China's foreign exchange snag

Author: | Published: 1 Aug 2005

Earlier this year, China's State Administration of Foreign Exchange (SAFE) issued two circulars to regulate cross-border investments by PRC residents. SAFE's action is believed to target abuse of offshore investment structures and possible dissipation of state-owned assets. But the regulations may also impact on foreign investors co-investing in China with Chinese nationals. Foreign investments in private-sector companies in China often use offshore holding company structures. These structures might be affected by unclear and burdensome requirements imposed by the new SAFE regulations. Moreover, the practical implementation of the regulations is uncertain and inconsistent. Foreign investors should understand and consider the potential implications of these regulations when planning and structuring investments in China.

The "Circular on Issues Relating to the Improvement of Foreign Exchange Administration of Mergers and Acquisitions by Foreign Investors" was issued by SAFE on January 24 2005. This circular makes outbound investments by PRC residents subject to approval...