Laws of the People's Republic of China

The State Administration of Foreign Exchange

Circular of the State Administration of Foreign Exchange on Improving the Administration of Foreign Exchange in Foreign Direct Investments

HuiFa [2003] No.30

March 3, 2003

Branches and foreign exchange administration departments under the State Administration of Foreign Exchange in provinces, autonomous regions and municipalities directly under the Central Government, and branch administrations of Shenzhen, Dalian, Qingdao, Xiamen, Ningbo; and headquarters of Chinese-capital designated banks of foreign exchange:

In order to adapt to the new international investment trend, introduce overseas investments through multiple channels, continuously perfect the administration on foreign exchanges in foreign investments and further improve the environment for foreign investments, some issues concerning the administration of foreign exchange in foreign direct investments is hereby circularized:

I.

Administration of the Accounts of and Capital Contributions by Foreign Investors

1.

A foreign investor who makes direct investment or engages in activities relevant to direct investment in China without establishing enterprise with foreign investment in China may apply to the administration of foreign exchange in the locality of the project to open a special foreign investor's foreign exchange account in the name of the investor. A foreign investor is permitted to open only one special foreign exchange account of multiple currencies at a bank except for otherwise approved by administration of foreign exchange. This kind of accounts shall be classified into following four categories based on the uses:

(1)

Investment accounts. After obtaining non-legal person business license, foreign investors who engage in construction contracting, joint exploration, development and exploitation of natural resources or venture capital investment may apply to open investment accounts to deposit foreign exchange funds relevant to payment therefor.

(2)

Acquisition accounts. Foreign investors who plan to establish enterprises with foreign investment in China may, if it is necessary to purchase land use right and attached real properties thereon, machinery and equipment or other assets in China at initial stage, apply to open the acquisition accounts after the asset purchase contracts come into force, in order for depositing funds for paying for acquisition.

(3)

Expense accounts. Foreign investors who plan to establish enterprises with foreign investment in China may, if it is necessary to conduct market research, planning and preparatory works for establishment of institutions in China at initial stage, open the expense account upon obtaining the notice for advance examination and approval of the company name from the administrations of industry and commerce, in order for depositing foreign exchange funds for payments.

(4)

Security accounts. Prior to making investments in China, if the foreign investors are required to provide to domestic institutions security funds in accordance with relevant stipulations and contract provisions, they may apply to open security fund accounts within the time period prescribed by the contracts in order to deposit and pay foreign exchange security funds. In applying to open special foreign exchange accounts, the foreign investors shall provide to the administrations of foreign exchange documents certifying the truthfulness and legality of the investments, and the administrations of foreign exchange shall decide upper limits on the amounts at the relevant accounts, the extended deposit duration and scope of settlements, etc. and shall conduct routine supervision (see Attachment 1). Funds to the special foreign exchange accounts of the foreign investors shall be input in the form of exchange instead of cash deposit. Settlements and transfers of funds in the accounts shall be verified by the administrations of foreign exchange on a case-by-case basis (see Attachment 2 and 3). Where a foreign investor has established an enterprise with foreign investment in China, any balance remained in the special foreign exchange account in the form of acquisition, expense and security accounts may be transferred to the capital account of the enterprise. On strength of relevant approval documents issued by the administration of foreign exchange, funds settled and transferred under the above accounts shall be regarded as the capital contribution of the foreign investor and capital verification may be conducted accordingly. Where the foreign investor has not established an enterprise with foreign investment in China, the foreign investor may go through the procedures for sales/purchases of foreign exchange in respect of the balance and remit it abroad on strength of relevant approval documents issued by the administration of foreign exchange.

2.

Where foreign investors make capital contributions to enterprises with foreign investment in China from funds in offshore accounts opened with banks authorized by People's Bank of China to conduct offshore businesses, the transfers of foreign exchange funds from offshore accounts to the capital accounts of the enterprises in China shall not require approvals of administration of foreign exchange. However, when the enterprises with foreign investment go through the procedures for capital verification inquiry, the banks receiving the remittances shall mark with "offshore funds" in the response letter to the inquiry letter in respect of the funds. Where a foreign investor makes capital contribution to an enterprise with foreign investment from non-resident individual exchange account opened at a bank in China, the administration of foreign exchange shall issue relevant approval documents (see Attachment 4) on foreign exchange businesses under capital items after verifying relevant submitted documents inerrant. Based on the approval documents, the bank shall carry out transfer of the fund from the non-resident individual exchange account to the capital account of enterprise with foreign investment in China, and the enterprise shall go through the procedures of capital verification as well as registration of foreign investment/exchange. Upon obtaining consent from the State Administration of Foreign Exchange, a branch with large business volume may grant the power of examination and approval on transfer of the above funds to designated foreign exchange banks that shall perform relevant duties such as examination, statistics, supervision and report for the record etc. Designated foreign exchange banks authorized with the above power shall implement strict internal control system and shall have been no record of grossly violating foreign exchange regulations in latest three years. When the enterprise with foreign investment go through the capital verification inquiry procedures, the bank receiving the fund shall mark with "non-resident individual transfer in China" in the response letter to the inquiry letter in respect of the fund.

