SAFE further opens cross-border investment, trade


The State Administration of Foreign Exchange (SAFE) on 23 October 2019 issued the Circular on Further Promoting the Facilitation of Cross-border Trade and Investment (circular No. 28). The circular aims to further liberalize and streamline the foreign exchange control over cross-border investments and trade. Measures are introduced to:

  • Simplify the foreign exchange control requirements under both current account and capital account items; and more importantly,
  • Relax the longstanding domestic equity investment restriction imposed on foreign-invested enterprises (FIEs).

Relaxation on equity investment by FIEs

Before circular No. 28, only FIEs with the explicit wording of “investment” in their business scope – e.g., a China investment holding company (CHC) – were allowed to utilize their registered capital for further equity investment in China. Normal FIEs without an investment business scope were generally forbidden from doing so.

Circular No. 28 has repealed this restriction. Now, normal FIEs (without an investment business scope) are also allowed to utilize and convert their capital received from foreign investors for making equity investment in China by way of: (i) capital injection into another PRC entity; and/or (ii) acquisition of equity interests in another PRC entity, provided that:

  • The investment does not fall under the forbidden industries listed in the Special Administrative Measures for Access of Foreign Investment (Negative List 2019 edition); and
  • The investment is for a genuine project and complies with applicable laws.

While the requirement under (1) is clear, circular No. 28 does not elaborate on the criteria of “genuineness” and “compliance” under (2). However, the test is expected to largely focus on the commercial reasonableness of the equity investment (by taking into consideration the existing business scope of the FIE), as well as the industrial licensing and other regulatory restrictions relating to the investment. The authors tend to take the view that SAFE sets these tests to prevent speculative investment, or any investment that is not for the purpose of genuine business operations and/or totally irrelevant to the current business operation of the proposed FIE investor.

This regulatory development gives foreign investors additional options in structuring their investments in China. In particular, for China M&A deals, having an FIE as the acquiring entity can help to achieve a more flexible payment arrangement. In the past, an offshore acquirer could only pay after the completion of the share transfer registration and SAFE filing for the new shareholder. This is definitely not attractive to Chinese sellers, who have to give up their registered title to the target without receiving a penny.

This development may also be attractive to those foreign investors: (i) who operate in a business sector where forming a CHC is not possible or practically difficult (such as real estate); (ii) who work on multiple projects with the same Chinese partner; or (iii) who simply want to have an investment vehicle in China without paying a high price.

The authors expect that the implementation of circular No. 28 will bring challenges to the traditional forms of FIEs with an investment business scope, such as CHC. Some of them might have to lower their requirements, or provide additional benefits to maintain relevance or to regain popularity.

Relaxation on the use of funds under capital account items

Under circular No. 28, PRC companies in pilot areas are no longer required to provide supporting documents to banks for verification before using the funds received under capital account items (including capital, foreign debt and the proceeds of an overseas listing) on a case-by-case basis.

Circular No. 28 has also simplified the use of funds under certain foreign directed investment-related accounts:

  • The restrictions on the conversion of funds in the asset realization accounts are now lifted. Account holders may now directly apply to convert these funds into RMB without showing the intended uses;
  • In respect of the deposit accounts opened by foreign investors, the funds in such accounts may: (i) after the underlying transaction is completed be directly used for other onshore investments or payment of consideration for another transaction; and (ii) be converted into RMB for payment of consideration or monetary remedies of the underlying transaction.

Simplification on foreign debt formalities

Circular No. 28 has also significantly simplified the foreign exchange procedures in relation to the borrowing of foreign debts by PRC non-financial companies in pilot regions.

In the past, PRC non-financial companies have always been required to complete a foreign debt registration with SAFE for each cross-border borrowing. Circular No. 28 now permits PRC non-financial companies in pilot regions to complete a one-off foreign debt registration up to an amount equal to their foreign debt quota. Companies may thereafter undertake foreign debt transactions directly at their banks, as long as these are within the foreign debt quota already registered with SAFE.

Other developments

Circular No. 28 also sets out other changes, including:

  • Simplification of the documentary and reporting requirements in relation to the payments under cross-border trade;
  • PRC contractors engaging in overseas construction projects, after completing the registration with SAFE, are now permitted to open an overseas account for the centralized management of funds and payments involved under the projects.

The issuance of circular No. 28 echoes the commitment of the central government in deepening the reform of its administration over the foreign exchange control regime. It also reflects a more liberalized policy stand that would benefit multinationals that have business operations in China.

However, it is also noted that how certain provisions under circular No. 28 can be implemented in practice are yet to be tested or supported by implementing rules to be further promulgated by SAFE.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at