SAFE relaxes grip on forex controls

Over the past few years, the State Administration of Foreign Exchange (SAFE) has been tightening administration on capital account transactions. In particular, the inflow of foreign exchange into China and exchange of registered capital of foreign invested enterprises (FIEs) from foreign exchange to renminbi. SAFE issued the famous Circular 142, or the Circular on Operational Issues Relevant to Improving the Control of the Payment and Conversion of Foreign Exchange in Connection with the Foreign Exchange Capital of Foreign-invested Enterprises (关于完善外商投资企业外汇资本金支付结汇管理有关业务操作问题的通知) in 2008. The most significant principle under Circular 142 is that foreign-invested enterprises are allowed to exchange their registered capital to renminbi only for business included in their business scope. SAFE issued further regulations in 2011 to elaborate detailed applications of this principle. On November 19 2012, SAFE issued another two new regulations both of which came into force on December 17 2012:

• Circular on Issues Relevant to Foreign Exchange Control in Connection with Foreign-invested Partnerships (国家外汇管理局关于外商投资合伙企业外汇管理有关问题的通知) (Circular 58)
• The Circular on Further Improving and Revising the Foreign Exchange Control Policy 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) (Circular 59)

Circular 58 provides that the administration of the capital of foreign-invested partnership enterprises (FIPEs) will be similar to the administration of registered capital of FIEs. This means that an FIPE can exchange the capital contributed by its foreign partners only for business included in its business scope. This indicates that a private equity fund established in the form of an FIPE can exchange the capital contributed by foreign partners to renminbi for making equity investments in China, if equity investments are included in its business scope.