China's foreign exchange regulator has announced a new regulation relating to citizens' overseas fundraising and return investment activities.

The new regulation, which comes into effect next month, will replace controversial rules promulgated earlier this year.

The existing rules, it is claimed, have created administrative obstacles to the use of venture capital by many Chinese private companies, particularly small and medium-sized enterprises.

The announcement was made by the State Administration of Foreign Exchange (SAFE) yesterday. The new regulation allows citizens, by using domestic assets, to set up overseas special purpose vehicles (SPVs) for fundraising purposes and make a return investment in China. It also specifies the procedures and requirements.

The new regulation aims to "encourage, support and guide the development of the non-state sector, further improve the policy support system for venture capital, and regulate cross-border capital transactions by China-based citizens through SPV-based fundraising and investment activities," the administration said in a statement.

Partly to circumvent high listing standards and strict forex regulatory requirements, an increasing number of privately owned Chinese firms have used overseas SPVs to raise funds in recent years. This method also encouraged the participation of venture capitalists, which rely heavily on easy exit channels.

But SAFE rules enacted at the beginning of this year, aimed at blocking capital outflow and tax evasion, reportedly slowed down the overseas listings of Chinese firms because they contained stricter approval procedures.

(China Daily October 24, 2005)