China Simplifies Rules on Foreign Exchange Administration of FDI

May 13, 2013 Posted by China Briefing Reading Time: 5 minutes

May 13 – To further standardize and clarify the foreign exchange administration of foreign direct investment into China, the country’s State Administration of Foreign Exchange (SAFE) released the “Regulations on the Foreign Exchange Administration of Onshore Direct Investment by Foreign Investors (Huifa [2013] No. 21, hereinafter referred to as ‘Circular 21’),” which came into effect on May 13, 2013.

The SAFE promulgated Huifa [2012] No. 59 in November 2012, which simplified dramatically the foreign exchange administration procedures for inbound and outbound direct investment. On this basis, Circular 21 further simplified the foreign exchange administration procedures for FDI-related foreign exchange registration and settlements, account opening and usage, and fund remittances.

According to Circular 21, “onshore direct investment by foreign investors” refers to the setting up of foreign-invested enterprises or projects (FIEs) in China via new establishment, mergers and acquisitions, or other means, through which rights and interests including ownership, rights of control, or operation and management rights are acquired.

To achieve foreign exchange administration via registration, Circular 21 stipulates that the following requires registration with SAFE branches:

Remission of pre-operating expense for establishing FIEs;
Establishment of FIEs;
Foreign investors’ contribution of capital in the form of foreign exchange, equity, tangible or intangible assets (including onshore lawful profits), or payment of consideration to a Chinese shareholder when acquiring a domestic enterprise.
Changes to an FIE such as capital increase, capital reduction, equity transfer;
Deregistration of an FIE or conversion of an FIE into a non-FIE; and
Equity transfer, onshore reinvestment and relevant matters related to FDI by onshore and offshore institutions and individuals.

Upon registration, an FIE can open a pre-operating expense account, capital account and asset conversion account with a bank according to its requirements. Banks are required to report information regarding the opening of and changes to accounts, fund remittances, and foreign exchange settlements to SAFE branches.

SAFE branches will conduct annual examination of FIEs based on relevant regulations, and are entitled to conduct on-site or off-site inspections where it discovers abnormal or suspicious activities.

Circular 21 also applies to the establishment of financial institutions in China, and covers investors from Hong Kong, Macau, and Taiwan.

In addition, Circular 21 abolishes 24 foreign exchange administrative regulations that are out of date or no longer applicable. The abolished regulations are as follows:

