Issues Relevant to Improving Foreign Exchange Control on Foreign Direct Investment Circular

1. If a foreign investor does not establish a foreign-invested enterprise in China, but engages in direct investment or direct investment related activities in China, such investor may apply to the foreign exchange administration of the place where the investment project is located to open in the investor's name a dedicated foreign exchange account for a foreign investor.

Foreign investors are only permitted to open one dedicated multiple currency foreign exchange account at one bank, unless otherwise approved by the foreign exchange administration. Depending on its purpose, the account will be one of the following four types:

(1) Investment account. If a foreign investor contracts for a project, carries out cooperative exploitation or development of or exploration for resources, or engages in venture capital or risk investment in China, it may, after it obtains a non-legal person business licence, apply to open this type of account for the purpose of depositing and paying the relevant foreign exchange funds.

(2) Acquisition account. If the foreign investor intends to establish a foreign-invested enterprise in China and needs to acquire leaseholds and immovable property attached to such land, machinery, equipment or other assets, etc. during the preliminary period, it may, after the asset purchase contract has entered into effect, apply to open this type of account for the purpose of depositing and paying the foreign exchange amount of the acquisition.

(3) Expense account. If a foreign investor intends to establish a foreign-invested enterprise in China and needs to carry out work such as market research and strategizing, establishment preparations, etc. during the preliminary period, it may, after it has collected the notice of pre-approval of the company name issued by the administration for industry and commerce, apply to open this type of account for the purpose of depositing and paying the relevant foreign exchange funds.

(4) Guarantee account. If, before a foreign investor invests in China, it needs to provide a funding guarantee to a domestic institution in accordance with relevant regulations or as agreed in the contract, it may, for the period prescribed in the contract, apply to open this type of account for the purpose of depositing and paying the foreign exchange guarantee funds.

To apply for a dedicated foreign exchange account, a foreign investor must provide the foreign exchange administration with materials in support of the authenticity and lawfulness of its investment activities. The foreign exchange administration will determine matters such as the ceiling and term of existence of, and the scope of payments into and out of, the relevant account and carry out routine oversight (see Annex 1). The funds in the foreign investor's dedicated foreign exchange account shall be paid by cash remittance, not by cash deposit. The settlement and transfer of funds in the account must be verified and approved by the foreign exchange administration on a case-by-case basis (see Annexes 2 and 3).

In the case of acquisition, expense and guarantee type dedicated foreign exchange accounts for foreign investors, if the foreign investor establishes a foreign-invested enterprise in China, the balance of the said account may be transferred to the capital account of the enterprise, in which case the funds settled and transferred from the said account may be treated as a capital contribution made by the foreign party, and procedures for capital verification may be carried out therefor, on the strength of the relevant approval document issued by the foreign exchange administration. If the foreign investor does not establish a foreign-invested enterprise in China, it may carry out foreign exchange purchase and payment procedures in respect of the unused funds, and procedures for remittance of the funds out of China, on the strength of the relevant approval document issued by the foreign exchange administration.

2. If a foreign investor makes a capital contribution to a foreign-invested enterprise in China by using funds in an offshore account opened with a designated foreign exchange bank that has obtained approval from the People's Bank of China to engage in offshore business, the transfer in China of the foreign exchange funds from the offshore account to the enterprise's capital account is not subject to approval by the foreign exchange administration. However, when the foreign-invested enterprise carries out confirmation request procedures in connection with investment verification, the bank that received the remittance shall identify those funds in the reply to the confirmation request as "off-shore funds".

