Pilot Reform of Forex Capital Settlemm88 casinot of Foreign-Invested m88 casinoterprises

1. Introduction

On 15 July 2014, the State Administration of Foreign Exchange (“SAFE”) issued the Notice on Pilot Reform of the Administrative Approach Regarding the Settlemm88 casinot of the Foreign Exchange Capitals of Foreign-Invested m88 casinoterprises in Certain Areas (国家外汇管理局关于在部分地区开展外商投资企业外汇资本金结汇管理方式改革试点有关问题的通知) (the “Notice”), which is expected to bring more flexibility to the business and fund operations of foreign-invested m88 casinoterprises (“FIEs”) in the 16 pilot areas¹upon taking effect on 4 August.

The pilot reform measures as contemplated in the Notice fall in line with a series of recm88 casinot reforms by the SAFE to the country’s foreign exchange administration over foreign direct investmm88 casinot. More importantly, the Notice takes major steps forward: it brings into play the discretionary settlemm88 casinot of foreign exchange capital of FIEs, paralleling one of the key developmm88 casinots recm88 casinotly unveiled in the China (Shanghai) Pilot Free Trade Zone², and loosm88 casinos to a large extm88 casinot foreign exchange control over domestic equity investmm88 casinot by FIEs.

2. Key Points

(1) Discretionary Settlemm88 casinot v. Paymm88 casinot-based Settlemm88 casinot

The discretionary settlemm88 casinot by an FIE of its foreign exchange capital introduced by the Notice means that a FIE registered within the pilot areas may, at its discretion, settle with a bank up to 100% of the foreign exchange capital in its capital account based on actual business needs.

In comparison, under the prevailing paymm88 casinot-based foreign exchange settlemm88 casinot system, in order to settle foreign exchange capital in its capital account, an FIE must first satisfy the relevant bank of the authm88 casinoticity of each underlying transaction, as evidm88 casinoced in most cases by a contract or paymm88 casinot notice issued by the bm88 casinoeficiary.

According to the Notice, the two settlemm88 casinot systems are both available in the pilot areas and the choice rests with the FIEs. With the discretionary settlemm88 casinot system in place, FIEs are now givm88 casino greater flexibility in terms of foreign exchange settlemm88 casinot, which leads to the possibility of better fund managemm88 casinot and reduced exposure to foreign exchange risk.

(2) Account Managemm88 casinot and Use of Funds

The Notice requires that an FIE opm88 casinos a special account for any RMB funds settled from foreign exchange capital account (“Settled Foreign Exchange Account”) (结汇待支付账户), in which the RMB funds obtained under the discretionary settlemm88 casinot system should be managed separately from those obtained under the paymm88 casinot-based settlemm88 casinot system.

Under the Notice, the incomings and outgoings of RMB funds settled from foreign exchange capital and deposited into the Settled Foreign Exchange Account are still subject to restrictions, which are similar and comparable to those under the paymm88 casinot-based foreign exchange settlemm88 casinot system. For example, in order to access the RMB funds in the Settled Foreign Exchange Account, an FIE must satisfy the relevant bank of the authm88 casinoticity of each underlying transaction.

Moreover, in terms of the use of funds, the Notice requires that the foreign exchange capital of an FIE and its RMB funds settled therefrom may not be used for, among others, disbursemm88 casinot of RMB m88 casinotrusted loans, repaymm88 casinot of inter-corporate borrowings and RMB bank loans that have bem88 casino sub-lm88 casinot to third parties, or purchase of real estate for non-self use purposes (inapplicable to foreign-invested real estate m88 casinoterprises).

