State Administration of Foreign Exchange, Issues Relevant to Improving Foreign Exchange Control on Foreign Direct Investment Circular

Issued: March 3 2003
Effective: April 1 2003

Main contents: Foreign investors that have not established an enterprise in China but have engaged in direct investment or related activities in China may apply to the State Administration of Foreign Exchange (SAFE) in the place of the investment to open a designated foreign investor foreign exchange bank account in one bank (Section One (1)). The designated accounts available include: investment accounts, purchase accounts, expense accounts and guarantee accounts. Foreign investors can transfer funds from an offshore account of an approved designated foreign exchange bank or from an onshore non-resident individual spot exchange account for capital contribution in a foreign-invested enterprise (Section One (2)). With the approval of SAFE, foreign investors may make capital contributions to foreign-invested enterprises by such additional means as capitalization of development funds, reserves, undistributed profits, dividends payable, and proceeds from advance withdrawal of investment, liquidation and equity transfer (Section One (3)). In respect of purchase of equity of domestic enterprises, the owner's equity in the target company of a foreign investor shall be determined by the proportion of actual paid-in purchase consideration. Relevant equity transfer, capital reduction, liquidation and remittance of profits shall be handled according to such proportion (Section One (4)). Section Two concerns confirmation of capital verification inquiry and registration of foreign exchange for foreign capital contribution in foreign-invested enterprises. The foreign exchange capital funds paid by a foreign investor of a foreign-invested enterprise shall not exceed 1% of the approved maximum of the enterprise capital fund account and the amount in excess shall not exceed US$10,000 (Section Two (1)). Section Three deals with administration involving capital reduction, foreign capital contribution of foreign-invested companies limited by shares and fund management companies with foreign equity participation as well as foreign exchange settlement of capital funds of foreign investment.
Appended to the Circular are charts detailing such procedures as the examination and approval for opening, amendment and cancellation of designated foreign investor foreign exchange bank accounts; the examination and approval for transfer of foreign exchange funds from onshore non-resident individual spot exchange accounts of foreign investors to capital funds accounts of foreign-invested enterprises; and the examination and approval for domestic re-investment using assets derived from advance withdrawal of investment, liquidation, equity transfer and capital reduction, etc. by foreign investors from their foreign-invested enterprises already invested.

Relevant legislation: Investment Within China by Foreign Investment Enterprises Tentative Provisions, Jul 25 2000, CLP 2000 No.8 p22; Administration of Foreign Exchange Accounts Inside China Provisions, Oct 7 1997, CLP 1998 No.4 p22; Reforming the Mode of the Administration of Foreign Exchange Settlement of Capital Funds of Foreign Investment Circular, Jun 17 2002, CLP 2002 No.6 p10 and Foreign Exchange Control of Capital Account Items Operational Rules, 2001