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    Person-in-charge of the SAFE Answers Questions on Improving Foreign Exchange Administration Policy Regarding Overseas Lending Granted by Domestic Enterprises
Person-in-charge of the SAFE Answers Questions on Improving Foreign Exchange Administration Policy Regarding Overseas Lending Granted by Domestic Enterprises

The SAFE issued recently the Circular on Relevant Issues Regarding Foreign Exchange Administration of Overseas Lending Granted by Domestic Enterprises (hereinafter referred to as the Circular). The person-in-charge of the SAFE was interviewed on the relevant issues.
Q: What is the main purpose of promulgation of the Circular?
A: Chinese overseas investment has seen steady development with positive results. Meanwhile, Chinese-funded enterprises in overseas countries are baffled and impeded from further development and expansion due to difficulties in overseas financing and to insufficient liquid funds. The ongoing international financial crisis has added to the liquidity pressures of overseas financial institutions and the deterioration in the financing environment for Chinese-funded enterprises. Current cross-border financial services provided by domestic financial institutions have proven to be inadequate to meet the needs of overseas Chinese-funded enterprises for further development, which still require improvement. The measures recently issued by the State Council, which aim to further stabilize external demand, call for considerable efforts to be made to address the financing difficulties of foreign trade enterprises, as well as to support the go-global move of Chinese enterprises of diverse ownerships to stimulate exports. In such a context, for the purpose of bolstering the go-global efforts of financially strong enterprises, further promoting the facilitation of investment and trade as a way to stabilize external demand and for better coping with the global financial crisis, the SAFE issued the Circular in a timely manner and with earnest efforts of drawing on the experiences from the pilot reform of lending overseas.
Q: What is the main content of the Circular?
A: The Circular mainly includes the following content: First, the scope of lenders for overseas lending is expanded from the qualified Chinese and foreign-funded transnational companies currently in force to qualified enterprises of diverse ownerships. Second, the sources of funds for overseas lending have been expanded. Domestic enterprises are allowed to provide overseas lending through the use of diverse forms of sources of fund within certain limitations, such as self-owned foreign exchange and foreign exchange purchased with the home currency. Third, the ratification and exchange procedures for overseas lending have been streamlined. Matters concerning the opening of special foreign exchange accounts for overseas lending, fund transfers within China, and the purchase of foreign exchange etc. will all be handled directly by designated foreign exchange banks. Fourth, the statistical monitoring and risk prevention mechanism for overseas lending has been improved.
Q: How does the SAFE guard against possible risks to the equilibrium in the balance of payments brought about by overseas loans?
A: The economic stimulus package which aims to expand domestic demand and foster the stable and rapid development of the national economy has yielded initial positive results. The operation of the economy has witnessed positive changes and the general position of the balance of payments remains stable and free from major fluctuations. These have laid a solid foundation for overseas lending. Meanwhile, the relatively limited amount of overseas lending, as compared to the total scale of the balance of payments and the foreign exchange reserves, will not have a major impact on the national equilibrium of the balance of payments, and consequently the overall risks will be controllable. 
In terms of the design of the detailed policy plans for overseas lending, we have perfected the statistical monitoring and risk prevention mechanism for overseas lending, which are mainly embodied in the following aspects:  management of the qualifications of the lenders and borrowers for overseas lending has been perfected, and two quantitative thresholds have been installed for an overseas lending quota: the quota for overseas lending shall not exceed 30 percent of the owners equity of the lender and shall not exceed the total agreed investment amount that has been concluded through the registration procedures by the borrower, and the lower of the two figures shall be adopted; the term of validity for overseas lending is clarified; the quota ratification, special foreign exchange account, foreign exchange fund transfers within China as well as the outward and inward remittances of overseas lending will be integrated into the foreign exchange management information system under direct investment, and a sound statistical monitoring mechanism is established for the inflow and outflow of foreign exchange funds for overseas lending; in the Circular, safeguard provisions are established stipulating that the SAFE can make timely adjustments to the qualifications, fund sources, amounts, terms, etc. of domestic enterprises for overseas lending.
Q: What new measures are incorporated in the Circular to streamline administration, decentralize power, and to provide facilitation for the enterprises?
A: On the premise of effectively preventing risks, the Circular has further streamlined administration, decentralized power, and provided facilitation for the enterprises, which are mainly embodied in the following aspects: the ratification, registration, and other procedures related to overseas lending will be handled by the branches of the SAFE and the SAFE will be responsible for instructing and organizing implementation of the relevant policies; in terms of administration of the exchange, the ratification procedures for domestic transfers involved in overseas lending are streamlined, except that outward remittances of loans through the special account for overseas lending as well as inward remittances of funds for repayment of the principal and interest or the performance of a guarantee for the special account for overseas lending are subject to ratification by the foreign exchange administrations, the transfer between related domestic foreign exchange accounts and special foreign exchange accounts for overseas lending and settlement of foreign exchange can be completed at banks by domestic lenders by presenting the ratification documents for overseas lending, without having to obtain ratification by the foreign exchange administrations. As for the administration of overseas lending quotas, balanced management shall apply, i.e., domestic enterprises engaged in overseas lending can repeatedly use the recovered quota for overseas lending within the ratified quota and term, thus changing the previous principle based on the amount incurred. This will be conducive for domestic enterprises to determine independently the frequency and amount of overseas lending so as to satisfy the financing needs of their overseas invested enterprises as well as to increase the efficiency of fund use. 
Q: What are the qualifications of the lenders?
A: The Circular has reduced the restrictions on the qualifications for overseas lending to a large extent. In the case that both the lenders and the borrowers are registered and established in accordance with the law and their registered capital has been fully paid, and the lenders and borrowers have sound track records and are free from violations of foreign exchange administration regulations within the recent three years after ratification by the foreign exchange administrations, the borrowers and lenders can apply to the said Administration for granting loans to their overseas directly-invested enterprises.  
Q: What are the sources of the funds for overseas lending?
A: The Circular allows domestic enterprises to offer lending to their overseas directly-invested enterprises by using self-owned foreign exchange funds in the foreign exchange capital account and foreign exchange account under the current account, foreign exchange funds purchased with RMB, and funds participating in the foreign currency pool.
Q: What is the relationship between overseas lending and overseas direct investment?
A: In a broad sense, overseas investment can be classified as overseas claim investment and overseas equity investment. