SAFE Circular 28 – End or Beginning of the “China Holding”?

SAFE Circular 28 liberalizes domestic investments by foreign-invested enterprises

On October 25th, 2019, the Circular of the State Administration of Foreign Exchange on Further Promoting the Ease of Cross-Border Trade and Investment (国家外汇管理局关于进一步促进跨境贸易投资便利化的通知) (“Circular 28”) came into effect.

According to Circular 28, foreign-invested enterprises (“FIE”) may use capital funds to carry out domestic equity investments.

In simple words: Pursuant to Circular 28, it should be possible for a foreign investor to inject forex into a Chinese subsidiary, which subsidiary could then use the funds to acquire shares in another Chinese company.

Sounds familiar?

Indeed: As early as in June 2015, SAFE had issued Circular 19 providing for essentially the same. However, after issuing Circular 19, SAFE made it known that it would only implement the new regulation if the FIE in question had a business scope including the word “investment”. It turned out that in most cases the competent authorities were reluctant to change the business scope of FIE to include the word “investment”. As a result, Circular 19 was not implemented in practice, safe for a few exceptional cases.

Before Circular 19, only regulated foreign-invested investment companies, venture capital and private equity enterprises were generally permitted to use capital funds for equity investments. However, the regulatory thresholds for establishing such investment vehicles in China are rather high. Equity investments by “normal FIEs” (other than regulated investment vehicles) were only permitted if such normal FIEs used funds other than equity capital, such as RMB funds out of profits, equity transfer in China, etc. Please refer to our Newsletter SAFE Circular 19 – End or Beginning of the “China Holding”?

Four years on, there is reason to be optimistic that this time the liberalization will be implemented. One reason is that Premier Li Keqiang put his weight behind the liberalising measures of Circular 28 by publicly announcing that they would be issued. Another reason is that on January 1st, 2020, the new PRC Foreign Investment Law (“FIL”) will become effective. According to the FIL, most laws and regulations specifically applying to foreign-invested companies will be abolished.