New Circular deregulates foreign exchange controls

“It comes as part of the financial industry's 12^th five-year plan to open-up and liberalise foreign exchange controls in the direct investment area. The Circular was already in its draft form earlier this year and was circulated internally to solicit comments,” said Tan.

The Circular was put on hold because of China's once-in-a-decade power transition, but was quickly rolled out afterwards.

Accounts

After incorporation FIEs have to establish a pre-expenditure account to handle any acquisitions of assets. Previously, SAFE heavily regulated this special account through time limits, ceiling amounts and minimum foreign exchange inflow, which all required the Administration's approval.

The Circular has abolished many of these obstacles, as SAFE's approval is no longer necessary and incorporation expenditures and subsequent transfers will now involve bank procedures.

Similarly, capital accounts were subject to strict regulations. The capital account, along with the current account, forms the cornerstone of foreign exchange controls in China. FIEs use the capital account to make capital contributions.

Control of the capital account is now streamlined, as banks can open an account for FIEs with restrictions over the location and the number of accounts removed.

“The Circular assigns more responsibility to banks and SAFE will only administer foreign exchange related to registrations and keep a high level supervision on capital flows. Banks will play a much larger role in verifying capital account transactions, especially as they check documentation and establish accounts,” said Tan.

Banks' Role

Banks will now play a much greater role in administering foreign exchange for FIEs under the Circular. SAFE has provided detailed guidelines to help banks and local branches of the Administration to implement these changes.

“This is a practical and pragmatic approach from SAFE. There will still be monitoring and control over FIEs and SAFE reserves the right to punish banks for not exercising due prudence in its verification,” said Tan.

If SAFE decides that a bank is not following regular practices this is likely to lead to all transactions being scanned by the Administration. By providing this detailed guidance, SAFE has shown its commitment to letting banks take the lead.

Financing

One of the most exciting elements to come out of the Circular is the potential for financing. FIEs can now lend to their headquarters an amount equalling the profits owed to them, which has never been allowed before.

“This creates a new way for money to flow out. It is a minor step, but for profits owed to foreign investors it means proceeds do not have to be repatriated as dividends, which immediately trigger tax issues,” said Tan

A full text translation of the Circular and a feature article providing analysis will be available online in early January and in the January/February issue of China Law & Practice

By David Tring

Further reading:

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

How to get your money out of China

Relaxing foreign exchange controls