23 January, 2017
On 28 November 2016, an article entitled “Briefing by Shanghai Municipal Administration of Foreign Exchange on cross-border foreign currency payment and receipt for capital items” issued by the State Administration of Foreign Exchange ("SAFE"), caused heated discussion. The article listed the certain requirements for banks who manage capital items and stated that, in relation to a single purchase of foreign exchange, foreign exchange payment, local currency and foreign currency expenditure of USD 5 million or more, a report shall be submitted to SAFE. Moreover, foreign investment with outflows of over USD 50 million (inclusive) now requires approval by relevant authorities.
The article also mentioned two meetings held by the People's Bank of China on 25 November and Shanghai Municipal Administration of Foreign Exchange on 28 November respectively. During the meetings, restrictions on overseas investment were issued by People's Bank of China requiring that mandatory reporting and review of purchases of foreign exchange of over USD 5 million would become imperative and closer supervision of RMB outflows. As a result of these measures, we have seen complications arise in the purchase of foreign exchange and cross-border RMB remittances in a number of cross-border mergers and acquisitions projects that we have worked on.
In light of the current economic environment, cross-border capital flow has to be carefully managed on a macroscopic level so as to better develop relevant business. In order to effectively prevent cross-border capital flow risk and maintain the stability of the foreign exchange market, it is suggested that various measures to be taken including:
- limitation of irrational outbound investment trend in the areas of real estate, hotels, studios, entertainment, sports clubs
- limitation of outbound investment by limited partnership corporations
- limitation of large investment in non-core business
While the above article has triggered a heated debate, some argue that the more stringent supervision of cross-border capital flows will affect the normal profit remittance by foreign invested enterprise. On 9 December 2016, SAFE issued a statement clarifying that there is no restriction on normal profit remittance by foreign invested enterprises.
We will issue further updates once the full effect of these new regulations becomes known.
For further information, please contact:
Michael Crips, Partner, Clyde & Co
michael.cripps@clydeco.com
