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Chinese regulator eases overseas investment restrictions

China’s SAFE has made changes to its forex administration in order to make it easier for Chinese individuals and businesses to invest overseas
Chinese authorities hope that by easing rules around special purpose vehicles they can encourage more inward investment to the country

China’s SAFE has made changes to its forex administration in order to make it easier for Chinese individuals and businesses to invest overseas

China’s State Administration of Foreign Exchange (SAFE) has recently eased restrictions for domestic companies and individuals with regards to the establishment of special purpose vehicles (SPVs) overseas. The rules, in short, allow investors to keep profits and dividends generated by SPVs, whereas previously they were required to repatriate any such funds within 180 days.

The reform package marks just one measure on a long list of reforms introduced by Chinese authorities to slacken ties on forex administration

The administration issued the Notice of the State Administration of Foreign Exchange Administration for Overseas Investment, Financing and Round Trip Investment Undertaken by Domestic Residents via Special Purpose Vehicles (Decree 37) on July 14, to take effect as of July 4. The revision is aimed at “improving (yuan) convertibility in cross-border capital and financial transaction in an orderly manner,” according to SAFE, as well as supporting outbound investment from Chinese sources.

Under the new rules, the definition of an SPV, according to Decree 37, as compared with Decree 75 has changed in two fundamental ways. For one, Chinese residents can use overseas assets or interests to form a SPV, and where once SPVs were restricted to overseas financing, under the new Decree 37 definition individuals are permitted to carry out alternative investment activities such as M&A transactions.

The reform package marks just one measure on a long list of reforms introduced by Chinese authorities to slacken ties on forex administration, driven primarily by the country’s increasing reserves, which rose to just shy of $4trn in the first quarter of this year. SAFE will be hoping that the changes facilitate overseas investment and remove the complications that have long existed for those looking to conduct cross-border transactions.

By recognising the legality of SPVs for the purposes of overseas financing and investment, Chinese individuals and enterprises will be able to more easily venture abroad. The amendments in principle align with the government’s global strategy; however, it remains to be seen how well the new laws will work in practice, and the regulator has pledged to crack down on any illegitimate transactions.

 

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