2014.05.26 XIE, Qing (Natasha)、Cui Yu
Free trade accounts include: FTZ resident entity’s free trade account (FTE), foreign entity’s free trade account (FTN), financial institution’s free trade account (FTU), FTZ resident individual’s free trade account (FTI) and FTZ foreign individual’s free trade account (FTF) (collectively, the "Free Trade Accounts"). All FTZ resident entities (including entities established in the FTZ and the local presence of foreign entities in the FTZ), foreign entities and individuals can open Free Trade Accounts as needed.
Administration of Fund Movement and Foreign Exchange Conversion
Under the FTZ’s general principle to "relax control from offshore to FTZ, but tighten control from FTZ to elsewhere in China", the Implementing Rules adopt different supervision regime for two types of funds movements: (1) funds transfer between Free Trade Accounts and any of foreign accounts, non-resident accounts in mainland China (outside FTZ) or other Free Trade Accounts shall be administrated under the prudential macro-management principle; and (ii) funds transfer between Free Trade Accounts and other bank accounts in mainland China (including FTZ) shall be strictly administrated under the “limited infiltration” principle as if they were cross-border transactions.
The Implementing Rules spelled out the detailed rules of funds movement and currency conversion through Free Trade Accounts. First, banks are permitted to directly process cross-border (including inward and outward FTZ) fund settlement under current account items and direct investment account items, specifically, the account opening bank can effect, upon the satisfaction of its transaction authenticity review, the following four types of RMB funds settlement between the same (non-financial) entity’s Free Trade Accounts and other bank accounts in mainland China: (1) current account transactions; (2) repayment of RMB loans advanced by banks in Shanghai with the term of more than six months (exclusive); (3) greenfield investments, M&A financing, registered capital increase and other industrial investment; and (4) other cross-border transactions permitted by PBOC Shanghai.
Additionally, the Implementing Rules contemplate to distinguish various types of business and adopt various RMB-forex conversion policies, which are specifically:
(i) For transactions that have already been opened to direct conversion (including current account transactions and direct investment transactions), the funds in the Free Trade Accounts are free to convert;
(ii) For “innovative financing and investment transactions” contemplated under the PBOC Opinions, funds in the Free Trade Accounts may be converted on needed basis; and
(iii) For certain high-risk identified transactions, funds in the Free Trade Accounts shall be converted under the implementing rules to be issued by PBOC Shanghai.
Guided by the five categories of “innovative financing and investment transactions” under the PBOC Opinions, i.e., cross-border direct investment, individual cross-border investment, capital markets two-way opening up, overseas fundraising by FTZ resident companies, and risk hedging in FTZ markets or overseas markets, PBOC Shanghai can, under the risk-controllable principle, launch each category one-by-one when it is ready and to promote each of them with the full facilitating of the Free Trade Accounts. To this end, PBOC Shanghai needs to work on specific rules for such business in conjunction with other regulatory authorities, and it is also reasonably expected that PBOC and other regulator would probably allow qualified entities to carry out pilot cases in the absence of existing rules in place. In addition, specific rules related to certain high-risk identified businesses remain to be issued by PBOC Shanghai separately. The Implementing Rules generally provide that PBOC Shanghai can adopt separate account administration mechanism through sub-account under the Free Trade Accounts, to regulate those high-risk identified businesses.
It is noteworthy that the Implementing Rules propose that the balance in the Free Trade Accounts shall not be taken into account for foreign debt administration purpose temporarily. Clarity is awaited on how this provision will be interpreted by PBOC.
Supervision and Administration
The Implementing Rules require financial institutions to establish internal control and risk management facilities corresponding to the separate accounting business, and impose on financial institutions obligations related to system connection, information submission, international payment balance statistic reporting, and relevant requirements for implementing anti-money laundering, anti-terrorist financing and anti-tax evasion regulations. As PBOC Shanghai needs to conduct the inspection and acceptance of the separate accounting business system for each financial institution applicant, it may still take some time to officially launch the separate accounting business. Considering major commercial banks in Shanghai have made substantial preparation prior to the release of the Implementing Rules, it is reasonably expected that this step may not take a long time.
At the same time, PBOC Shanghai issued the "China (Shanghai) Free Trade Zone Separate Accounting Business Prudential Risk Management Detailed Rules (Pilot)” and the "People's Bank of China Shanghai Head Office’s Evaluation Mechanism of Separate Accounting Business Prudential Risks Management (Pilot)”. These rules set out detailed requirements on the prudential risk management work of financial institutions in respect of building up their separate accounting business.
