SAFE further opens cross-border investment, trade

0
1892
investment
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

The State Administration of Foreign Exchange (SAFE) on 23 October 2019 issued the Circular on Further Promoting the Facilitation of Cross-border Trade and Investment (circular No. 28). The circular aims to further liberalize and streamline the foreign exchange control over cross-border investments and trade. Measures are introduced to:

  • Simplify the foreign exchange control requirements under both current account and capital account items; and more importantly,
  • Relax the longstanding domestic equity investment restriction imposed on foreign-invested enterprises (FIEs).

Relaxation on equity investment by FIEs

Before circular No. 28, only FIEs with the explicit wording of “investment” in their business scope – e.g., a China investment holding company (CHC) – were allowed to utilize their registered capital for further equity investment in China. Normal FIEs without an investment business scope were generally forbidden from doing so.

Circular No. 28 has repealed this restriction. Now, normal FIEs (without an investment business scope) are also allowed to utilize and convert their capital received from foreign investors for making equity investment in China by way of: (i) capital injection into another PRC entity; and/or (ii) acquisition of equity interests in another PRC entity, provided that:

  • The investment does not fall under the forbidden industries listed in the Special Administrative Measures for Access of Foreign Investment (Negative List 2019 edition); and
  • The investment is for a genuine project and complies with applicable laws.

While the requirement under (1) is clear, circular No. 28 does not elaborate on the criteria of “genuineness” and “compliance” under (2). However, the test is expected to largely focus on the commercial reasonableness of the equity investment (by taking into consideration the existing business scope of the FIE), as well as the industrial licensing and other regulatory restrictions relating to the investment. The authors tend to take the view that SAFE sets these tests to prevent speculative investment, or any investment that is not for the purpose of genuine business operations and/or totally irrelevant to the current business operation of the proposed FIE investor.

This regulatory development gives foreign investors additional options in structuring their investments in China. In particular, for China M&A deals, having an FIE as the acquiring entity can help to achieve a more flexible payment arrangement. In the past, an offshore acquirer could only pay after the completion of the share transfer registration and SAFE filing for the new shareholder. This is definitely not attractive to Chinese sellers, who have to give up their registered title to the target without receiving a penny.

This development may also be attractive to those foreign investors: (i) who operate in a business sector where forming a CHC is not possible or practically difficult (such as real estate); (ii) who work on multiple projects with the same Chinese partner; or (iii) who simply want to have an investment vehicle in China without paying a high price.

The authors expect that the implementation of circular No. 28 will bring challenges to the traditional forms of FIEs with an investment business scope, such as CHC. Some of them might have to lower their requirements, or provide additional benefits to maintain relevance or to regain popularity.

You must be a subscribersubscribersubscribersubscriber to read this content, please subscribesubscribesubscribesubscribe today.

For group subscribers, please click here to access.
Interested in group subscription? Please contact us.

你需要登录去解锁本文内容。欢迎注册账号。如果想阅读月刊所有文章,欢迎成为我们的订阅会员成为我们的订阅会员

已有集团订阅,可点击此处继续浏览。
如对集团订阅感兴趣,请联络我们

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link