Interim Measures for the Administration of Foreign Exchange Registration for Foreign-Invested Enterprises ([96] Huizihanzi No. 187)
Reply on Issues Concerning the Foreign Exchange Administration of Foreign Enterprises Undertaking Domestic Projects ([98] Huizihanzi No. 204)
Notice of the State Administration of Foreign Exchange on Authorizing Local Offices to Handle Foreign Exchange Services Related to Equity Transfer and Liquidation of Foreign-Invested Enterprises (Huifa [1999] No. 397)
Reply of the State Administration of Foreign Exchange on Issues Concerning the Foreign Exchange Control for Foreign Investors’ Reinvestment with Renminbi Amount (Huifu [2000] No. 129)
Notice of the State Administration of Foreign Exchange on the Reform of the Administrative Method for the Settlement of Foreign Exchange Capital Funds Under Foreign-invested Projects (Huifa [2002] No. 59)
Reply of the State Administration of Foreign Exchange Concerning Domestic Residents’ Purchase of Foreign Exchange to Pay Equity Transfer Price to Foreign Investors (Huifu [2002] No.231)
Notice of the State Administration of Foreign Exchange on Issues Concerning Improving the Annual Foreign Exchange Inspection of Foreign Invested Enterprises (Huifa [2004] No.7)
Notice of the State Administration of Foreign Exchange on Improving the Work on Administration of Examination and Verification of Foreign Exchange Settlement and Registration of Foreign Debts under the Capital Accounts of Foreign-Invested Enterprises (Huifa [2004] No. 42)
Notice of the State Administration of Foreign Exchange on Capital Verification Inquiry into Foreign Direct Investment and Registration of Foreign Investment and Foreign Exchange in Export Processing Zones, Bonded Areas and the Shanghai Diamond Exchange (Huifa [2004] No. 108)
Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning the Opening of Foreign Exchange Capital Accounts of Insurance Intermediary Institutions (Huizongfa [2006] No. 6)
Notice of the General Affairs Department of the State Administration of Foreign Exchange on Releasing the List of the 1st Batch of Foreign Invested Real Estate Projects Approved by the Ministry of Commerce (Huizongfa [2007] No. 130)
Notice of the General Affairs Department of the State Administration of Foreign Exchange on Implementing Online Release of the List of Foreign Invested Real Estate Projects Approved by the Ministry of Commerce (Huizongfa [2007] No. 138)
Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Foreign Exchange Settlement of the Fund used in Purchasing Commodity Premises by Foreign Individuals (Huizongfu [2007] No. 86)
Notice of the State Administration of Foreign Exchange on Issues Concerning Nationwide Expansion of Information System for Foreign Exchange Business of Direct Investment (Huifa [2008] No. 16)
Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Relating to the Operation of the Information System of Foreign Exchange Transaction in Direct Investment and the Foreign Exchange Account System (Huizongfa [2008] No. 129)
Notice of the General Affairs Department of the State Administration of Foreign Exchange on Delegation of Examination and Approval of Special Foreign Exchange Deposit Account for Land Use Right Auction of Foreign Investors and Special Foreign Exchange Deposit Account for Equity Transaction of Foreign Investors to Lower Administrative Levels (Huizongfa [2008] No. 130)
Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues concerning the Use of Foreign Exchange Capital Settled by Foreign-invested Venture Capital Investment Companies for Investment in Domestic Equity (Huizongfu [2008] No. 125)
Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Foreign Exchange Registration of Foreign Invested Real Estate Enterprises (Huizongfa [2009] No. 42)
Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Foreign Exchange Registration of Receiving Foreign Exchanges by Foreign Shareholders in Cross-Border Share Swap (Huizongfu [2010] No. 5)
Notice of the State Administration of Foreign Exchange on Printing and Distributing the “Operating Rules for Foreign Exchange Administration Concerning Financing and Round-Trip Investment by Domestic Residents through Overseas Special-Purpose Companies” (Huifa [2011] No.19)
Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Capital Verification Inquiry Involved in Capital Contribution by Foreign Investors with Non-Priced Equipment of Enterprises Engaging in Businesses of Processing with Materials Supplied by Clients, Manufacturing Products according to Samples Provided by Clients, Assembling Parts Supplied by Clients, and Compensatory Trade (Huizongfu [2011] No. 155)
Notice of the State Administration of Foreign Exchange on the Issues Related to the Administration of Foreign Exchange of Foreign-Invested Partnerships (Huifa [2012] No. 58)
Notice of the General Affairs Department of the State Administration of Foreign Exchange on Payment of Abandonment Fees for Offshore Cooperative Oil and Gas Fields with Funds within the Special Foreign Exchange Accounts of Foreign Investors after Exchange Settlement (Huizongfa [2012] No. 126)
Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Alteration of Foreign Exchange Registration Involved in Share Reduction of Foreign Shareholders of Neusoft Corporation (Huizongfu [2012] No. 34)

Circular 17
In conjunction with the promulgation of Circular 21, SAFE released the “Notice Concerning the Promotion of the Capital Account Information System (Huifa [2013] No. 17, hereinafter referred to as ‘Circular 17’),” which also came into effect from May 13, 2013.

Circular 17 outlines the new Capital Account Information System (CAIS) aimed at simplifying the information platform for foreign investment and foreign exchange administration. The improved ability to collect capital account statistics enabled by the CAIS paves way for the complete convertibility of the RMB capital account.

With the implementation of the CAIS, the below three independent systems, along with the “High Frequency Debt Supervision Pre-warning System” will no longer be employed:

Direct Investment Foreign Exchange Administration Information System;
Foreign Debt Statistics Supervision System; and
Foreign Exchange Account Administration Information System.

If they have not already done so, foreign institutions should be sure to apply for a special institution code with SAFE’s capital account administration authorities. A special institution code is a required form of identification when foreign institutions open and close accounts, conduct fund remittances, or undergo foreign exchange settlements with banking institutions in mainland China.

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