China's foreign exchange regulator has announced a new regulation relating to local citizens’ overseas fundraising and returns investment.

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

They were believed by many to have created administrative obstacles for the use of venture capital by many Chinese private companies, particularly small and medium-sized ones.

The new regulation was announced by the State Administration of Foreign Exchange (SAFE) yesterday. It allows domestic citizens, by using domestic assets, to set up overseas special purpose vehicles (SPVs) for fundraising purposes and make a return investment in China. It 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 domestic 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 Chinese private firms have used overseas SPVs to raise funds in recent years. This method also encouraged the participation of venture capital, which relies heavily on easy exit channels.

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