SAFE Plugs Holes for China/Offshore Round-trip Investments

By Neal A. Stender, Selena M. She and Mingyi [Calvin] Jin of Orrick,
Herrington & Sutcliffe

A series of regulatory changes has affected round-trip investments, consisting of transfers of assets or company equity from China to offshore companies, along with reinvestments or loans back into China by those “special purpose companies” [often referred to as special purpose vehicles, or SPVs].

These changes have contributed to somewhat of a 'roller-coaster' ride for investors in recent years. The number of transactions surged in 2004, collapsed in 2005¹, and recovered gradually in 2006 and early 2007. Some recent investments have been structured in less than optimal ways in order to avoid qualifying as round-trips. Other investments were simply deferred while waiting for government procedures to be clarified. The most seriously affected investors during 2006 were those that had completed round-trip investments in or before 2005 but were not able to comply with a March 31 2006 deadline for after-the-fact registrations. That deadline has now been formally cancelled, and many investors who missed it will bear little or no penalty. Many new investors will also benefit from new clarification of foreign exchange registration procedures, but many others will be negatively affected by the broadening and tightening of registration requirements.