Chinese Regulators Continue to Liberalize Foreign Exchange and Capital Account, and at the Same Time, Tighten Control on Backdoor Listing

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A group of important Chinese governmental agencies including the State Administration of Foreign Exchange (SAFE), People’s Bank of China (PBOC) and China Securities Regulatory Commission (CSRC) have recently announced new measures to further liberalize China’s economy, internationalize its RMB currency and avoid a “hard landing”.

  • Repatriation: Under new SAFE rules published on 15 June 2016 (国家外汇管理局关于改革和规范资本项目结汇管理政策的通知), all China onshore entities (including Chinese enterprises and enterprises with foreign ownership but excluding financial institutions) can now repatriate 100% of the proceeds of offshore debt and bond issuances and convert the proceeds to RMB. In the past, onshore entities could only bring foreign currency into China via equity injection and loans from their foreign shareholders.
  • Interbank CDs: Following the successful completion of several pilot programs, the China Foreign Exchange Trading System and National Interbank Funding Centre, a sub-division of PBOC, published an announcement on 21 June 2016 (关于修订《银行间市场同业存单发行交易规程》的公告) that offshore institutional investors and other investors recognized by PBOC will be allowed to invest in Chinese interbank certificates of deposit. By adding more players to China’s interbank market, the regulators seek to accelerate the internationalization of RMB as a measure to halt its continuing devaluation.
  • Offshore RMB: PBOC announced through Weibo on 21 June 2016 that it is conducting a feasibility study on allowing onshore banks to participate in the offshore RMB markets. Currently, Chinese financial institutions can only do so through their offshore branches.
  • Foreign Issuers: In its 2015 annual report, PBOC announced its plan to further open up China’s capital markets by allowing “qualified foreign companies” to issue stocks or Chinese Depository Receipts (CDRs) in China in the near future – another important measure to internationalize the RMB.
  • Backdoor Listings: On 17 June 2016, CSRC released proposed amendments to its rules governing major restructuring of listed companies (上市公司重大资产重组管理办法) for public consultation. The proposed amendments contain detailed qualitative and quantitative measures to further clamp down backdoor listings, including:
    • Four additional bright line tests – currently, if the total asset value of the assets purchased by a listed company exceeds 100% of the total assets of the listed company for the previous year, that transaction is regarded as a backdoor listing. CSRC proposes to add four additional tests: net asset value, revenue, net profit and additional shares issued – if any exceeds 100% of the amount of the prior year, the transaction will be regarded as a backdoor listing.
    • Fundamental change of core business(es) – a new requirement that there cannot be a fundamental change of the listed company’s core business(es) following the asset purchase. Otherwise, the transaction will be regarded as a backdoor listing.
    • Change of control of the listed company – a more stringent way of ascertaining whether a change of control of the listed company has occurred, by looking at changes in not only the controlling shareholder, but also the board of directors and management of the listed company.
    • “Catch-all” provision – CSRC to have the authority to prohibit “any other transaction designated by CSRC”, making it more difficult for companies to circumvent the rules.