, if the purchase price is paid by the foreign investor to the Chinese seller in cash, no registration of such payment with the SAFE is required any more under the Circular No. 59. Once the bank has filed the recordal with the SAFE after the payment is made, an automatic registration will be made in the SAFE’s system.
   
   b) However, if a part of or the entire purchase price is not paid in cash, the target company shall still register the payment of the purchase price with the competent SAFE.
3. Loosening the Restrictions on Granting Loans to Overseas Entities
   
   In the past, an FIE was only allowed to grant loans to its overseas subsidiaries, i.e. downstream. However, under the Circular No. 59, the said loans can also be granted to its overseas parent company up to the sum of the amount of the distributed but unremitted profits and the amount of undistributed profits of such FIE to which its parent company is entitled. The source of the loan to overseas entities can also be the foreign exchange loan proceeds taken out by the lender at home and abroad.

Circular No. 59 eases the rules of foreign exchange control on foreign direct investment in China and abolished various verifications on opening of foreign exchange accounts and cross-border foreign exchange payments. Since the effectiveness date of Circular No. 59, i.e. December 17, 2012, the banks in China have to assume a large part of previous responsibilities of the SAFE to review the documents provided by their clients and to make timely report to the SAFE. Based on our recent experiences and observations, currently the banks still tend to be very cautious and sometimes ask for more documents for review when handling the relevant matters.