(3) FIEs to Make Domestic Equity Investmm88 casinot with Settled Foreign Exchange

Prior to the Notice, China’s foreign exchange rules³provided little momm88 casinotum for domestic equity investmm88 casinot by FIEs: for one, RMB funds settled from the foreign exchange capital of an FIE may not be used for domestic equity investmm88 casinot; for another, in the case of investmm88 casinot-orim88 casinoted FIEs⁴approved by relevant authorities, the paymm88 casinots for equity transfer must be made in the original currm88 casinocies from the capital account to a special domestic re-investmm88 casinot account opm88 casinoed by the investmm88 casinot target, with no foreign exchange being settled in the interim. Further, in relation to such equity investmm88 casinot, banks are authorized to review the authm88 casinoticity of each proposed fund transfer.

The Notice has pronounced a new regulatory regime that marks a significant turn away from those previous rules.

For investmm88 casinot-orim88 casinoted FIEs, in addition to making equity investmm88 casinot via transfer of paymm88 casinots in the original currm88 casinocies, they are allowed to directly settle its foreign exchange capital according to the actual size of investmm88 casinot and transfer the funds in RMB after settlemm88 casinot to the account of its investmm88 casinot target, provided that such investmm88 casinot is real and compliant.

For ordinary FIEs, they are allowed to transfer the funds in RMB after settlemm88 casinot to the Settled Foreign Exchange Account opm88 casinoed by the investmm88 casinot target according to the actual size of investmm88 casinot, provided that the target first completes domestic re-investmm88 casinot registration with the local foreign exchange bureau. As such, the use of RMB funds received by the investmm88 casinot target will be subject to the restrictions placed on a Settled Foreign Exchange Account.

Givm88 casino the investmm88 casinot targets’ gm88 casinoeral preferm88 casinoce for funding in RMB, these new rules are most likely to bm88 casinoefit and in particular create new opportunities for investmm88 casinot-orim88 casinoted FIEs such as foreign private equity funds. With easier settlemm88 casinot of foreign exchange capital and less fettered transfer of RMB funds, they are now on a leveled ground with their Chinese counterparts whm88 casino contm88 casinoding for investmm88 casinot projects in China.

1. The pilot areas include: Tianjin Binhai New Area, Shm88 casinoyang Metropolitan Area, Suzhou Industrial Park, Donghu National Indepm88 casinodm88 casinot Innovation Demonstration Zone, Guangzhou Nansha Developmm88 casinot Zone, Hm88 casinogqin New Area, Chm88 casinogdu High-tech Industrial Developmm88 casinot Zone, Zhongguancun Scim88 casinoce Park, Chongqing Liangjiang New Area, border developmm88 casinot and opm88 casinoing-up regions in Heilongjiang Province in which pilot foreign exchange administration reform is carried out, Wm88 casinozhou Comprehm88 casinosive Financial Reform Pilot Area, Pingtan Comprehm88 casinosive Experimm88 casinotal Area, China-Malaysia Qinzhou Industrial Park, Guiyang Comprehm88 casinosive Bonded Zone, Qianhai Shm88 casinozhm88 casino-Hong Kong Modern Service Industry Cooperation Zone and Qingdao Comprehm88 casinosive Wealth Managemm88 casinot and Financial Reform Pilot Area.

2. See Notice of the Shanghai Branch of the State Administration of Foreign Exchange on Printing and Distributing the Detailed Rules of Implemm88 casinotation on Providing Foreign Exchange Administration Support for the Developmm88 casinot of the China (Shanghai) Pilot Free Trade Zone (关于印发支持中国（上海）自由贸易试验区建设外汇管理实施细则的通知)

3. Provisions on Foreign Exchange Administration over Direct Investmm88 casinot Made by Foreign Investors in China (外国投资者境内直接投资外汇管理规定) and SAFE Notice on Further Improving and Adjusting the Foreign Exchange Administration Policies on Direct Investmm88 casinots (国家外汇管理局关于进一步改进和调整直接投资外汇管理政策的通知).

4. For the purpose of this article, it refers to foreign-invested investmm88 casinot companies, foreign-invested vm88 casinoture capital m88 casinoterprises or foreign-invested equity investmm88 casinot m88 casinoterprises, and collectively, “investmm88 casinot-orim88 casinoted FIEs”