China’s New Foreign Exchange Control Rules Offer Improved Regulatory Transparency for Equity Financing Deals

By Z. Alex Zhang and Patrick H. Hu

The State Administration of Foreign Exchange of China ("SAFE") has issued new rules, effective as of November 1, 2005, on foreign exchange registration concerning equity financing transactions through offshore "special purpose companies" ("SPCs") and their onshore investment in China. This new set of rules (commonly referred to as "Circular 75") is significant in that the SAFE regulators have willingly considered the relevant comments from the foreign venture capital and private equity investors as well as domestic emerging companies that seek foreign funding to finance their onshore operations. Such comments were voiced in reaction to the two sets of rules the SAFE issued earlier this year.