“The key purpose is to encourage enterprises to borrow money overseas that can be more smoothly transferred back into China, and to increase flexibility for nei bao wai dai, which is very helpful for Chinese companies,” said Xianghong (Shirley) Wang, a finance partner at Zhong Lun Law Firm in Beijing.

Nei bao wai dai refers to onshore security for an offshore loan. Circular 3 will see more transactions where Chinese companies use this method to bring cash back into the country either by debt, such as intercompany loans, or equity, such as by increasing capital in onshore holdings, Wang said.

SAFE's 2014 rules for cross-border security for offshore loans did not permit issuer proceeds to return to China for certain financings—a measure put in place at the time to prevent the influx of 'hot money'. Now that the tide has turned and the focus is on bringing in foreign capital and stemming outflows, the new circular lifts that restriction.

Impact on MNCs

Circular 3 also allows multinational companies (MNCs) to use 100% of their daily deposit balance onshore, as a means of facilitating their FX management operations. Spending was previously capped at 50%.

“This means MNCs on the ground will have more to spend from their financing,” said Tiecheng Yang, head of Clifford Chance's China financial regulatory group in Beijing. “Companies wanting to expand business operations in China can do so through their internal cash pool instead of issuing bonds or getting loans.”

While SAFE has repeatedly stated that there are no restrictions or hurdles for distributing dividends to offshore accounts, MNCs in China have reportedly faced difficulties in remitting profits and dividends out of the country due to capital curbs.

In theory this shouldn't be a problem, but several large remittances may have been delayed by local SAFE bureaus and banks' asking for more documents and evidence, such as tax payments and board resolutions for declaration, said Yang.

Outbound

As part of the outflow controls, authorities including SAFE have been cracking down on falsely declared transactions–those disguised as cross-border investments to funnel money out of the country. Circular 3, in line with other recent policies, requires banks to strengthen verification of outbound deals.

Banks must review the source of funds, the planned use of funds, the underlying contract of the transaction, and approvals from shareholders meetings or partnership resolutions.

“These increased scrutiny and compliance requirements could be a concern for foreign sellers who may worry whether the Chinese buyers will be able to meet the schedule in M&A deals,” said Yang. Concerns are primarily related to the transfer of money from onshore to offshore accounts to make the purchase and whether the acquirer will be able to remit the payment in one lump sum.

Pending questions

Circular 3 will be supplemented by guidelines to iron out technical uncertainties.

One example is whether proceeds from offshore bond issuances secured by onshore guarantees (nei bao wai zhai) can be freely remitted back to China, said Wang. In practice, it's advisable for companies to check with SAFE as Circular 3 isn't exactly clear on this point, she said.

By Katherine Jo

China's scramble to plug capital outflows is in sharp contrast to its efforts to facilitate the movement of cash in the opposite direction, as the government widens channels for money entering the country.

A new policy issued by the nation's currency regulator and central bank subsidiary encourages companies to bring in more foreign capital to be converted into renminbi for onshore use. The State Administration of Foreign Exchange (SAFE) released the Circular on Further Promoting Exchange Control Reform and Improving Genuineness and Compliance Reviews (Circular 3) on January 26.

Circular 3 follows the September issuance of Circular 16, which provided companies in China a more flexible discretionary method for converting foreign currency obtained abroad into renminbi. The new rules also expand the scope of conversion to include onshore FX loans, providing greater funding ease for borrowers and opportunities for domestic lenders.

“The key purpose is to encourage enterprises to borrow money overseas that can be more smoothly transferred back into China, and to increase flexibility for nei bao wai dai, which is very helpful for Chinese companies,” said Xianghong (Shirley) Wang, a finance partner at Zhong Lun Law Firm in Beijing.

Nei bao wai dai refers to onshore security for an offshore loan. Circular 3 will see more transactions where Chinese companies use this method to bring cash back into the country either by debt, such as intercompany loans, or equity, such as by increasing capital in onshore holdings, Wang said.

SAFE's 2014 rules for cross-border security for offshore loans did not permit issuer proceeds to return to China for certain financings—a measure put in place at the time to prevent the influx of 'hot money'. Now that the tide has turned and the focus is on bringing in foreign capital and stemming outflows, the new circular lifts that restriction.

Impact on MNCs

Circular 3 also allows multinational companies (MNCs) to use 100% of their daily deposit balance onshore, as a means of facilitating their FX management operations. Spending was previously capped at 50%.

“This means MNCs on the ground will have more to spend from their financing,” said Tiecheng Yang, head of Clifford Chance's China financial regulatory group in Beijing. “Companies wanting to expand business operations in China can do so through their internal cash pool instead of issuing bonds or getting loans.”

While SAFE has repeatedly stated that there are no restrictions or hurdles for distributing dividends to offshore accounts, MNCs in China have reportedly faced difficulties in remitting profits and dividends out of the country due to capital curbs.

In theory this shouldn't be a problem, but several large remittances may have been delayed by local SAFE bureaus and banks' asking for more documents and evidence, such as tax payments and board resolutions for declaration, said Yang.

Outbound

As part of the outflow controls, authorities including SAFE have been cracking down on falsely declared transactions–those disguised as cross-border investments to funnel money out of the country. Circular 3, in line with other recent policies, requires banks to strengthen verification of outbound deals.

Banks must review the source of funds, the planned use of funds, the underlying contract of the transaction, and approvals from shareholders meetings or partnership resolutions.

“These increased scrutiny and compliance requirements could be a concern for foreign sellers who may worry whether the Chinese buyers will be able to meet the schedule in M&A deals,” said Yang. Concerns are primarily related to the transfer of money from onshore to offshore accounts to make the purchase and whether the acquirer will be able to remit the payment in one lump sum.

Pending questions

Circular 3 will be supplemented by guidelines to iron out technical uncertainties.

One example is whether proceeds from offshore bond issuances secured by onshore guarantees (nei bao wai zhai) can be freely remitted back to China, said Wang. In practice, it's advisable for companies to check with SAFE as Circular 3 isn't exactly clear on this point, she said.