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China announces new policy which facilitates financing of private enterprisesí« foreign investment
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The way a project or business venture is structured may influence its ability and the ease to attract investment from Chinese private enterprises.



China's State Administration of Foreign Exchange (SAFE) announces a significant policy which facilitates financing of Chinese private enterprises' foreign investment - "Adjustment of foreign exchange control for promoting and guiding a healthy development of foreign direct investment by private enterprises".  The policy is about simplifying and relaxing capital release and capital repatriation at foreign locations.  The policy also allows personal guarantee within China to be used for raising finance off-shore for foreign direct investment.  This foreign exchange control adjustment goes hand in hand with the policy announced recently for implementation of supporting policies to encourage Chinese private enterprises to invest overseas, streamlining and framing management of Chinese private enterprises' foreign investment, and delivering Chinese government support services to Chinese private enterprises for their foreign investment plans.  The new foreign exchange control takes effect on 1.7.2012

Capital flow
According to the policy announcement, Chinese private enterprises will now be able to take out bank loans in foreign currency within China, and to have the funds released at foreign locations for their foreign investment.  Previously, Chinese private enterprises needed to buy foreign currency with RMB, or to use their allocated foreign currency within a quota, and to remit the funds to overseas.  That process involved layers of foreign exchange control & in/out remittance verification steps, which are now gone.

Chinese private enterprises investing overseas wishing to repatriate capital can now remit their investment funds (in foreign currency) back to China under a much simpler framework without going through tedious registration process of decreasing capital or withdrawing capital.  This implies that investment capital can be repatriated and re-deployed much more flexibly.  However, the policy announcement has not elaborated on repatriation of profit made in foreign investment and the link between domestic operation and overseas operation of the same enterprise in terms of capital flow.  

Leverage for raising foreign investment funds
The policy indicates that several instruments can now be used to lever raising of finance by Chinese private enterprises for foreign investment.  To promote the "Go-Abroad" policy, SAFE allows Chinese on-shore enterprise to provide guarantee for loan taken out by foreign investing enterprise.  At the same time, a person entity within China can now be a joint guarantor for the same loan (for raising level of security and/or for bigger loan amount).  The guarantee can be in the form of personal guarantee, real property security, financial security, or other allowed form of security.  It is reported that shares in foreign companies may also be accepted as a form of security.


It is reported that by May 2012, the total lending in foreign currency in China is US$566 billion, which is
only approximately 6% of the total lent amount in China.  The figure is expected to increase under the new foreign investment (outside China) and exchange control policies. 

Implication for business
The amount of investment that a Chinese private enterprise can exercise is not restricted by a quota system anymore.  Instead, it now depends on how much an enterprise can raise in foreign currency debt funding or bond issue.  That in turns depends on quality of security which can be put forward.  It is expected that foreign currency debt transaction and debt trading may take place among Chinese private enterprises when there is difference in finance raising capacity.

For foreign local businesses who wish to attract investment from Chinese private enterprises, those who are structured with clearly identifiable asset class which can be valued with acceptable valuation method in the market - (suitability for use as security in debt finance), and those with simple company holding structure - (suitability for merger, acquisition, share transfer), may have a higher chance of success in attracting investment from Chinese private enterprises, mainly because of the ease or not for the Chinese private enterprises to raise finance back home.

AAPAC Group can help
If you need assistance in terms of structuring your project or business venture to prepare for B2CB (Business to Chinese Business) investment transaction, our company can help, particularly if your business is in property development, project management, planning, architecture, design, engineering, construction, building material & system, properties & real estate.
 

Fabian Chan
Source: China SAFE, Sina Finance - 14.7.2012

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China facilitates financing of private enterprises' foreign investment

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