China’s State Administration of Foreign Exchange (SAFE) recently issued a notice to clarify the registration procedures necessary for onshore banks to make direct foreign investments. Onshore banks include policy banks, State-owned commercial banks, joint stock commercial banks, urban and rural commercial banks, and even locally incorporated foreign banks.
Once an onshore bank has obtained approval from the China Banking Regulatory Commission (CBRC), it must then also register with SAFE if it plans to a) establish a new branch, b) establish a subsidiary, c) purchase equity interests in an offshore entity in accordance with law, or d) make any other direct investment projects as approved by the relevant regulatory authorities. After this registration process, the onshore bank may directly conduct the purchase and remittance of foreign exchange funds through its own business system – the bank must simply report to SAFE within three days after the transaction occurs.
There are also several restrictions regarding foreign exchange funds used during outbound direct investments. First, while an onshore bank may directly purchase and remit foreign exchange funds out of the PRC for preliminary expenses of an outbound investment, these expenses are capped at 15% of the total investment, unless SAFE approves an exemption. Additionally, any profits generated by an onshore bank from foreign direct investments must be consolidated with the overall foreign exchange profits and converted into RMB in accordance with the relevant rules. Non-bank onshore entities are allowed the discretion to keep foreign currency funds or convert them into RMB, but the new regulations force banks to consolidate and convert their foreign investment profits into RMB. Finally, if an onshore bank transfers any part of its offshore interests to another onshore entity, the payment must occur onshore, and be denominated in RMB.