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China Lifts Road Block On Red Chip Listings
December 2005 | China Practice | Regional | Regional Reports

The China State Administration of Foreign Exchange ("SAFE") recently re-opened a route for domestic enterprises to list overseas via an offshore holding company (popularly known as 'red chip' listings).

From 1 November 2005, the revised rules promulgated by the SAFE have eased requirements for citizens of People's Republic of China ("PRC") to set up special purpose vehicles ("SPV") for an overseas listing. Related rules published earlier this year have also been abolished.

Prior to 24 January 2005, PRC domestic enterprises would register an offshore holding company to inject their domestic assets. The holding companies would then be the listing vehicle in Hong Kong or Singapore.

SAFE promulgated two sets of rules in January and April 2005, which effectively required PRC companies to seek approval from SAFE before making such asset injections. The previous rules were aimed at preventing unregistered foreign exchange outflows, as the yuan is not freely convertible. However, the previous rules also had the undesired effect of stalling efforts by PRC companies to restructure their operations for an overseas listing.

The 'Notice Regarding Foreign Exchange Control For Fundraising And Offshore-Domestic Investments By Domestic Residents Through Special Purpose Vehicles' (国家外汇管理局关于境内居民通过境外特殊目的公司融资及返程投资外汇管理有关问题的通知), promulgated by the SAFE on 21 October 2005, took effect on 1 November 2005, abolishing the January and April rules. The new rules allow a PRC domestic enterprise or a PRC natural person ("PRC Residents") to transfer their assets to a foreign SPV.

The new rules imposes a notification procedure to SAFE, as opposed to an approval procedure under the abolished rules. Under 21 October 2005 rules, PRC Residents are required to register with SAFE before they can establish or control SPVs. The new rules also provide that PRC Residents who have established SPVs or acquired control of SPVs prior to 1 November 2005 must register these offshore investments by 31 March 2006.

The new rules state that upon the completion of an overseas fundraising exercise, which includes an initial public offering ("IPO"), the funds raised

be remitted to and used in the PRC in accordance with the use of proceeds and business plans as disclosed in the prospectus. There is now a requirement for any profits, bonuses or funds payable to PRC Residents arising from changes in the capital of the SPV to be remitted into the PRC within 180 days. These include funds raised from an IPO or sale of assets.

IPO professionals and market participants have eagerly awaited the promulgation of these new SAFE rules. Prior to 21 October 2005, activity, especially pre-IPO restructuring ground to a slow halt, causing concern amongst many that the red chip method of listing outside China had been effectively taken away. Direct listing of a PRC company in Singapore ("'S' share listings") by comparison, would have been open to fewer PRC companies and taken longer. An 'S' share listing is required to comply with the China '4-5-6' rules (namely that the company must have net tangible assets of not less than RMB400 million, the funds raised from the offering must not be less than USD50 million and the company must have net profit after tax of RMB 60 million) and requires approval from the China Securities Regulatory Commission.

More than 60 PRC companies have listed via the red chip method todate and thanks to the new rules, we can look forward to more such listings.