2013.05.22 XU, Yicong、FENG, Rui、Guo Mengqiu、Lin Yucheng
To deepen the reform of foreign exchange administration, the State Administration of Foreign Exchange (“SAFE”) released the Circular on Issuing the Measures for Administration of Foreign Debt Registration (Hui Fa [2013] No.19, “Circular No.19”) on April 28, 2013. Circular 19 substantially improved the current foreign debt registration regime by simplifying and clarifying the foreign debt registration procedures. Along with Circular No.19 coming into effect on May 13, 2013, eight previous administrative regulations and rules in connection with the foreign debt administration, including the Circular on Issues Concerning Improvement of Foreign Debt Administration (Hui Fa [2005] No.74), have lost their effects.
Circular No.19 is distinct from the current administration rules of foreign debt registration with the following notable highlights:
1. Upgrading foreign debt administration
Circular No.19 applies different foreign debt registration requirements to three different types of debtors within the PRC, namely the finance authority, the domestic banks and other domestic debtors. Where a debtor is a finance authority, it shall report to the local foreign exchange administration the preceding month’s information on contract signing, withdrawal, repayment and account changes in relation to the foreign debts and the related currency conversion between foreign exchange and Renminbi (RMB) within the first 10 working days of each month. Where a debtor is a domestic bank, the debtor shall report the information of foreign debts through the relevant online administrative system run by SAFE for each of the debts. Where a debtor is an entity other than the foregoing two types of debtors, the debtor shall register or file each of the debts to the local foreign exchange administration within the designated time limit.
Furthermore, Circular No.19 explicitly provides that the following three types of enterprises with foreign investment shall for the purpose of foreign debt administration be treated in the same way as Chinese domestic enterprises1 : (a) domestic enterprises in which the foreign capital contribution is less than 25%; (b) foreign-invested enterprises (“FIEs”) with the total investment equal to the registered capital; and (c) FIEs with foreign capital contribution not less than 25% while the total investment amount not being specified. The foreign debt of FIEs below will be administered by reference to the rules applicable to Chinese domestic enterprises (i.e., quota control by NDRC and SAFE): (i) FIEs in which foreign capital contribution is reduced to below 25% due to capital increase (of Chinese investors), equity transfer or restructuring, or (ii) FIEs with their enterprise classification changed, making it impossible to calculate the difference between the total investment and the registered capital. With respect to such FIEs, the foreign debts that have been remitted to the related FIE’s account before the occurrence of the above transactions or changes could still be converted into RMB and repaid in accordance with the operational guidance set forth in the related Appendix attached to Circular No.19. Nevertheless, such FIEs are not allowed to withdraw any new foreign debt after the related transactions or changes occur.
Circular No. 19 emphasizes that, unless otherwise provided under laws, the trading credits (such as foreign customer advances and payables to foreign sellers of goods or services), and payables to foreign entities arising from the trading of financial assets (other than foreign debts) including the ancillary interests and fees, shall not be deemed as foreign debts in terms of the foreign debt quantity control. In such cases foreign debt registration is not required, and the domestic entities shall pay relevant considerations and costs to foreign entities in accordance with the foreign exchange regulations applicable to the underlying transactions.
2. Clarifying the use of foreign debts
Pursuant to Circular No.19, foreign debts could be used for trading of goods and services within the borrower’s business scope, and for financial asset transactions as prescribed by laws. With respect to the use on transactions of financial assets, the following requirements and restrictions are worth of noting:
(1) Repayment of existing debts with new borrowing is allowed, but the new foreign debts cannot be converted into RMB. The new debts raised by an FIE for the similar foreign debt restructuring will not deplete its foreign debt quota defined by the difference between total investment and registered capital, as long as the principal balance of such FIE’s foreign debts does not increase and the new borrowings will not be converted into RMB;
(2) Foreign debts could be used for equity investment by, for example, setting up new enterprises or acquiring equity or shares in any Chinese or foreign enterprises, provided that for such purposes (a) only transfer with original currency of foreign debts is permitted, i.e., no conversion of foreign currencies into RMB is allowed, and (b) the borrowers should have the approved business scope to do equity investment;
(3) No foreign debts could be used for providing loans, except for the loan extension by foreign-invested leasing companies or foreign-invested small loan companies;
(4) No foreign debt could be used for providing mortgage or pledge, except for that made by guarantee companies,;
(5) No fund raised by foreign debts could be used for securities investment; and
(6) Where the funds in a foreign debt account need to be saved as fixed-term deposits, the debtor can carry out the relevant procedures with the same bank in the jurisdiction of the same branch of SAFE, as long as there is no conversion or transfer of funds.
