SAFE to Remove Foreign Exchange approvals on Investments
1. SAFE has released a new Circular relaxing currency controls, what does this mean?
China is well known to be a country with a highly restricted currency. China’s currency controls are regulated and implemented by the State Administration of Foreign Exchange (SAFE). In recent years China has made several incremental moves designed to gradually increase the convertibility of the Chinese currency (RMB) and make international transactions easier.
China/Foreign “Current Account” transactions (that is, daily business transactions) are already largely completed without restrictions on the flow of currencies into and out of China. However, “Capital Account” transactions, transactions putting money into or transferring money out of a company’s registered equity, remain closely regulated, requiring the approval of SAFE.
China is now taking a significant step to change this through SAFE’s issuing of the Circular on Further Simplifying and Improving Foreign Exchange Administration Policies on Direct Investments (Circular 13).
Circular 13, coming into effect on June 1, 2015, presents a major change whereby SAFE will remove the approval process on Capital Account transactions.
2. So what’s actually changed? Can my China company send money back to my home country without restriction?
Not quite. Currently, an enterprise wishing to make a cross border transfer or currency exchange is required to report the transaction to SAFE. This applied to foreign investment such as paying in Registered Capital, as well as to foreign and domestically invested companies remitting dividends or payments abroad.
Starting from June 1, 2015, enterprises only need to work with the sending or receiving bank, which will register and approve the transaction on its own.
The catch is that the bank must have obtained a financial institution identification code from SAFE and have activated a capital account information system in coordination with SAFE. It is unclear which banks will fulfill these criteria but it is a safe bet that most major banks with which a Foreign Invested Enterprise may do business will likely be qualified.
It is not expected that the bank will approve unlimited transfer of funds out of the enterprises Capital Account, however enterprises will benefit from one less bureaucratic step and government approval.
3. My foreign company is also planning on contributing substantial non-liquid assets to establish our new China company, will this still require government approvals?
As of June 1, 2015, this process will be substantially easier as Circular 13 cancels confirmation registration with SAFE for non-cash capital contributions made by a foreign investor into establishing a China company. Additionally, registration of Equity acquisitions of a Chinese company by a foreign investor will no longer require a confirmation registration with SAFE.
As indicated above, when a cash contribution is made to the capital of a China company by a foreign investor the enterprise will be required to register the capital contribution directly with the bank, again without having to seek any approval from SAFE.
In each instance, the bank will have to have the appropriate system established in coordination with the local SAFE.
4. What about the Foreign Exchange Annual Review process? Will there be any changes?
Absolutely. in keeping with the trend to make foreign exchange a simpler process for enterprises, Circular 13 will end current requirements that enterprises undergo annual foreign exchange inspections. Instead, inbound and outbound investors will register foreign exchange transactions directly with SAFE by September 30 of each year. If the enterprise fails to file a registration, the bank will suspend its ability to make such foreign exchange transactions via the Capital Account.
This fits with a broader trend in China toward self-reporting, rather than annual inspections involving government authorities. A similar change was implemented last year as to Annual Reporting under the Company Law.
5. Are there any changes benefiting China outbound investment in particular?
Yes, Circular 13 will eliminate the need for an offshore enterprise established by a Chinese individual or entry to make a foreign exchange filing with SAFE to facilitate any new investments in other offshore entities or to re-invest. The elimination of these “Outbound Reinvestment Filings” will facilitate easier investment and growth abroad for domestic Chinese enterprises.