Amid the lingering trade dispute with the United States，China has been grappling with the considerable challenge of downward pressure on its economy. Since early 2019 it has taken a series of measures to offset some of the effects of the trade dispute by facilitating cross-border investment. Authorities have made it easier and less costly for foreign companies to make use of their capital under the Regulations on the Centralized Operation of Multinational Enterprise Group Funds [SAFE Document No. 7 (2019)]. They have also removed investment quota limits under the Qualified Foreign Institutional Investor and the Renminbi Qualified Foreign Institutional Investor programs and have made it easier for foreign institutions to transfer funds when investing in the interbank bond market. In addition to offsetting pressures from the trade dispute，these measures have been aimed at improving China’s business environment and encouraging higher quality investments. 

Further，the State Administration of Foreign Exchange (SAFE) issued its Notice on Further Promoting the Cross-border Trade and Investment Facilitation [SAFE Document No. 28 (2019)]. The Notice，which includes six measures concerning cross-border investment and financing，cancels restrictions on downstream equity investment using foreign capital injected by the foreign shareholders of an enterprise in China. It also calls for trial programs to abolish case-by-case registration of foreign borrowings. It also makes it more convenient to register the discharging of offshore debt by allowing this to be done at a local bank，instead of at SAFE’s branch office. In addition，limits on the number of foreign currency bank accounts under the capital account have been removed while other measures have been rolled out as part of the effort to simplify procedures related to the use of foreign exchange. This article provides context to the drafting of the Notice and reviews its provisions.

Capital Account Opening

Phase One - 1979 to early 2000s

This period featured procedures for capital movements that could be described as making inflows easy but tightly regulating outflows. Emphasis was put on capital controls and there were strict reviews of all items that came under the capital account.  

Phase Two - Early 2000s to 2014

During this second period，China adjusted its foreign exchange regulations to meet the needs of its rapidly developing economy. The nation adopted different policies on capital flows as its balance of payments position changed along with the maturing of its program of economic reform. Between 2001 and 2007，China focused on creating channels for capital outflows. It took measures to facilitate overseas direct investment and put forward the Qualified Domestic Institutional Investment program for outbound securities investment. From 2008 to 2014，further steps were taken to control capital inflows and promote outflows. This was designed to address the pressure from mounting foreign exchange reserves due to huge capital inflows (Foreign exchange reserves reached a peak of US$3,992.3 billion in June 2014).

Phase Three - From 2015 to Present

From 2015 to the present，China’s economy has been transitioning from rapid growth to higher quality development. This has required considerable effort to adjust the economic structure and change growth momentum. To help sustain this transition，international capital has been granted greater access to the mainland market. For example，the regulation of foreign direct investment has been placed under a framework of “pre-establishment national treatment + a negative list.” This provides a level playing field and ensures that foreign investors can participate in any area of the economy that is not specifically designated as off-limits. The stock market and the interbank bond market have been opened to foreign capital and a macro-prudential approach has been applied to regulate cross-border financing.

China has also standardized the regulation of capital outflows. For instance，there have been specific provisions for different categories of overseas investment under the guiding principle of prudential supervision. Measures have been taken to contain irrational investment and prevent irregular capital outflows via strengthened regulation of overseas loans making use of a domestic guarantee. 

The Notice also relaxes restrictions on equity investments by foreign companies. Some foreign companies have been permitted since 2015 to utilize their capital for investment in equity stakes in companies in China. Foreign firms allowed to take advantage of this measure included investment companies，venture capital firms and equity investment enterprises. However，existing restrictions remained in place for non-investment foreign companies. Although policies provided moderate relaxations for domestic equity reinvestment using renminbi proceeds – either from voluntary settlements of foreign exchange capital funds or renminbi funds held in an account for settled foreign exchange funds -- companies without the explicit wording of “investment” in their business scope were generally forbidden from doing so.

The Notice repealed this restriction. Now，foreign companies that are not classified as investment firms，which account for 90% of all foreign companies registered in China，are also allowed to utilize this new provision and convert capital received from foreign investors to make equity investments in China.

In practice，if a foreign company makes an equity investment with renminbi capital funds，the target company should open a capital fund account and register its acceptance of domestic reinvestment funds. The company does not need to register monetary capital contributions. For investments using funds obtained through the settlement of foreign exchange capital，the company receiving the funds needs to open an account classified as  “capital account — foreign exchange settled and to be paid.” It also needs to register its acceptance of domestic reinvestment funds.