If a foreign investor makes a capital contribution to a foreign-invested enterprise with foreign exchange funds in a non-resident personal cash foreign exchange account in China, the foreign exchange administration shall examine the relevant information submitted by it and, after verifying that such information is in order, issue the relevant approval document for foreign exchange transactions relating to capital account items (see Annex 4), on the strength of which (i) the bank shall effect domestic transfer of the said amount from the non-resident individual cash account to the capital account of the foreign-invested enterprise and (ii) the enterprise shall carry out the confirmation request procedures in connection with investment verification and the foreign exchange registration procedures for the foreign capital. If the foreign exchange administration has a heavy workload, it may, subject to approval by the State Administration of Foreign Exchange, delegate the examination and verification powers in respect of the transfer of the said funds to the relevant designated foreign exchange bank, in which case the designated foreign exchange bank shall perform the duties of conducting examination and verification, compiling statistics, monitoring the transaction and reporting for the record, etc. The authorized designated foreign exchange bank shall have strict internal controls and have no record of a major violation of foreign exchange regulations during the most recent three years. When the foreign-invested enterprise carries out confirmation request procedures in connection with investment verification, the bank that received the remittance shall identify those funds in the reply to the confirmation request as "domestic transfer by a non-resident individual".

3. In addition to contributing capital in the form of freely convertible currency, imported equipment and other supplies, intangible assets, renminbi profits, etc., subject to approval by the foreign exchange administration, a foreign investor may also contribute capital to a foreign-invested enterprise in any of the following ways:

(1) increasing the capital of the foreign-invested enterprise by converting funds in its expansion fund, reserve fund (or capital common reserve or surplus common reserve), etc.;

(2) increasing the capital of the foreign-invested enterprise by converting its undistributed profits or dividends payable or interest payable thereon;

(3) increasing the capital of the foreign-invested enterprise by converting the principal of a loan from the foreign party (which has been registered as a foreign debt) or the interest thereon for the current period; or

(4) reinvestment by the foreign investor in China of property obtained in ways such as early recovery of investment from, liquidation of, transfer of equity in or reduction of the capital of, a foreign-invested enterprise previously invested in by it.

If a foreign investor contributes capital through any of the above-mentioned methods, the foreign exchange administration shall examine the information submitted by it and, after verifying that such information is in order, issue the relevant approval document for foreign exchange transactions relating to capital account items (see Annexes 5 and 6), on the strength of which the bank shall effect the relevant domestic transfer and the enterprise shall carry out the confirmation request procedures in connection with investment verification and the foreign exchange registration procedures for the foreign capital.

4. If a foreign investor or an investment-type foreign-invested enterprise acquires equity in a domestic enterprise, it shall pay the consideration for acquisition of such equity (i.e. the price to be paid by the foreign party to the Chinese party for its equity, which may take the form of foreign exchange funds owned by the foreign investor or the investment-type foreign-invested enterprise, renminbi profits obtained from other foreign-invested enterprises invested in by it in China, or other lawful property) in accordance with laws, regulations and the equity transfer contract, and carry out the registration procedures for the foreign-investment-related receipt of foreign exchange from the transfer of equity with the foreign exchange administration of the place where the transferor of the equity is located, or entrust the transferor of the equity handling the registration. If the consideration for acquisition of the equity is to be paid in a lump sum, the registration procedures for the foreign-investment-related receipt of foreign exchange from the transfer of equity must be carried out within five days after payment of the consideration has been received. If the consideration for acquisition of the equity is to be paid in instalments, the registration procedures for the foreign-investment-related receipt of foreign exchange from the transfer of equity must each time be carried out within five days after an instalment of the consideration is received.

Until the foreign investor has paid the consideration for acquisition of the equity in full, its owner's equity in the enterprise shall be determined in proportion to the percentage actually paid by it, and the relevant foreign exchange transactions involving transfer of equity, reduction of capital, liquidation and/or outward remittance of profits shall be handled in accordance therewith.

After the foreign exchange administration has examined the information submitted by the foreign investor and verified that it is in order, it shall register the foreign-investment-related receipt of foreign exchange from the transfer of equity for the foreign investor and issue the relevant certificate (see Annex 7). The registration certificate for foreign-investment-related receipt of foreign exchange from the transfer of equity is the valid document attesting that the consideration for the acquisition of equity by the foreign party has been paid, and is an important basis on which the enterprise acquired should carry out foreign-investment-related foreign exchange registration. Each branch and foreign exchange control department shall consolidate the data from registration of foreign-investment-related receipt of foreign exchange from the transfer of equity (including registered amounts of shares and money) with data from other types of registration of foreign capital inflow, using the format of the new "Report Form for Foreign-Investment-Related Foreign Exchange Registration" (see Annex 8), and submit the same to the State Administration of Foreign Exchange on a monthly basis. The previous format of the "Report Form for Foreign-Investment-Related Foreign Exchange Registration" will be discontinued from the date of effect of this Circular.