As far as item (2) above is concerned, we understand, based on the restrictions on fund transfer and business scope, that the provision should only apply to FIEs having the business scope to do investment activities, such as foreign-funded investment companies, foreign-invested venture capital companies, and foreign-invested partnership enterprises which engage in private equity investment. Ordinary FIEs cannot use foreign debt for reinvestment in China.
As for the period for use of foreign debts, Circular No.19 requires that the use period shall match the repayment period of foreign debts. Except for a bridge loan, as a principle, short-term foreign debts may only be used as working capital, and may not be used in medium-term or long-term usages such as investment in fixed assets. Unless the approval authority or the creditor specifies the use method, medium-term or long-term foreign debts could be used for short-term purposes.
Regarding foreign exchange settlement, Circular No. 19 provides that in principle foreign debt borrowed by a domestic financial institution or a domestic enterprise may not be converted into RMB, unless otherwise approved by SAFE as an exceptional case. Foreign debts borrowed by an FIE may be converted into RMB based on the actual needs of such FIE. In this connection, Circular No.19 continues the administrative mode set up by Circular No.142 of SAFE issued in 2008, which requires the bank to examine the documents related to the use of RMB converted from foreign debts, including the related contracts, agreements, invoices, payment orders (from the payee), payment instructions (form the payer), checklists or certificates, etc. Banks are also required to carry out due diligence investigations on the use of foreign debts declared by a debtor (other than any bank) with regard to the foreign exchange settlement, and to provide necessary reminders to debtors regarding legal compliance issues. In addition, Circular No.19 requires the enterprise applicants to provide the following written statement: “the company undertakes that the use of the RMB funds converted from the foreign debts complies with the declared using methods; if the actual usage does not comply with the declared using methods, the company will take the corresponding legal liabilities.”
3. Specifying procedures and approval principles for onshore loans guaranteed by offshore entities
Circular No.19 provides that when an FIE borrows onshore loans with guarantees provided by an offshore entity, the FIE can directly enter into the guarantee agreement with the foreign guarantor and the creditor. Where the debtor defaults and the foreign guarantor repays the debts, the foreign debt arising from the performance of guarantee should be deemed as short-term foreign debt (calculated based on the balance of principal owed by the onshore debtor to the offshore guarantor). Such foreign debts shall be subject to SAFE’s quantity control according to the difference between the FIE’s total investment and registered capital.
As to Chinese domestic enterprises, Circular No. 19 provides that any Chinese domestic enterprise which intends to receive foreign guarantees for onshore debts should apply to the local branch of SAFE for a quota. After the quota is granted by SAFE, the Chinese domestic enterprise may enter into the guarantee agreement to the extent of the approved quota. SAFE will review the applications by considering the following principles:
(1) Whether the enterprise’s business falls into an encouraged industry according to the State’s policy;
(2) Whether the enterprise gained profits during the past three years consecutively, or has a positive outlook of business operation;
(3) Whether the enterprise has the sound financial management system and internal control system;
(4) the ratio of net assets against total assets of the enterprise shall not be less than 15%; and
(5) the total balance of the foreign debts and the offshore guarantees shall not exceed 50% of the enterprise’s net assets.
Where the offshore guarantor repaid the debts, the Chinese domestic debtor shall carry out short-term foreign debt registration for such payables and file the required information with the local branch of SAFE.
4. Brief Comments
Circular No.19 is another major milestone of foreign exchange administration after the SAFE release of the Circular on Further Improving and Adjusting Foreign Exchange Administration Policies on Direct Investment (Hui Fa [2012] No.59). Circular No.19 combines and integrates the previous departmental regulations and normative documents, and defines and clarifies the principles of approval throughout various steps of foreign debt registration and administration in a systematic way. Save the registration of signing of foreign debt contracts (which remains to be a SAFE handling), most of other procedures, such as foreign-debt account opening, foreign exchange conversion and repayment of principal and interests of foreign debts, may be processed solely with the banks designated to handle foreign exchange affairs. Circular No. 19 further strengthens the SAFE’s indirect administration mechanism with banks as the major interface. SAFE will primarily depend on the information system for capital account matters to monitor the banks’ foreign debt processing and conduct statistics and analysis of foreign debt situations. This approach, while trying to actively prevent the risks in association with foreign debts, facilitates the borrowing and extension of foreign debts by enterprises in China. We envisage the future trend in foreign exchange administration following the route of “simplifying the procedures while strengthening the supervisions”.
1. Pursuant to the Interim Provisions on Statistics and Monitoring of Foreign Debt which comes into effect on March 1, 2003, the borrowing of long-term or medium-term foreign debts by Chinese domestic enterprises or other domestic organizations shall be subject to the approval of quota by the National Development and Reform Commission (NDRC), and the borrowing of short-term foreign debts by Chinese domestic entities shall be subject to the approval and balance control of SAFE.