The Notice also states that there will be an expanded version of the pilot reform program for foreign exchange receipts and payments facilitation. Since 2017，Chinese companies in pilot areas have no longer been required to provide support documents to banks on a case-by-case basis for verification before using funds received as capital account items (mainly including capital funds，foreign debts and proceeds from an overseas listing). Currently，there are 12 free trade zones included in these pilot areas，among them Fujian，Zhejiang，and Jiangsu provinces and the cities of Shenzhen and Ningbo.The newly issued Notice expands the areas to include all of Shanghai and China’s six newly created foreign trade zones. It is expected that the pilot reform program will be extended to other special economic zones and parts of the country that have close links to the global economy. Ultimately，these programs could be rolled out nationwide.

The use of funds from the settlement of foreign exchange brought in under the capital account has also been made much easier.Restrictions on the conversion of funds in “asset realization” accounts have been removed. Institutional and individual account holders within China no longer need to show the intended uses to banks during payment.  The Notice allows the funds to be converted into renminbi directly.

Moreover，restrictions on the use and settlement of funds in deposit accounts opened by foreign investors has also been eased. Previously，these funds could be used only for transaction guarantee purposes and could not be settled. Deposits remitted by foreign investors from abroad or from within China needed to be remitted back via the original path. However，the Notice eases this restriction. Such deposits can now be used directly for other onshore investments or onshore and offshore payments on an unrelated transaction once the principal transaction has been completed. The funds can also be converted into renminbi for local currency payments.

Foreign debt registration has also been simplified. One measure is to allow an enterprise to complete registration of the discharging of foreign debt at a bank instead of a local SAFE branch.  The enterprise initially had to complete the formalities for discharging debt at the local SAFE branch within one month after the repayment of each cross-border borrowing. However,companies can now undertake these procedures directly at banks and the one-month time limit has been scrapped.

Another measure is simplifying the registration formalities for foreign borrowings by Chinese companies in pilot regions. China has been making gradual progress in this area. In 2016，the requirement of prior approval for each overseas borrowing by financial and non-financial entities was scrapped. Instead，authorities applied macro prudential principles，allowing Chinese enterprises to borrow an aggregate amount of overseas debts on the basis of a leverage ratio calculated as two times the borrower’s net assets. Nevertheless，each enterprise receiving financing from abroad needed to register at the local SAFE branch. To facilitate registration formalities，SAFE  in March implemented a one-off foreign debt registration procedure in the regulation of centralized operations and management of cross-border funds by multinational companies. The policy measure has been welcomed by enterprises and banks. Based on experience，one-off foreign debt registration at local SAFE branches is applied to overseas borrowings within the previously mentioned debt quota by non-financial companies in the Guangdong-Hong Kong-Macao Greater Bay Area and the Hainan Foreign Trade Zone. Additionally，no prior approval is needed for borrowing or repaying the debt. Related inward and outward remittances，as well as settlements and purchases of foreign exchange can be conducted directly through banks. 

There are also new measures liberalizing foreign currency bank accounts set up under the capital account. The Notice allows companies to open multiple foreign exchange accounts under the capital account to meet their actual needs，as long as these come within the framework of prudential supervision. This changes the previous situation in which different foreign currency accounts were required for different types of capital account activities. In the past there also were limits on the number of foreign exchange accounts for capital account items other than a foreign company’s capital or a domestic enterprise’s overseas listing. For example，a maximum of three special accounts could be opened for each overseas borrowing. In principle，each account holder could open only one special account for deposits remitted from abroad. Also，only one domestic asset realization account could be opened for each equity transfer transaction.

In addition to the scrapping of limits on the number of accounts，foreign exchange accounts were re-classified in the SAFE Circular on Simplifying Foreign Exchange Accounts [SAFE Document No. 29 (2019)]. Three categories including the “master account for international capital” were eliminated while other categories were sharply reduced. In all there are now 19 categories of foreign exchange accounts under the capital account. Additionally，procedures for opening an account have been greatly simplified.  

The Notice also expands a pilot scheme for cross-border asset transfers. In the past there were facilitation policies for handling non-performing loans by financial asset management companies using foreign capital. Previously，a foreign company would apply to the National Development and Reform Commission or another agency for approval or filing purposes. Once the application was successful，the company could record the consideration in its account and settle funds directly at a bank. And the transaction needed to be reported to SAFE. As for foreign investors who bought nonperforming assets，they or their agent were allowed to purchase or pay foreign exchange funds directly for the transfer or collection of those assets.

Nevertheless，there was no such regulation for other kinds of cross-border asset transfers. The Notice allows cross-border transfers of distressed debts and trade financing in the pilot areas of the Guangdong-Hong Kong-Macao Greater Bay Area and the Hainan Free Trade Zone as well as the transfers of financial asset managers’ nonperforming loans.

The author is the director general of SAFE’s Capital Account Management Department