3.

In addition to making capital contributions in a way of freely convertible currencies, imported equipments and other material items, intangible properties and RMB-denominated profits etc., foreign investors may contribute to the registered capitals of enterprises with foreign investment in the following ways with approval from administrations of foreign exchange:

(1)

The enterprises with foreign investment increase the enterprise capitals by transferring the development funds and reserve funds (or capital public reserves and surplus reserves) etc. into the registered capitals;

(2)

The enterprises with foreign investment increase the enterprise capitals by transferring their unallocated profits, dividends payable and interests accrued therefrom etc. to registered capitals;

(3)

The enterprises with foreign investment increase capitals by transferring of the principals and current interests of registered foreign debts of the foreign parties into registered capitals; or

(4)

The foreign investors make reinvestments in the way of properties gained through early recouped investments or assets derived from liquidation, stock equity transfer or reduction of registered capitals from enterprises with foreign investment in which they have invested. Where the foreign investors make capital contributions in any of the above ways, the administrations of foreign exchange shall issue relevant approval documents (see Attachment 5 and 6) on foreign exchange businesses under capital item after verifying relevant submitted documents and their authentications. Based on the approval documents, the banks shall carry out relevant transfers of the funds in China, and the enterprises shall go through the procedures for capital verification inquiry as well as registrations of foreign investments and foreign exchanges.

4.

Where foreign investors and investment-type enterprises with foreign investment acquire stock equities of domestic enterprises, they shall pay considerations (i.e. the prices paid by foreign parties to Chinese parties for buying the stock equities of the latter which may be in form of foreign exchange funds owned by the foreign investors and investment-type enterprises with foreign investment, RMB-denominated profits from other enterprises with foreign investment in which they have invested and other assets legally obtained) for purchases of the stock equities in accordance with the provisions of laws, regulations and stipulations of transfer contracts reached between the two parties, and make foreign investments and foreign exchange registrations on receipt of foreign exchange for equity transfers with the administrations of foreign exchange at the localities of the transferors by themselves or by the transferors under their authorizations. Where payment of considerations of equity purchases are made in a lump sum, the foreign investment and foreign exchange registrations in respect of the proceeds earned through the transfers shall be made within 5 days of receipt of the considerations and where payments thereof is made by installments, foreign investment and foreign exchange registrations shall be made in respect of each of the installments within 5 days of receipt of each installment. Before foreign investors have paid in full the considerations for share transfers, their ownership equity in the acquired enterprises shall be fixed in accordance with the ratio that has actually been paid and foreign exchange businesses such as stock equity transfers, reduction of registered capitals, liquidation and profit remittances shall be handled accordingly. The administrations of foreign exchange shall handle foreign investment and foreign exchange registrations on receipt of foreign exchange for equity transfers and shall issue relevant certificates (see Attachment 7) after verifying relevant documents submitted by foreign investors and their authentications. The certificates on foreign investments and foreign exchange registrations on receipt of foreign exchange for equity transfers are valid documents certifying that the considerations payable by foreign parties for stock equity transfers have been received, and they shall also serve as important bases for the acquired enterprises to make foreign investment and foreign exchange registrations. All Branches and Foreign Exchange Administration Offices shall summarize and report to the State Administration on monthly basis the data on foreign investments and foreign exchange registrations on receipt of foreign exchange for equity transfers (including number and amount registered) and the data on inflow of other types of foreign investments in the form of Report on Foreign Investment and Foreign Exchange Registration (see Attachment 8) as newly issued. The former form o the Report on Foreign Investment and Foreign Exchange Registration shall cease to be used from the date of entering into force of the Circular.

5.

