China has lifted restrictions on Foreign-invested Enterprises (FIEs) using foreign capital for onshore equity investments

On October 23, 2019, the State of Foreign Exchange (SAFE) in China released the Circular of the State Administration of Foreign Exchange on Further Promoting the Cross-border Trade and Investment Facilitation (the New Policy), which allows non-investing FIEs to use their equity capital to invest in equity of domestic enterprises. 

Before the release of the New Policy, only investing FIEs and FIEs with investment as business scope could carry out domestic equity investment with their equity capital injected from offshore shareholders, and these types of FIEs are very difficult to establish due to various practical hurdles. This New Policy now allows all types of FIEs to use their equity capital received from their offshore shareholder to make onshore equity investments that are open to foreign capital (i.e. not on the current “foreign investment negative list”.)

According to the New Policy, non-investing FIEs can make equity investments using their foreign equity capital or RMB funds converted from that. If a non-investing FIE carries out equity investment with its foreign currency, the invested entity shall go through a domestic reinvestment registration process and open a foreign-currency capital account to receive such funds. If a non-investing FIE conducts its domestic equity investment with RMB converted from its foreign currency-denominated capital, the invested entity shall go through a domestic reinvestment registration process and open a “settled-to-be-paid” account to receive the RMB funds.

The New Policy is expected to attract more foreign funds to make onshore investments via their existing onshore operating subsidiaries, especially strategic investments in enterprises in both the upstream and downstream of the industrial chain in China.