2014.03.17 LU, Juyi、Vincent YUAN、Emma WANG
During a policy briefing in Shanghai on February 28 held by the Shanghai branch of the People’s Bank of China in support of the foreign exchange administrative policy development in the China (Shanghai) Pilot Free Trade Zone (the “FTZ”), the Notice of the Shanghai Branch of the State Administration of Foreign Exchange on Printing and Distributing the Detailed Rules of Implementation on Providing Foreign Exchange Administration Support for the Development of the China (ShaJoey LUnghai) Pilot Free Trade Zone (国家外汇管理局上海市分局关于印发支持中国（上海）自由贸易试验区建设外汇管理实施细则的通知)(the “Notice”) was introduced. This indicates the beginning of relaxing at a large scale the foreign exchange administration in the FTZ.
The key developments regarding the capital account items (资本项目) appear in the following six aspects:
1. Delegation of the authority over the foreign exchange registration under foreign direct investment
According to the previous foreign exchange rules1 , foreign exchange matters under direct investment by foreign investors (such as those in relation to preparation, establishment, alteration, and liquidation) shall be registered with the State Administration of Foreign Exchange or its local counterpart (the “SAFE”). The Notice now, however, explicitly provides that the authority over the foreign exchange registration and amendment registration under such direct investment in the FTZ has been delegated to banks in the FTZ.
2. Discretionary settlement of foreign exchange funds of foreign invested enterprises
The Notice provides that the foreign invested enterprises in the FTZ may choose to settle their foreign exchange funds at their discretion. Before the introduction of this Notice, the foreign exchange rules require that the foreign invested enterprises can settle their foreign exchange funds only after completing such procedures as the submission of capital verification reports to banks and the review by banks for the authenticity of the underlying transactions 2. With the introduction of the Notice, now the regulatory framework in relation to the settlement of foreign exchange funds of the foreign invested enterprises in the FTZ has changed the administrative focus from the prior regulatory review to ex post statistics monitoring, which would better facilitate the daily operation of the foreign invested enterprises in the FTZ.
However, in terms of the use of the funds after settlement, the Notice still requires that the funds so settled cannot be used for such purposes as (i) doing any business beyond approved business scope, (ii) investing in securities (except if done by investment enterprises), (iii) directly or indirectly extending RMB entrusted loans, and (iv) purchasing real estates for non-self use purposes.
3. Raise the ceiling for the outbound lending by the enterprises in the FTZ
According to the previous foreign exchange rules3 , the balance of outbound lending of a domestic lender shall not exceed 30% of its owner’s equity, nor shall it exceed the agreed amount of Chinese investment for which the borrower has completed required registration procedures. Where it is necessary for a domestic enterprise to exceed the aforesaid proportions, the local SAFE where the lender is located shall make preliminary examination and subsequently submit such application to the central SAFE for verification and approval. The Notice now has increased the ceiling of the owner’s equity to 50%. When a domestic enterprise needs to increase the aforesaid proportions, the SAFE will conduct relevant review on a case by case basis. This adjustment to raise the ceiling will better promote the cross-border financial activities carried out by the enterprises in the FTZ.
4. More freedom on outbound security business
Under the Notice of the State Administration of Foreign Exchange on the Issue of the Administration of External Guarantee by Domestic Institutions (国家外汇管理局关于境内机构对外担保管理问题的通知) issued on July 30, 2010, the outbound security by domestic entities is administered by the SAFE through balance administration via approval for quota (余额管理) or through approval for each case (逐笔审核), and there are various requirements in relation to such aspects as the ratio of net assets to total assets of the security provider and the secured party, the relationship between the security provider and the secured party, the profit making status of the secured party.
The Notice, however, provides that the enterprises in the FTZ may engage in outbound security at their discretion without prior approval from the SAFE, and has removed the limitation on those such as the net asset ratio of the security provider and the secured party, the profit making status of the secured party and the equity relationship between the security provider and the secured party. Based on the Notice, the enterprises in the FTZ will enjoy more freedom of carrying out outbound security business, except completing the outbound security registration according to relevant rules and ensuring that the use of the funds under the outbound security is consistent with the purpose permitted under relevant rules.