Where non-investment type enterprises with foreign investment establish enterprises or acquire enterprises in China in accordance with Interim Provisions on Investments in China by Enterprises with Foreign Investment promulgated jointly by the Ministry of Economic and Trade Cooperation and the State Administration for Industry and Commerce, the invested enterprises with no foreign capitals are permitted exempt from going through the procedures for foreign investment and foreign exchange registration and capital verification and request for certificate for foreign exchange. The administration of foreign exchange shall on strength of Enterprise Legal Person Business License, which has been issued by the administrations of industry and commerce to the invested enterprise and which is marked with "with investment from enterprise with foreign investment", treat the invested enterprise as an enterprise with foreign investment in its raising of funds from abroad. The administrations of foreign exchange shall not approve transfers of foreign exchange funds within China between the non-investment type enterprises with foreign investment and the enterprises they invested, and between different enterprises invested by the non-investment type enterprises. In case of special circumstances in which this type of transfer within China is necessarily required, the branches and the foreign exchange administration departments shall report to the State Administration.

6.

A domestic enterprise to which the ratio of foreign investor's capital contribution is below 25% shall complete foreign exchange registration of enterprise with foreign investment and go through the procedures for verification inquiry as well as foreign investment and foreign exchange registration in accordance with relevant provisions on strength of an approval certificate for enterprise with foreign investment which is issued by foreign economic and trade department and is mark with "ratio of foreign investment below 25%" as well as a foreign investment business license issued by department in charge of administration of industry and commerce and marked with "ratio of foreign investment below 25%".

II.

Capital Verification Inquiry and Foreign Investment and Foreign Exchange Registration The capital verification inquiries of enterprise with foreign investment and foreign investment and foreign exchange registrations shall be handled in accordance with the following principles:

1.

In establishing enterprise with foreign investment, if the foreign exchange capital contributed by a foreign investor exceeds the upper limit of the capital account of the enterprise, once such excess is no more than 1% of the upper limit and no more than $10,000 US equivalent in absolute value, the administration of foreign exchange shall handle the capital verification inquiry as well as foreign investment and foreign exchange registration based on the actual amount contributed. If the amount of foreign exchange contributed to the enterprise for stock equity participation is in excess of the sum reached by multiplying its ratio of equity with the amount of registered capital of the enterprise due to appreciation of the enterprise's capital, the excess shall be included into the upper limit of the capital account of the enterprise. The principle set forth in the above paragraph shall still apply to the entry of foreign exchange fund in excess of the limit.

2.

Where a foreign investor who contributes investment in tangible assets the enterprise with foreign investment entrusts an accounting firm to make inquiry with administration of foreign exchange, if there is inconsistency between the value of such assets as appraised by an appraisal institution under the commodities inspection administration and the value declared in the Customs Declaration when importing such assets, the administration of foreign exchange shall adopt the value as appraised by the former for the purpose of capital verification inquiry and foreign investment and foreign exchange registration.

3.

Where a foreign investor who contributes only intangible assets to an enterprise with foreign investment entrusts an accounting firm to make inquiry with administration of foreign exchange, it shall list the contributed intangible assets in the Schedule attached to the Letter of Inquiry on Foreign Party's Capital Contribution, based on which the administration of foreign exchange shall make foreign investment and foreign exchange registration for the contribution of the intangible assets and shall indicate in the Response Letter to the Letter of Inquiry on Foreign Party's Capital Contribution that "the intangible assets of the foreign party has been registered with the number of registration XXXX. This letter is only valid for certificating that it has been registered."

4.

Where a foreign investor makes investment or equity participation at a premium, or where the value of in-kind contribution made by the foreign investor is appraised at a value higher than the declared value to the Customs, or where due to fluctuation of exchange rate or other similar causes, the actual amount contributed to the enterprise with foreign investment exceeds the amount of registered capital of the enterprise with foreign investment, the administration of foreign exchange shall register the registered capital of the enterprise as well as its actual amount of contribution due to the premium.

5.

Where the enterprise that "processes raw documents on clients' demands, assembles parts for the clients and process according to the clients' samples or engages in compensation trade" who intends to transform into enterprise with foreign investment entrusts accounting firms to make inquiry with administration of foreign exchange, it shall submit relevant documents to the administration of foreign exchange, and after examination and confirmation that the equipment to be invested for the transformation is imported goods for which payment abroad has not been made, the administration of foreign exchange shall issue Response Letter to the Letter of Inquiry on Foreign Party's Capital Contribution in accordance with the value specified in the appraisal report on value of commodities and make foreign investment and foreign exchange registration(see Attachment 9).

6.

