China opens further to cross-border investment

A new SAFE circular simplifies procedures for foreign investment in the country. But how it will work in practice is still an open question.

China’s State Administration of Foreign Exchange (SAFE) has issued a new circular that drastically simplifies the requirements and procedures for foreign investment, according to a report by law firm Paul Hastings.

Circular 59, which was issued last week and will become effective on December 17, took a very different direction on investment regulations, and “removed many of the approval requirements that have been put in place over the last ten years”, according to the report.

Foreign investors specifically, including private equity investors, will no longer need SAFE approval to open foreign exchange bank accounts, to convert foreign currency to RMB within accounts set up for investment, or to use profits earned in China to make other investments in China.

This circular is not targeted at private equity specifically, according to Yi Lu, a partner at Paul Hastings in Shanghai. But its goal is to make private equity activity in the country – especially mergers and acquisitions – much easier. 

“This development may have a profound effect on inbound and outbound investments, including greenfield/brownfield projects, growth capital investments, and mergers and acquisitions,” the report said.

Lu and three other lawyers from Paul Hastings speculate that the relaxations are “an indirect response to the notable decline in the volume of foreign direct investments into China in the past few months”, according to the report.

However, there is one key restriction on foreign investment that has not been repealed by Circular 59: SAFE Circular 142, which was issued in 2008, prohibits foreign-invested enterprises from converting their registered capital into RMB to make other investments or acquisitions in China. 

That limitation is a particular drawback for private equity, Lu told PE Asia.

The most important part of this circular, according to Lu, is it signals a change in SAFE’s role in investment regulation.

“[SAFE] is gradually shifting its focus from micro-administration to macro-supervision,” she said in the report. Whereas previously private equity investors would have to go through SAFE for approval for every step of investment, they will now have to deal with the commission much less, according to Lu.

Private equity investors will instead have to deal much more with Chinese banks, which will approve the bank accounts and issue the equity. While the hope is that this will make investment easier, Lu is unsure how it will turn out in practice.

“The banks are used to just calling up SAFE and asking, ‘Can I approve it?’. But now, SAFE is basically saying, ‘it’s your problem’”, and it may take the banks a while to adjust to that, Lu added.