5. In the case of enterprises invested and established or acquired by a non-investment-type foreign-invested enterprise in accordance with the Investment Within China by Foreign-invested Enterprises Tentative Provisions jointly issued by the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce, if the investee enterprise has no foreign capital, it need not carry out the procedures for foreign exchange registration of a foreign-invested enterprise, confirmation request procedures in connection with investment verification and foreign exchange registration procedures for foreign capital. On the strength of the Business Licence for an Enterprise Legal Person including the words "invested in by a foreign-invested enterprise" issued to the investee enterprise by the administration for industry and commerce, the foreign exchange administration shall administer foreign debt acquired by the investee enterprise as for foreign-invested enterprises.

The foreign exchange administration may not approve the domestic transfer of foreign exchange funds between a non-investment-type foreign-invested enterprise and its investee enterprise or between different investee enterprises of a non-investment-type foreign-invested enterprise. If, in special circumstances, it is truly necessary to effect this type of transfer within China, the foreign exchange administration or foreign exchange control department shall submit the matter to the State Administration of Foreign Exchange.

6. If the proportion of the capital contributed by a foreign investor to the registered capital of a domestic enterprise is less than 25%, the enterprise shall carry out foreign exchange registration for a foreign-invested enterprise and handle the confirmation request procedures in connection with investment verification and foreign exchange registration procedures for foreign capital in accordance with relevant provisions on the strength of the foreign-invested enterprise approval certificate annotated with the words "foreign capital less than 25%" issued by the foreign trade and economic cooperation department and the business licence for a foreign-invested enterprise annotated with the words "foreign capital less than 25%" issued by the administration for industry and commerce.

2. Confirmation Request in Connection with Investment Verification and Foreign Exchange Registration for Foreign Capital of Foreign-invested Enterprises

Relevant issues arising during the work of confirmation request in connection with investment verification and foreign exchange registration for foreign capital of foreign-invested enterprises shall be handled in line with the following principles:

1. If the amount of foreign exchange capital to be paid by a foreign investor to establish a foreign-invested enterprise exceeds the approved limit for the enterprise capital account but the excess amount of funds does not exceed 1% of the limit for the enterprise's foreign exchange capital account and the exact figure does not exceed the equivalent of US$10,000, the foreign exchange administration may handle confirmation request in connection with investment verification and foreign exchange registration for foreign capital for the enterprise according to the amount actually paid into the account.

If the enterprise's capital increases in value, that portion of the amount of foreign exchange paid by the foreign investor when it invested in the enterprise's equity that exceeds the product of its equity percentage and the registered capital shall be booked up to the limit for the enterprise's capital account. Foreign exchange funds in excess of this limit shall be booked in line with the principle set out in the preceding paragraph.

2. When a foreign-invested enterprise to which a foreign investor has contributed capital in kind entrusts an accounting firm to request confirmation from the foreign exchange administration, if the price amount of the contribution in kind confirmed by the price confirmation department of the commodity inspection authority is not the same as the amount given in the customs import declaration, the foreign exchange administration shall use the value confirmed by the commodity inspection authority and handle confirmation request in connection with investment verification and foreign exchange registration for foreign capital therefor.

3. When a foreign-invested enterprise to which a foreign investor has contributed intangible assets entrusts an accounting firm to request confirmation from the foreign exchange administration, it shall set out the intangible assets contributed in a contribution detailed table and include this with the letter requesting confirmation of foreign capital contribution. The foreign exchange administration shall carry out foreign capital foreign exchange registration for the intangible assets contributed on the strength of this, and note the words "this contribution in foreign intangible assets has been registered, the registration number is xxxxxx. This reply is only a valid proof of such registration" on the reply to the confirmation request for foreign capital contribution.

