Highlights

• Due to RMB depreciation and foreign exchange fluctuation, PRC authorities have tightened review on the truthfulness of outbound investment, for purposes of combating exchange arbitrage and underground private banks.

• SAFE launched a new system to supervise individuals’ foreign exchange activities since January 1, 2016, and will list violative individuals on a “Supervised List”.

• SAFE launched a series of special examinations to be conducted by banks in August, 2015, to enhance the management on the foreign exchange registration, fund wire-out, overseas loan under domestic guarantee and other aspects in connection with the outbound investment transactions.

• Due to capital outflow pressure, certain local authorities even imposes stricter interpretation of law, and prohibit outbound investors from making investment by using registered capital.

• Despite the tightened review and stricter local practice, we believe they will not hinder truthful outbound investments, although PRC authorities may take longer time for processing the case and may require more supporting documents.

Main Article

Due to RMB depreciation and foreign exchange fluctuations, authorities of People’s Republic of China (“PRC”) have tightened review on the truthfulness of outbound investment, for purposes of combating exchange arbitrage and illegal private banks.

This article covers four tightened sections: SAFE enhances oversight on individuals’ foreign exchange quota control; SAFE tightens review on truthfulness of outbound investment; SAFE tightens review on truthfulness of overseas loan under domestic guarantee, and; local authorities may impose stricter interpretation on the fund qualified for outbound investment.

1. SAFE Enhances Oversight on Individual Foreign Exchange Quota Control

SAFE launched SAFE Notice to Furtherance Issues Concerning the Management of Individual Foreign Exchange Control (《国家外汇管理局关于进一步完善个人外汇管理有关问题的通知》) on December 25, 2015 (“SAFE Notice [2015] No.49”), which requires the bank to adopt a new system to supervise individuals’ foreign exchange activities (including purchase and settlement of foreign currencies) since January 1, 2016.

SAFE Notice [2015] No.49 prohibits individuals from purchasing/borrowing foreign exchange quota, splitting settlement, and taking other measures to circumvent the PRC foreign exchange quota control (i.e., 50,000 USD or equivalent per annum). Otherwise, SAFE may list the violative individual on a “Supervised List”. Specifically,

• If an individual offers his/her foreign exchange quota to others for improper purpose, SAFE will issue (through relevant bank) a warning notice to such individual for his/her first violation. If such individual conducts a second violation, SAFE will list him/her on the “Supervised List”;
• If an individual takes advantage of other’s foreign exchange quota in order to circumvent the quota control, SAFE will list him/her on the “Supervised List” at his/her first violation;
• The term of supervision lasts for the rest of such year plus 2 additional years. During the term of supervision, if the supervised individual intends to purchase or settle any amount of foreign currency into RMB, he/she shall provide his/her identity card along with supporting documents proving truthfulness of the transaction to the bank for verification and review.

Despite the above, we understand that, an individual listed on the “Supervised List” is still able to purchase/settle foreign currency as long as satisfactory supporting documents are provided.

Currently an individual still cannot make outbound investment directly, but may do so through a company owned by him/her where the company should conduct outbound investment filing/approval procedures with National Department of Reform Commission (“NDRC”) and Ministry of Commerce (“MOFCOM”).

2. SAFE Tightens Review on Truthfulness of Company Outbound Investment

To our knowledge, SAFE launched a special examination against the banks in August, 2015, and required the bank to strengthen document review on the source of fund and truthfulness of the transaction.

Recently, for an outbound investor who intends to purchase a large amount of foreign currency, the bank may inform such investor to discuss the usage of fund at SAFE at an arranged time.  This is a new and additional procedure which may prolong the timeline required to deal with PRC government for outbound investment.

3. SAFE Tightens Review on Truthfulness of Overseas Loan under Domestic Guarantee

According to the 2014 version of Foreign Exchange Management Guidelines on Cross-Border Guarantee (《跨境担保外汇管理操作指引》), if a PRC company acts as a Guarantor for an overseas loan (i.e., both the Guarantee and the Creditor are foreign entities), the PRC Guarantor shall conduct guarantee registration with local SAFE within 15 business days after execution of the guarantee agreement. If the Guarantee defaults the repayment of loan, the PRC Guarantor may make the guaranteed payment at the bank by presenting the guarantee registration documents. In addition, the PRC Guarantor shall conduct external debt registration with local SAFE within 15 business days after the guaranteed payment.

To our knowledge, SAFE launched a special examination against the banks in August, 2015 to strengthen review on the claimed default and the guaranteed performance payment, i.e., the bank shall check whether the agreement clauses have any inclination for default, whether the PRC Guarantor has conducted external debt registration after guaranteed performance payment, whether the Guarantee has executed a new guarantee agreement with the PRC Guarantor, reasons for Guarantee’s default, flow of the loan, usage of the loan, etc.

4. Local Authorities May Impose Stricter Interpretation on Fund Qualified for Outbound Investment

We noticed in our recent outbound investment practice that certain local authority even imposed stricter interpretation of law probably due to pressure of capital outflow. For example, one of our clients (a PRC company) intended to make outbound investment through the capital of a to-be-established subsidiary. But it was told by local MOFCOM that only profits were qualified source of fund, while the registered capital of a to-be-established subsidiary could not be used for outbound investment, which we have not heard of before.

Despite the tightened review and stricter local practice, we believe they will not hinder truthful outbound investments, although PRC authorities may take longer time for processing the case and may require more supporting documents.