As long ago as May 2010, the State Council issued the Opinions on Encouraging and Guiding the Healthy Development of Private Investment (Guo Fa [2010] No.13) to encourage private capital investment abroad. In order to facilitate overseas investments and simplify foreign exchange control policies for outbound investment by Chinese enterprises, the PRC State Administration of Foreign Exchange (SAFE) released the Circular of State Administration of Foreign Exchange on Issues concerning Foreign Exchange Control in Relation to Encouraging and Guiding the Healthy Development of Private Investment (Hui Fa [2012] No.33) (the “Circular”). Now, a new Circular simplifies the regulation processes for the remittance of foreign direct investment capital as well as offshore loans granted by domestic enterprises and relaxes the administration of external security provided by individuals. The Circular promulgated by SAFE came into force on 1st July, 2012 with the following provisions.
Simplify the management of overseas direct investment funds
Before this Circular was issued, domestic enterprises were required to register outbound investment reduction or the withdrawal of such outbound investment before they could remit any funds back to China. Now, such direct investment funds, as defined by the difference between the domestic enterprise’s total investment and its registered capital, may be remitted back to domestic territorries without registration of capital reduction or divestment as long as such funds have been registered with the local foreign exchange bureau.
Removal of restrictions on funding of outbound lending
The new Circular has also removed the verification requirements for purchasing foreign currency to be used for outbound lending and fund repatriation from overseas. After the completion of the relevant registration formalities, domestic enterprises may receive or make payments through a special account for offshore loans opened with the bank having foreign exchange business. These loans must be within the offshore loan quota approved by SAFE.
Permission of providing external security by individuals
In the past, individuals were not permitted to provide financial assurances on behalf of a foreign entity. However, under the new Circular, an individual in China may act as co-guarantor with a Chinese company to provide a guarantee, a mortgage, a pledge, or other legitimate means permitted under the PRC Security Law connected to financing provided by a foreign lender to an offshore company. However, the individual is only allowed to do so if an external guarantee is also provided by a Chinese company. In other words, foreign lenders now require the individual owners of private companies to provide security for the loans taken out by offshore enterprises.
Such individuals must entrust the domestic enterprise providing the corporate external guarantees with applying for the individual external security at the company’s local bureau of SAFE. If SAFE approves the external security provided by said Chinese company, SAFE may register the individual external guarantee together with the external security provided by the company. Meanwhile, SAFE will not verify the terms of the individual security, such as the qualifications of the individual, the manner of security, or the scope of the secured assets.
This article is intended solely for informational purposes and does not constitute legal advice. Although the information in this article was obtained from reliable official sources, no guarantee is made with regard to its accuracy and completeness. For more information please visit dandreapartners.com or WeChat: dandreapartners.
