Introduction
On October 23, 2019, China’s State Administration of Foreign Exchange (SAFE) introduced a major update by releasing the Circular on Further Promoting Cross-Border Trade and Investment Facilitation (the “New Policy”). This policy marks a significant shift by allowing non-investing Foreign-Invested Enterprises (FIEs) to use their equity capital for onshore investments in domestic enterprises. Prior to this update, only a select group of FIEs, specifically those designated as “investing FIEs” or those with investment as part of their business scope, could make domestic equity investments using their equity capital injected by offshore shareholders. Establishing these types of FIEs, however, was a complicated process, often fraught with numerous regulatory hurdles.
With the introduction of the New Policy, all types of FIEs are now permitted to use their foreign equity capital to invest in domestic enterprises, provided these investments are not restricted by the “foreign investment negative list” (which outlines sectors where foreign investment is either prohibited or limited). This is a game-changing development for foreign companies looking to expand their footprint in China’s growing market.
How the New Policy Works
Under the New Policy, non-investing FIEs have the flexibility to use either foreign currency or RMB (converted from foreign currency) for their onshore equity investments. However, there are specific processes that must be followed, depending on the type of currency used:
• Foreign Currency Investment: If a non-investing FIE makes an equity investment using foreign currency, the invested domestic entity must complete a domestic reinvestment registration process. Additionally, the invested entity must open a foreign-currency capital account to receive the funds.
• RMB Investment: If the equity investment is made using RMB that has been converted from foreign currency, the invested domestic entity must also go through the reinvestment registration process and open a “settled-to-be-paid” account to receive the RMB funds.
Both of these investment paths are designed to ensure that all transactions are compliant with SAFE regulations and that the funds are tracked appropriately within the financial system.
Opening New Opportunities for Foreign Capital
This policy shift is poised to significantly boost foreign investment in China by making it easier for non-investing FIEs to participate in the domestic market. Previously, foreign businesses faced considerable barriers when attempting to reinvest their offshore equity capital in domestic enterprises, particularly in sectors that are strategically important to China’s economic development. By allowing a wider range of FIEs to directly use their foreign equity capital, the New Policy opens the door for increased investments in industries that are not on the “foreign investment negative list.” This includes sectors such as advanced manufacturing, technology, and services, which are crucial to China’s evolving industrial landscape.
Moreover, this new flexibility benefits foreign businesses looking to consolidate their presence in China by enabling strategic investments in both upstream and downstream enterprises within the industrial chain. For example, a foreign-owned manufacturer may now more easily invest in its Chinese suppliers or distribution partners, fostering deeper integration with local businesses and creating synergies that were previously harder to achieve.
Additionally, the ability to make onshore equity investments using RMB converted from foreign currency allows for smoother financial operations, as businesses no longer need to navigate the complex approval processes that were previously required. This streamlined investment process will likely attract a broader range of international investors, from multinational corporations to smaller enterprises, driving foreign capital into sectors that are aligned with China’s economic goals.
In summary, this policy not only enhances the investment landscape for foreign entities but also aligns with China’s broader strategy of opening up its markets to global investors while fostering innovation and growth in key industries.
Conclusion
China’s New Policy on cross-border investment represents a significant liberalization of the rules governing foreign capital. It offers new opportunities for foreign-invested enterprises to make equity investments in domestic companies, without the previous restrictions that limited such activities. This development is likely to bolster strategic investments in key industries and promote stronger integration of foreign capital into China’s economy. For foreign businesses looking to expand in China, understanding the implications of this policy—and ensuring compliance with the associated procedures—will be critical to success.