Foreign Exchange Controls and Overseas Listings

What should be noted is the retroactive application of the Circular. A company that is listed publicly prior to the promulgation of the Circular is also required to go through the foreign exchange registration procedure mentioned above within three months.

Remittance of Foreign Exchange to China

The Circular makes some changes to the foreign exchange remittance requirements of foreign-invested and Chinese-controlled companies. In comparison with prior legislation governing foreign-invested companies, the Circular to some extent loosens the control on remitting funds raised overseas to China, and indicates more flexibility in disposing of such funds. First, the term given by the CSRC for remittance is extended from 10 days to 30 days. Second, the Circular for the first time determines that such funds will be deemed and managed as funds of foreign direct investment, whereby the companies may select to retain them in special accounts subject to the approval of SAFE, but are not limited to the settlement of foreign exchange as previously required. Moreover, new share issues are also covered. According to the Circular, foreign exchange funds procured by domestic shareholding entities by way of sales of the shares held by them or assets of foreign-invested companies shall also be remitted into China within 30 days after deducting relevant fees. All such foreign exchange shall thereafter be settled subject to the approval of SAFE.

Unlike foreign-invested companies, foreign exchange issues relating to Chinese-controlled companies have not been addressed in prior legislation. Of course there is no need to remit funds raised from overseas listings and share issues to China since, taking into account their places of registration, these firms are not domestic companies. However, in the case of their domestic shareholders' obtaining foreign exchange funds from the share transfer or the sales of their assets, such domestic shareholders will have identical obligations to those of foreign-invested companies, as specified in the preceding paragraph.

Before all the aforesaid funds are remitted to China, both foreign-invested and Chinese-controlled companies may, if so desired, apply to SAFE to open temporary accounts abroad to deposit such funds, with a term not exceeding three months. The prior restriction that Chinese-invested banks must be used for opening such accounts has been lifted and, bewilderingly, the required list of documents to be submitted has also been eliminated.

Special Provisions for Chinese-controlled Companies

When a Chinese-controlled company uses funds raised outside China to invest in China by way of direct investment or foreign loans, the relevant procedures shall be followed as if the company were a general foreign enterprise that has made such investments. Similarly, its domestic shareholder is also treated as a general domestic enterprise when going through the relevant foreign exchange registration procedure for investment abroad in the form of injecting assets or equity. To avoid the contingent outflow of domestic property in consequence of such investment, the assets or equity proposed to be injected must at first be appraised and the investment amount shall not be less than the value from such appraisal. Where state-owned assets are concerned, the general appraisal and confirmation procedure provided for by the State-owned Assets Administration shall apply.

By Mao Baigen & Roland Sun,

Pu Dong Law Office

Shanghai