4. If the confirmed value of the foreign premium investment, equity or contribution in kind is greater than the value declared to customs, or the actual contribution to the foreign-invested enterprise is greater than its registered capital due to a fluctuation in the exchange rate or other similar factors, the enterprise's registered capital and the actual contributions made after injection of the capital gain shall be truthfully registered.

5. Where an accounting firm is entrusted to request confirmation from the foreign exchange administration of transformation investment for an enterprise that carries out processing and assembly of supplied materials and parts, the relevant information must be submitted to the foreign exchange administration. Once the foreign exchange administration has examined the same and confirmed that the equipment to be purchased with the transformation investment is to be imported and no foreign exchange is to be remitted out of China, it may issue a reply to the confirmation request for foreign capital contribution in accordance with the amount set out in the written commodity price confirmation, and carry out the procedures for foreign exchange registration for foreign capital (see Annex 9).

6. If the name of the foreign investor in a foreign-invested enterprise and the name of the overseas party that paid the investment are not the same, the foreign exchange administration may handle confirmation request in connection with investment verification and foreign exchange registration for foreign capital for the enterprise, and note the words "payee and investor not the same" on the reply to the confirmation request for foreign capital contribution.

7. In order to make it easier to check and confirm approvals for capital account foreign exchange transactions in other places, when the foreign exchange administration issues a capital account foreign exchange transaction approval for a foreign-invested enterprise, it shall include the contact person and contact telephone number for the relevant transaction.

8. If the foreign exchange administration discovers that a dedicated foreign exchange bank has violated account administration provisions by opening an account for an enterprise without authorization or accepting deposits in excess of the capital limit, etc. it shall impose penalties in accordance with the Administration of Foreign Exchange Accounts Inside China Provisions.

If an enterprise is found to have falsified or forged a voucher or information such as a capital account foreign exchange transaction approval, a reply from the foreign exchange administration or designated foreign exchange bank, or a customs import declaration, etc. the relevant materials shall be handed over to the judicial authorities for handling.

If, after an accounting firm has issued a capital verification report for an enterprise, the foreign exchange administration discovers that the accounting firm failed to request for a confirmation in connection with investment verification or failed to carry it out according to the prescribed procedures, it shall order the accounting firm to subsequently carry out the confirmation request procedures in connection with investment verification and report its violation to the local association of certified accountants. Until the local association of certified accountants renders a formal punishment decision, the accounting firm may not accept any new confirmation request in connection with investment verification. If, after the above offence has been dealt with, the accounting firm commits another offence, the branch or foreign exchange control department shall report its name to the State Administration of Foreign Exchange for public disclosure on its website and in other media, and recommend that the enterprise exercise prudence in selecting its accounting firm. If, when an accounting firm that failed to request for a confirmation in connection with investment verification or failed to carry it out in accordance with the prescribed procedures subsequently carries out such procedures, the foreign exchange administration discovers that the capital verification report issued by the accounting firm is false, it shall deliver the relevant materials to the judicial authorities for handling and notify the local administration for industry and commerce.

3. Administration of Reduction in Capital by Foreign-Invested Enterprises and Adjustment of Some Administrative Business

1. If reduction by a foreign-invested enterprise of the capital injected by its foreign investor involves the purchase and payment of foreign exchange, once the foreign exchange administration has examined the relevant information submitted by the enterprise and verified that it is in order, it shall issue the relevant capital account foreign exchange transaction approval (see Annex 10), on the strength of which the foreign investor may carry out procedures for the purchase, payment and remittance out of China of foreign exchange in respect of the capital subtracted.

If a foreign-invested enterprise reduces capital to lessen its book losses, or the capital subtracted is capital that has not yet been injected by the foreign party, the foreign exchange administration may not approve the relevant amount for re-investment in China by the foreign investor or for outward remittance as foreign exchange by the foreign-invested enterprise.

