Branch offices of the State Administration of Foreign Exchange in all provinces, autonomous regions and municipalities, departments of foreign exchange administration, and branch offices of Shenzhen, Dalian, Qingdao, Xiamen and Ningbo:

For purposes of adapting foreign economic development, improving and encouraging supporting policies of foreign investment and facilitating multinational operations of domestic investors, the State Administration of Foreign Exchange decides to adjust some foreign exchange policies. Related matters are now announced as follows:

1. For purpose of this Circular, the term “foreign investment” refers to conduct of all kinds of domestic artificial persons (hereinafter referred to as “domestic investors”) obtaining rights and interests such as ownership or management rights by establishing enterprises of single ownership, joint venture and cooperative enterprises, merger and acquisition, holding shares, injecting capital and permutation of stock rights

2. Foreign investment shall conform to national industrial policies of foreign investment and be conducive to promoting international flow and optimized deployment of production elements. Related administrative departments shall approve overseas investment projects of domestic investors.

3. The overseas investment of domestic investors can be supported by owned exchanges, exchanges purchased with RMB and domestic exchanges loans. State Administration of Foreign Exchange will no longer examine and approve the purchased exchanges amount of overseas investment for branches (departments of foreign exchanges administration) as from Jul 1, 2006. Upon examination and approval of related administrative departments on overseas investment projects, domestic investors may handle examining and approving formalities of foreign exchange purchasing and payment in accordance with related regulations.

4. After submitting applications of overseas investment projects examination and approval or investment intention, domestic investors may make payment of prophase expenditure related to overseas investment to foreign beneficiaries with approval of the local branch offices of the State Administration of Foreign Exchange and departments of foreign exchanges administration (hereinafter referred to “bureaus of foreign exchanges ”) before obtaining official approval.

5. The prophase expenditure of the overseas investment projects must conform to the following purposes:
(1). Deposit for purchasing shock rights of foreign enterprises and rights and interests of overseas capital in line with local laws and regulations or demand of assigning party.
(2). Bidding deposit during process of overseas projects bidding.
(3). Expenditure for market research, offices rent and facilities, recruitment and services of overseas intermediary organs in advance of overseas investment.
(4). Other prophase expenditures related overseas investment.

6. Materials required for formalities of examination and approval of prophase expenditure.
(1). Written application (including total amount of foreign investment projects, investment amount of different parties, means of providing fund, total amount of foreign exchanges as well as total amount, purpose and resource of prophase expenditure);
(2). Operation licenses or certification of registration of domestic investors;
(3). Documents related to bidding, merger and acquisition or cooperative projects (letter of intent, memorandum or framework agreement signed by both Chinese and foreign parties);
(4). Domestic investor’s letter of commitment in written form to local bureaus of foreign exchanges (promising that the prophase expenditure will be only used in approved overseas investment projects, otherwise, domestic investors will burden related legal responsibilities);
(5). Specification to nations (regions), banks, names, and number of overseas accounts;
(6). Other related materials required by bureaus of foreign exchanges.

In case the materials are of inerrability, the bureaus of foreign exchanges will issue document of approval of foreign exchange business of capital projects, upon which domestic investors may handle formalities of exchange purchasing and payment at appointed banks.

7. Generally, the prophase expenditures that domestic investors apply to remit shall not exceed 15 percent of the total amount of overseas investment; an excess of 15 percent because of business requirements need to be examined and approved by branch offices of State Administration of Foreign Exchange (departments of foreign exchanges administration).
8. In case the domestic investors need to open overseas accounts for overseas investment projects, they shall apply to local bureaus of foreign exchanges in accordance with related regulation of overseas foreign exchanges account administration.

9. In case the domestic investors cannot finish approving procedures of overseas investment in 6 months as from the day of remitting the prophase expenditure, the balance of the overseas accounts shall be moved back to the original accounts. In case the foreign funds are purchased with RMB, domestic investors shall handle formalities of exchanges clearance at appointed banks with the original documents of examination and approval of exchanges purchases.

10. Bureaus of foreign exchanges shall enhance auditing, statistics and monitoring of exchanges purchasing and payment of foreign investment fund, record related date and report to State Administration of Foreign Exchange in accordance with regulations.

11. In case the domestic investors violate regulations of the said Circular, bureaus of foreign exchanges will give punishment in accordance with related regulations such as Administrative Regulations of the People’s Republic of China.

12. This Circular will take effect as from Jul 1, 2006. Previous regulations that go against this Circular shall be subject to this Circular.