5. Simplify the procedures for outbound financial leasing business
Under the Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting the Policies on Capital Account Foreign Exchange Administration (国家外汇管理局关于进一步改进和调整资本项目外汇管理政策的通知) issued on January 10, 2014, when a financial leasing company or its project company carries out the outbound financial leasing business, within 15 working days upon the occurrence of external claims under such financial leasing transaction, it shall submit relevant materials to complete the registration for the external claims at the SAFE where it is located. This local SAFE shall review and examine the compliance and authenticity of the financial leasing transaction. However, the Notice has removed the requirement of approval for each case in relation to the external claims of the financial leasing companies in the FTZ, and instead requires only the registration of the incurred external claims. This development will accordingly better facilitate the development of the financial leasing business in the FTZ.
6. Improve the centralized operation and management of foreign exchange funds
Since the mid August of 2010, the SAFE has been running a pilot program in Shanghai for developing a RMB international trade settlement center, part of which provides the centralized management of regional or international funds settlement under relevant international trade orders (contracts). The Opinions of the People's Bank of China on Providing Financial Support for the Development of the China (Shanghai) Pilot Free Trade Zone (中国人民银行关于金融支持中国（上海）自由贸易试验区建设的意见) issued on December 2, 2013 allows the creation of a domestic foreign exchange fund pool in the FTZ for the purpose of collecting/pooling funds from the offshore affiliated companies, facilitating the centralized collection and payment, the centralized operation, and the two-way fund sweeping with domestic RMB fund pool. With the business of “cross-border fund pooling/sweeping” under the pilot program approved in 2013, the method of the administration over the cross-border foreign exchange borrowings and lending by multinational companies has shifted from the requirement of approval for each case to the balance administration via the approval for quota. This means that the surplus funds can be remitted overseas and foreign exchange can also be remitted in without prior approval for each case.
Multinational companies may open special accounts, including the primary account for international foreign exchange funds and the primary account for domestic foreign exchange funds. The former can be used to receive and manage the foreign exchange funds from offshore enterprises and the foreign debt proceeds borrowed from other offshore entities, and the latter can be used to receive and manage the foreign exchange funds from relevant domestic member enterprises.
The Notice has further improved the program of the centralized operation and management of the foreign exchange funds of the headquarters of multinational companies, and introduced the “primary account for domestic foreign exchange funds” to collectively refer to the domestic foreign exchange fund pool and international trade settlement center special account, and to cover the functions of such fund pool and special account. The Notice has also changed the regulatory administration method from approval to filing in relation to various matters (including such matters as the creation of fund pool, outbound lending) under the pilot program involving the primary account for international foreign exchange funds and the primary account for domestic foreign exchange funds. It is expected that the Notice will offer more support to such activities as the RMB international trade settlement and the centralized utilization by multinational companies of their foreign exchange funds in the FTZ.
Given the above, we are of the view that the Notice has simplified and relaxed at a large scale the regulatory administration in relation to the capital account items, encouraged the facilitation of cross-border fund flows and financing, put in place a new administrative method in a wide range (namely using the administrative method of “negative list”). It aims to start the free convertibility of capital account items, simplify the procedures for foreign exchange administration, promote the convergence of the “headquarter economy” and new types of trade or business, and the development of financial leasing business in the FTZ. With various reformative implementation rules gradually put in place in the FTZ, there will be more new policy development worth our attention.
1. Mainly including the Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Related to the Standardization of the Business Operations of Cross Border Renminbi Capital Account Items (国家外汇管理局综合司关于规范跨境人民币资本项目业务操作有关问题的通知) issued on April 7, 2011, and the Notice of the State Administration of Foreign Exchange on Printing and Distributing the Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China and the Supporting Documents (国家外汇管理局关于印发《外国投资者境内直接投资外汇管理规定》及配套文件的通知) issued on May 10, 2013, etc..
2. Mainly Including the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises (国家外汇管理局综合司关于完善外商投资企业外汇资本金支付结汇管理有关业务操作问题的通知) issued on August 29, 2008, and the Supplementary Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Relating to the Improvement of Business Operations with Respect to the Administration over Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises (国家外汇管理局综合司关于完善外商投资企业外汇资本金支付结汇管理有关业务操作问题的补充通知) issued on July 18, 2011, etc..
3.Mainly Including the Notice of the State Administration of Foreign Exchange on Foreign Exchange Control Issues Concerning Overseas Lending by Domestic Enterprises (国家外汇管理局关于境内企业境外放款外汇管理有关问题的通知) issued on September 9, 2009, etc..
