On 8 April 2015, the State Administration of Foreign Exchange (the SAFE) released the Notice on Reform of Administration over Conversion of Capital Funds of Foreign-invested Enterprises from Foreign Currency into Renminbi (the Notice), which will take effect from 1 June 2015.

According to the Notice, the capital funds in the capital account of a foreign invested enterprise (the FIE), after being duly confirmed as paid-in capital in cash, can be directly converted into Renminbi in whole or in part, at the discretion of the FIE. This reform is introduced by SAFE as another step towards its aim of streamlining the administration over foreign exchange in the sector of foreign direct investment and continues the roadmap of relaxation of China’s exchange control regime.

Monies converted from the FIE’s capital funds by way of “discretionary conversion” shall be first transferred into a corresponding Renminbi account of the FIE opened for the sole purpose of depositing such monies to settle any future payment. The monies from such Renminbi account can be used to settle payments incurred within the business scope of the FIE, but they are not allowed to be used in any of the following circumstances:

• Direct or indirect settlement of payments incurred outside the business scope of the FIE or prohibited under applicable national laws and regulations;
• Direct or indirect investment in securities, unless applicable laws and regulations provide otherwise;
• Direct or indirect provision of Renminbi entrustment loans (unless within the business scope), repayment of intercompany loans and repayment of Renminbi bank loans that have been sub-lent to a third party;
• Except for real property development FIEs, payment for the purpose of purchasing real property not for its own use.

For more information, please refer to the briefing here.