The State Administration of Foreign Exchange (SAFE), China's regulator tasked with monitoring foreign exchange (FX) flows, has long held a tight control on currency conversion. It has slowly relaxed its grip in recent years, however, releasing a series of liberalizing measures as a means of facilitating cross-border investments and financing. And on June 9, 2016, it issued the Circular on Reforming and Regulating the Policy for the Control of the Conversion of Foreign Exchange on the Capital Account (Hui Fa [2016] No.16) (Circular 16), as the latest step to smoothen the process for foreign and domestic enterprises to convert their funds.

China's FX conversion regime

For a long time, enterprises in China were only able to convert their FX proceeds from capital account transactions into renminbi by presenting a genuine demand of payment to their account banks. This scheme was referred to as conversion upon payment demand (PDC).

In July 2014, SAFE introduced a new scheme through the Circular on Issues Relevant to Launching a Pilot Project for Reform of the Administration Method for the Settlement of the Foreign Exchange Registered Capital of Foreign-invested Enterprises in Certain Regions, under which foreign-invested non-financial enterprises in designated regions were able to convert FX capital funds (i.e. capital contributed by foreign shareholders) at any time. This was referred to as the discretionary conversion (DC) method. Currency conversion under DC is not contingent upon a genuine payment demand, and the use of proceeds would only be verified at the payment stage. The scheme was applied nationwide in March 2015, pursuant to the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital Funds of Foreign-invested Enterprises (Hui Fa [2015] No.19) (Circular 19).