Where the name of the foreign investor to a enterprise with foreign investment is inconsistent with the name of the overseas payer who made payment for the investment, the administration of foreign exchange shall handle capital verification inquiry and make foreign investment and foreign exchange registration for it but indicate that "there is inconsistency between the payer and the investor" in the Response Letter to the Letter of Inquiry on Foreign Party's Capital Contribution.

7.

For easy queries from different localities, the administration of foreign exchange shall indicate the names of relevant contract persons and their telephone numbers when issuing approval documents for capital item foreign exchange business to enterprises with foreign investment.

8.

Where any designated foreign exchange bank is found to open accounts for enterprises without permission, making entry of capital in excess of limits etc in violation of provisions on account administration, the administration of foreign exchange shall impose sanctions on it in accordance with provisions of Provisions of Administration of Domestic Foreign Exchange Account. Where any enterprise is found to forge or alter documents or documents such as approval documents for capital item foreign exchange business, letters of response that administration of foreign exchange issues for designated foreign exchange banks, Customs declaration for imported goods etc., the administration of foreign exchange shall transfer such case to judicial organs for handling. If it is found that the accounting firm failed to make capital verification inquiry or the inquiry is made incompliant with prescribed procedures after it issues the capital verification report to enterprises, the administration of foreign exchange shall order such accounting firm to go through the capital verification inquiry procedures as remedial measures and notify its violation to the association of certified public accountants of its locality. No further inquiries from such accounting firm shall be accepted before the association of certified public accountants of its locality makes formal punishment decision to it. The Branches and Foreign Exchange Administration Offices shall report the names of the accounting firms that acted in violation of regulations again after having been punished to the State Administration who shall announce the names at the website of the State Administration of Foreign Exchange and other media and shall make recommendations to enterprises to be prudent in their choice of accounting firms. In the course of going through capital verification inquiry procedures as remedial measures by accounting firms failed to make the inquiry or the inquiry was made not in compliance with prescribed procedures, if it is found that the capital verification report issued by it is a false verification report, the administration of foreign exchange shall transfer the case to judicial organs to handle and shall notify the administration of industry and commerce at its locality.

III.

Administration of Registered Capital Reduction of Enterprise with Foreign Investment and Adjustment to Some Administration Business

1.

Where a foreign investor's capital contribution to a enterprise with foreign investment is reduced, which involves sale/purchase of foreign exchange, the administration of foreign exchange shall issue approval document for foreign exchange business under capital item (see Attachment 10) after examination on relevant documents submitted by the enterprise, based on which the foreign investor shall go through the procedures of the purchase, payment and remittance abroad of exchanges in respect of the reduced capital. Where the reduction is for the purpose of reducing losses on the accounting books of the enterprise with foreign investment, or that the amount reduced is the unpaid capital contribution of the foreign investor, the administration of foreign exchange shall not grant approval to the foreign investor to re-invest such amount in China or to pay the amount out of china by the enterprise with foreign investment.

2.

The mechanism of paid-up capital prescribed by Company Law of the People's Republic of China shall apply to the capital contributions to be made by foreign parties in companies limited-by-shares with foreign investment and fund management companies with foreign participations. When companies falling into the two categories makes application to administration of foreign exchange to open enterprise with foreign investment capital account, they do not need to present the enterprise legal person business licenses for enterprises with foreign investment issued by the administration of industry and commerce. By presenting respective approval certificates for companies limited-by-shares with foreign investment issued by foreign economic and trade department, the enterprise with foreign investment approval certificate issued by foreign economic and trade department and approval for commencement of business issued by CSRC, the company limited-by-shares with foreign investment and fund management company with foreign participation may go through relevant procedures. Relevant provisions on documents to be provided by companies falling into the above two categories for establishment of capital accounts and making enterprise with foreign investment foreign exchange registrations shall still be implemented.

3.

During the course of handling foreign exchange business, if the administration of foreign exchange needs to examine capital verification report of the enterprise with foreign investment, the Response Letter to the Letter of Inquiry on Foreign Party's Capital Contribution shall be examined simultaneously in the case that capital verification report is issued after May 1, 2002. If auditing report of enterprise with foreign investment needs to be examined in the course of handling foreign exchange business, the administration of foreign exchange shall simultaneously examine the Foreign Exchange Balance Sheet of the enterprise with foreign investment in the case that the auditing report is issued after the year of 2002.

4.

