China removes foreign exchange approvals for inbound and outbound direct investments

The State Administration of Foreign Exchange ("SAFE"), China’s foreign exchange regulator, recently issued the Circular on Further Simplifying and Improving Foreign Exchange Administration Policies on Direct Investments (国家外汇管理局关于进一步简化和改进直接投资外汇管理政策的通知, Hui Fa [2015] No. 13, "Circular 13") on 28 February 2015. Circular 13, which will become effective on 1 June 2015, relaxes controls on cross-border foreign exchange flows in connection with foreign direct investments into China, as well as facilitating Chinese outbound investments.

Traditionally, China has divided cross-border payments into two categories, one for 'current account' items which refer to trade and other recurring transactions, and the other for 'capital account' items, which basically covers equity investments and loans/debts. Current account items are liberalised and generally do not require SAFE approval; payments can normally be processed directly by a designated commercial bank after confirming, through the presentation of the underlying documentation, that there is a genuine and lawful underlying transaction. By contrast, China has traditionally imposed stringent controls on capital account transactions, which have typically been subject to SAFE approval both for the opening of the account, and for fund movements within such account.

In recent years, with the aim of strengthening the reform of capital account administration, facilitating and promoting cross-border investments, SAFE has issued various circulars relaxing some of these more stringent requirements, notably including the Circular on Further Improving and Adjusting Foreign Exchange Administration Policies on Direct Investment (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, Hui Fa [2012] No. 59) effective from 17 December 2012, which can be viewed as an important milestone whereby SAFE eliminated some of the stricter controls on capital account items that were more suited to an earlier era.

The release of Circular 13 marks another significant step on the road towards the long-term goal of liberalisation of conversion out of, or into, the RMB on the capital account, for both inbound and outbound investment transactions. In this note, we will discuss the key changes brought about by Circular 13 and its implications for investors.

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