2. Capital contribution by a foreign party in a foreign-invested company limited by shares or a fund management company with foreign equity participation is subject to the paid-up capital system specified in the PRC Company Law. When these two types of company apply to the foreign exchange administration to open capital accounts for a foreign-invested enterprise, they need not submit the business licence for a foreign-invested enterprise with the status of a legal person issued by the administration for industry and commerce, but may handle the relevant procedures on the strength of the foreign-invested company limited by shares approval certificate issued by the foreign trade and economic cooperation department, in the case of a foreign-invested company limited by shares, or the foreign-invested enterprise approval certificate issued by the foreign trade and economic cooperation department and the official reply for commencement of business issued by the China Securities Regulatory Commission, in the case of a fund management company with foreign equity participation.

When the foreign exchange administration examines the other information required from the above-mentioned two types of company for opening a capital account and handling foreign exchange registration for a foreign-invested enterprise, it shall handle the same in accordance with the relevant provisions.

3. If, in the course of a foreign exchange transaction the foreign exchange administration needs to examine the capital verification report of a foreign-invested enterprise, and such report was issued after May 1 2002, it shall also examine the relevant reply to the confirmation request for foreign capital contribution. If the foreign exchange administration needs to examine an audit report of the foreign-invested enterprise when handling a foreign exchange transaction and the audit report was issued after 2002, it shall also examine the Statement of Foreign Exchange Receipts and Payments of the foreign-invested enterprise.

4. In order to further enhance efficiency in the oversight of settlement of foreign exchange in relation to capital funds and ease enterprise investment fund operations, we hereby simplify the information that banks are required to examine under the operating rules for settlement of foreign exchange capital by authorized banks specified in the State Administration of Foreign Exchange, Reform of the Method of Reforming the Administration of Settlement of Foreign Exchange Capital for Foreign Investment Circular (ref. Hui Fa [2002] No.59) into the following three categories:

(1) written application by the enterprise (stating its capital account number, details of the funds paid in, the currency, amount and purpose of foreign exchange settlement, etc.);

(2) the enterprise foreign exchange registration certificate; and

(3) other supplementary information required as necessary.

Other examination and verification requirements shall be handled in accordance with the provisions of the State Administration of Foreign Exchange, Reform of the Method of Reforming the Administration of Settlement of Foreign Exchange Capital for Foreign-Investment Circular (ref. Hui Fa [2002] No.59) and the operation rules.

5. If a Sino-foreign cooperative enterprise pays the foreign party its early recovery of investment (including fixed returns) in fixed asset depreciation or intangible asset amortization, the "guarantee" under the Foreign Exchange Control of Capital Account Items Operational Rules (ref. Hui Fa [2001] No.38) shall be examined in accordance with the following provisions:

(1) if cooperative joint venture is in debt (bank debt or foreign shareholder debt), the foreign investor shall provide the written guarantee for the relevant amount issued by a foreign-invested financial institution established in China;

(2) if the only debts of the cooperative joint venture are loans by the foreign shareholder, the written guarantee of unconditional joint and several liability issued by the foreign shareholder for the joint venture company may be used in place of the above written guarantee of a foreign-invested financial institution;

(3) if the cooperative joint venture has no debts, the foreign investor need not provide a written guarantee.

Other examination and verification requirements shall be handled in accordance with the Foreign Exchange Control of Capital Account Items Operational Rules.

4. Miscellaneous Matters

1. For the purposes of the Circular "foreign exchange administration" means the branches of the State Administration of Foreign Exchange and the foreign exchange control departments and the branches under their administration.

2. We request that all branches and all foreign exchange control departments notify the designated foreign exchange banks within their jurisdiction of the parts of this Circular that relate to the operation of banks as follows:

(1) the contents of Items 1, 2 and 3 of Part One "Administration of the Accounts Opened and the Capital Contributed by Foreign Investors" and related Annexes 1 through 6;

(2) Article (1) and the first paragraph of Article (8) of Part Two "Confirmation Request in Connection with Investment Verification and Foreign Exchange Registration for Foreign Capital of Foreign-invested Enterprises"; and

(3) Article 4 of Part Three "Administration of Reduction in Capital by Foreign-Invested Enterprises and Adjustment of Some Administrative Business".

3. This Circular shall be implemented as of April 1 2003. If you experience any problems in the course of implementing this Circular, please contact the Capital Accounts Administration Division of the State Administration of Foreign Exchange, telephone 010-68402254.