In order to further improve the efficiency in supervision on capital settlement and facilitate the operation of investment capital by enterprises, the documents required to be examined by banks in accordance with operating procedures to be followed by authorized banks in settlement of capital in foreign exchange which is stipulated in the Circular of State Administration of Foreign Exchange Concerning Reform on Ways of Management of Settlement of Capital by Foreign Investment (HuiFa [2002] No. 59) shall be simplified into the following three ones:

(1)

A written application of the enterprise, indicating the account number of the capital account of the enterprise, situation of capital entry, currency for settlement, amount and usage etc.);

(2)

The Foreign Exchange Registration Certificate;

(3)

Other supplementary documents required in light of the circumstances. Other examination requirements shall as usual be in accordance with relevant provisions of the Circular of State Administration of Foreign Exchange Concerning Reform on Ways of Management of Settlement of Capital by Foreign Investment (HuiFa [2002] No. 59) and the operating procedures.

5.

Where a Chinese-foreign cooperative enterprise pays in form of depreciation of fixed assets or amortization of intangible assets to the foreign party for early recouping of its investment amount (including fixed returns), the examination on "guarantee letter" provided in Operating Procedures for Management of Foreign Exchange Business under Capital Item (HuiFa [2001] No. 38) is hereby amended as follows:

(1)

If the Chinese-foreign cooperative enterprise has outstanding debts (bank loan or shareholder's loan from foreign investor), the foreign investor shall provide guarantee letter in corresponding amount from a foreign-invested financial institution in China;

(2)

If the outstanding debt of the Chinese-foreign cooperative enterprise is shareholder's loan provided by foreign investor, a guarantee letter issued by the foreign investor stating that it unconditionally undertakes joint and severally liability with the contractual joint venture may be in lieu of the above letter of guarantee issued by the financial institutions.

(3)

If the Chinese-foreign cooperative enterprise has no debts, no letter of guarantee shall be provided by the foreign investor. Other examination requirements shall as usual be in accordance with relevant provisions of the Operating procedures for Administration of Foreign Exchange Business under Capital Item.

IV.

Othe Matters

1.

The term "administration of foreign exchange " mentioned in this Circular refers to the State Administration of Foreign Exchange, various branches, foreign exchange administration departments and Sub-branches within their jurisdictions.

2.

All branches and foreign exchange administration departments are required to transmit the following parts involving bank operations to the designated foreign exchange banks within their jurisdiction:

(1)

Article 1 , 2 and 3 of Part I, Administration of the Accounts of and Capital Contributions by Foreign Investors, as well as Attachments 1 to 6 of this Circular;

(2)

Article 1 and Paragraph 1, Article 8 of Part II, Capital Verification Inquiry and Foreign Investment and Foreign Exchange Registration; and

(3)

Article 4 of Part III, Administration of Registered Capital Reduction of Enterprise with Foreign Investment and Adjustment to Some Administration Business.

3.

This Circular shall enter into force as of April 1, 2003. If there is any question in the implementation, please contact the Capital Item Administration Department of the State Administration of Foreign Exchange through the telephone number 010-68402254.

Attachments:

1. Examination and approval on open, alteration and cancellation of foreign investor's special foreign exchange account(omitted);

2. Examination and approval on settlement of funds in foreign investor's special foreign exchange account (four categories in all) (omitted);

3. Examination and approval on transfer of funds from foreign investor's special foreign exchange account (four categories in all) to enterprise with foreign investment's capital in China (omitted);

4. Examination and approval on transfer of foreign exchange funds from non-resident individual exchange account opened with banks in China by foreign investors to capital account of enterprise with foreign investment (omitted);

5. Examination and approval on transferring of development fund, reserve fund (or capital public reserve and surplus reserve), unallocated profits, dividends payable and interests accrued therefrom, principal and accrued interest of registered foreign debt of the foreign parties etc. into registered capital of the enterprise (omitted);

6. Examination and approval on reinvestment to be made by foreign investors by property gained through early recouped investment or assets derived from liquidation, stock equity transfer or reduction of registered capital from enterprise with foreign investment in which they have invested (omitted);

7. Registration on foreign investment and foreign exchange in respect of proceeds of foreign exchange paid as consideration by foreign investors for purchase stock equity of Chinese party (omitted);

8. Report on foreign investment and foreign exchange registration in the region on yearly and monthly basis (form) (omitted);

9. Examination and approval on capital verification inquiry and Examination and approval on for the enterprises that "process raw documents on clients' demands, assemble parts for the clients and process according to the clients' samples or engage in compensation trade" who intends to transform into enterprise with foreign investment (omitted);

10. Examination and approval on reduction of registered capital by foreign parties in the enterprise with foreign investment (omitted).