On 8 April 2015, the State Administration of Foreign Exchange (SAFE) issued the Circular of the SAFE on Relevant Issues Concerning the Reform of the Administrative Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises/国家外汇管理局关于改革外商投资企业外汇资本金结汇管理方式的通知 (Circular 19), which will come into effect on 1 June 2015. By Circular 19, foreign-invested enterprises (FIEs) across the country, and not just FIEs in designated areas, will be able to convert foreign exchange in their capital accounts into RMB at any time and to use funds from their capital accounts for onshore equity investments.

A Gradual Liberalisation Process

FIEs in China have been subject to foreign exchange control for years, especially in respect of capital account transactions. Conversion of foreign exchange in the capital accounts and withdrawal of funds from these accounts can only be done on an as-needed basis. In particular, SAFE's Circular 142, which was published in 2008, prohibited FIEs from using the converted RMB from their capital account balance to make equity investments in China.

Since early 2014, the above restrictions have been gradually relaxed, initially in the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ), followed by an expanded reform program in 16 designated industrial parks (Pilot Areas). Please see our earlier legal update for details.

Largely mirroring the measures implemented in the Shanghai FTZ and the Pilot Areas, Circular 19 relaxes the capital account settlement for all FIEs across the nation.

Conversion-at-will of Funds in Capital Accounts

Circular 19 enables FIEs in China to convert any amount of foreign exchange in their capital accounts into RMB at any time. No supporting documents are required for the conversion; however, to use the converted RMB, an FIE still needs to provide supporting documents and go through the review process with the banks for each withdrawal. Nevertheless, by being able to convert foreign exchange at a time when the exchange rate is favourable, an FIE can suitably hedge its exchange risks.

It is worth noting that Circular 19 does not apply to foreign exchange loans borrowed by the FIEs. An FIE is still required to provide supporting documents for the bank's review for each conversion and withdrawal of its foreign exchange loans.

Equity Investment by Non-investment FIEs?

While Circular 19 reiterates the requirement that FIEs must use converted RMB for purposes within their approved business scope, it allows FIEs to use their converted RMB from capital accounts to make equity investments in China, which was expressly prohibited by Circular 142 for non-investment FIEs (such as manufacturing companies).

This change brought by Circular 19 potentially opens the door for foreign investors to set up investment platforms in China. However, a practical issue remains for non-investment FIEs – whether they need to expand their business scope to include "investment" before making equity investments? It appears that answers to these questions still vary in the Shanghai FTZ and the Pilot Areas, where provisions similar to those of Circular 19 have already been implemented. Since Circular 19 does not provide further clarification on this issue, it remains to be seen whether local SAFE across the country will follow the same practice once Circular 19 enters into effect on 1 June 2015.

If this is the case, a subsequent question is whether the approval authorities and the registration authorities will allow any company to include "investment" in its business scope. The answer to this largely depends on the practice of local authorities, and it could be practically difficult in some places.

Facilitating Investment by Investment FIEs

Under the old regime, if investment FIEs (such as holding companies, venture capital and private equity firms) choose to invest with foreign exchange in their portfolio companies, the portfolio companies must provide supporting documents evidencing the authenticity of the transaction to the banks for each conversion and withdrawal of the funds.

The new regime under Circular 19 makes this process much easier, i.e., an investment FIE may convert the foreign exchange in its capital account into RMB and remit such RMB to the portfolio companies' basic RMB accounts for further use.


The issuance of Circular 19 is another major step taken by the Chinese government to liberalise the foreign exchange control regime. Starting with the Shanghai FTZ and Pilot Areas, SAFE has now provided foreign investors, on a nationwide basis, with more options and flexibility in the conversion and use of foreign exchange.

However, uncertainties and potential hurdles remain with some major issues such as the possibility for non-investment FIEs to engage in equity investment. Unless these issues are clarified and resolved, the practical value of Circular 19 can be limited.