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Legal Update

New Safe Measures To Curb Foreign Debt Registration And Conversion In The Real Estate Sector

20 July 2007
Mayer Brown JSM Legal Update

Summary

On 10 July, 2007, the State Administration of Foreign Exchange ("SAFE") issued the Circular of the Comprehensive Affairs Department of the State Administration of Foreign Exchange on Issuing the List of the First Batch of Real Estate Foreign-Invested Projects Already Filed with the Ministry of Commerce ("Circular 130").  Circular 130 is as a supplement to the Circular on the Reinforcement and Regulation of Approval and Supervision of Foreign Direct Investments in the Real Estate Sector, which was jointly issued by the Ministry of Commerce and SAFE on 23 May 2007. In a nutshell, Circular 130 effectively prohibits borrowing of foreign debts by foreign investment enterprises in the real estate sector ("Real Estate FIEs") established on or after 1 June 2007.

Full Update

The salient points of Circular 130 are set out below:

1.  Foreign Debts not Allowed for New Real Estate FIEs

SAFE will not process any foreign debt registration, or approve any foreign debt conversion, of any Real Estate FIE which obtains its certificate of approval and completes the filing procedures with MOC Beijing on or after 1 June 2007. This effectively prohibits any such new Real Estate FIE from borrowing from overseas (including from overseas shareholders).

Such new measure extends to those Real Estate FIEs established before 1 June 2007 which have their increase in registered capital approved and filed on or after 1 June 2007.  But in such cases it is unclear from the language of Circular 130 as to whether SAFE will still process foreign debt registration, or approve foreign debt conversion, of foreign debt borrowed by such Real Estate FIE within its original borrowing gap prior to the increase of registered capital. Enquiries should, therefore, be made with the relevant local SAFE in each individual case in order to ascertain its specific requirements.

2.  Further Restrictions on Real Estate FIEs which are not Filed with MOC

Additional restrictions apply to a Real Estate FIE which has obtained its certificate of approval on or after 1 June 2007 from the local branch of MOC but fails to complete the filing procedures with MOC in Beijing.  In respect of such FIEs, SAFE will not process any foreign exchange registration (or supplemental registration) or settlement and conversion of foreign currency under its capital account (nor will SAFE process any foreign debt registration, or approve any foreign debt conversion, of such FIE). The major implications are that the overseas shareholder of such new Real Estate FIE cannot inject registered capital to such FIE as such FIE is not allowed to open any foreign currency account.

The same restrictions apply to any Real Estate FIE established before 1 June 2007 which obtains approval of increase in its registered capital on or after 1 June 2007 but fails to complete the filing procedures with MOC in Beijing.

3. Date of Establishment

The date of the approval by MOC of a Real Estate FIE is the date which is specified as such in the "Foreign-Invested Enterprise Certificate of Approval" of such Real Estate FIE.

4.  Periodical Publication of the List of Real Estate FIEs which are Filed with MOC

SAFE will periodically, through the internet, publish the list of those Real Estate FIEs which have completed the filing procedures with SAFE, thus enabling local branches of SAFE and designated foreign exchange banks to conduct searches on-line.

Circular 130 also includes the list of the first batch of Real Estate FIEs which have successfully completed the filing procedures with MOC.

For further information, please contact:

Name:
Position: Partner
Phone: +852 2843 2321
Fax: +852 2103 5127

Name:
Position: Partner
Phone: +852 2843 4480
Fax: +852 2103 5091

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