BACKGROUND

China strictly regulates cross-border investments including both inbound and outbound investments. The laws and regulations promulgated by the PRC government concerning inbound investments from foreign investors since China adopted its open-door policy to foreign investments in early 1980s have been evolved into a more developed and established statutory regime to date, acclaimed internationally as a great contributor to China’s economic success for the past 30 years. While the PRC government’s position towards inbound investments has been generally positive, its attitude towards outbound investments by domestic entities and individuals has been prudent, partly due to its concern about capital and foreign exchange outflow. Now sitting on the world’s no. 1 foreign exchange reserve, China has moved towards a more open policy for outbound investments. In 2004, the Ministry of Commerce (“MOFCOM”) introduced two outbound investments regulations which were subsequently replaced by the Rules for the Administration of Outbound Investments (????????) (the “Outbound Investment Rules”, click here for our previous client alert) on March 16, 2009. However, the Outbound Investment Rules govern only outbound investments made by domestic entities. There has been no clear policy as to how a PRC domestic individual obtains the approval to invest offshore or conduct a cross-border capital account transaction other than relying on the statutory annual US$50,000 foreign exchange purchase quota (the “Annual Personal Forex Quota”).1 The promulgation of Circular 7 constitutes a limited development in this regard, providing for a mechanism to allow a domestic individual to receive, exercise, cash out or otherwise realize benefits under the stock options or incentive shares issued by an offshore listed company. Nevertheless, the overall foreign exchange control over individuals’ capital account transactions largely remains intact.