3 February, 2017
On 26 January 2017, SAFE issued the Notice on Further Improving the Reform of Foreign Exchange Administration and Review of Veracity and Compliance (the “Notice”). Nei Bao Wai Dai The Notice has further eased the restrictions on Onshore Securities for Offshore Loans (commonly referred to “Nei Bao Wai Dai”), by allowing the funds raised through Nei Bao Wai Dai to be directly or indirectly repatriated to China, for utilisation in debt and equity investment, etc. within China. Nei Bao Wai Dai refers specifically to security or guarantee provided by an entity incorporated in PRC while both the borrower and the beneficiary (e.g. the lending bank) are incorporated and operate outside of China.
Pursuant to the previous Provisions on the Foreign Exchange Administration of Cross-border Securities promulgated by SAFE in 2014 (the “2014 Provisions”), the repatriation of loan proceeds of Nei Bao Wai Dai for use in lending and equity investment and securities investment etc. within China was restricted without the approval of SAFE.
The Notice suggests that loan proceeds raised through Nei Bao Wai Dai (the “Borrowings”) can now be repatriated into China for use in funding certain debt or equity investments, but it remains unclear the extent to which such Borrowings can be used for other forms of investment. The 2014 Provisions include the following, as examples of restrictions on repatriation of Borrowings:
1. where the Borrowings are used to acquire the equity of a non-PRC target company, of which over 50 percent of the assets are located within the PRC;
2. where the Borrowings are used to repay/refinance the debt of the borrower or any other non-PRC company, while the monies originally borrowed are transferred, directly or indirectly, back to the PRC in the form of equity or debt; and
3. where the borrower uses the Borrowings to make advance payments for trade in goods or trade in services, and the payment time is more than one year before the time of delivery of the goods or services and the amount of the advance payment exceeds USD 1 million and 30 percent of the total price of the sales and purchase agreement.
We will update you once SAFE provides further guidance on whether any of the above restrictions will now be wholly or partially lifted in light of the Notice.
Foreign Currency Other main points under the Notice include
(a) allowing foreign entities in free trade zones to settle transactions in foreign currency;
(b) expanding the scope of settlement of domestic and overseas foreign currency loans; and
(c) strengthening the compliance and verification regime for outbound payments.
The Notice sends a clear signal that the Chinese government is strengthening the restriction of outflows of foreign currency while welcoming the inflows of the same.
