SAFE Relaxes Capital Inflow Controls and Strengthens Outflow Authenticity Reviews

On 26 January 2017, the State Administration of Foreign Exchange (“SAFE”) issued the Notice on Further Promoting Foreign Exchange Administration Reform and Perfecting Authenticity and Compliance Review.

The notice is aimed at relaxing certain foreign exchange inflow controls and strengthening the authenticity and compliance reviews for capital outflows carried out by China’s designated foreign exchange banks.

Specifically, the notice:

  • Expands the scope of domestic foreign exchange loan settlement.
  • Permits the proceeds of an outbound guarantee to be repatriated for use in China through cross-border lending or equity investment.
  • Facilitates the centralised operation and management of foreign exchange by a multinational by allowing full onshore utilisation of the deposit in the MNC’s foreign exchange master account.
  • Permits the foreign exchange settlement of non-resident institutional free trade accounts opened in China’s pilot free trade zones.
  • Requires banks to examine relevant board or partner resolutions, tax declarations and audited financial statements of foreign-invested enterprises, and ensures their prior-year losses are made up, before remitting profits abroad.
  • Requires banks to examine the source and planned use of foreign exchange, as well as related board or partner resolutions, contracts and other authenticity documents, in carrying out outbound investment foreign exchange registration and capital remittance procedures.
  • Clarifies that an onshore entity’s foreign currency and RMB outbound financing must share the same outbound financing quota (that is, an aggregate of no more than 30 percent of the entity’s audited equity).

Market Reaction

Alan Xu, Partner, Zhong Lun Law Firm, Hong Kong

“In line with the Chinese government’s recent policies of encouraging inbound investment and capital inflow, by issuing this notice SAFE aims to funnel proceeds raised from offshore bond issuance into China. In addition, the implementation of the notice will likely encourage more and more Chinese bond issuers to use a simple guarantee structure for their offshore bond issuance, and keepwell agreements, as a way to enhance a bond issuer’s credit quality, will become much less popular in China.”

Action Items

General Counsel for offshore companies and foreign-invested enterprises should work with finance colleagues to take full advantage of any opportunities presented by the notice. In addition, counsel will want to advise finance colleagues to review any revisions to the authenticity and compliance review procedures in place at their foreign exchange bank in China to avoid unnecessary delays in outward remittances of foreign exchange.