Regulator makes outbound investment easier

“The solution, as embodied in the Circular, is to let the Chinese companies purchase foreign currency with renminbi from huge foreign currency reserves or use the foreign currency they deposit in Chinese banks' accounts and lend the money to the acquisition vehicle abroad,” said Zhou.

The Circular builds on regulations issued in October 2004 – the Circular on Issues Relevant to the Administration of Internal Operation of Foreign Exchange Funds of Multinational Companies (关于跨国公司外汇资金内部运营管理有关问题的通知) – and opens overseas funding to a wider range of companies. Lenders can now use more sources of foreign currency: their own, foreign currency purchased from Chinese banks, or currency from the foreign currency pool of its group companies. The foreign loans can be granted in three forms: a direct loan from the lender to the borrower, an entrusted loan from designated Chinese banks or an entrusted loan from the lender group's finance company.

The new Circular will particularly benefit privately-funded overseas investments since they do not have an official and efficient debt financing channel for their overseas investments, according to two lawyers at a large European firm. The lawyers said they anticipated more privately-funded outbound M&A transactions as result.

The move to stimulate overseas loans follows the relaxation by Safe of foreign exchange restrictions on outbound investment and new China Banking Regulatory Commission Guidelines for Risk Management by Commercial Banks of Loans Extended for Mergers and Acquisitions (商业银行并购贷款风险管理指引). More recently, the National Development and Reform Commission issued its own regulation (the Circular on Improving the Administration of Offshore Investment) in which the Commission says Chinese companies must file a notice containing relevant information before they enter into any legally binding agreement. PT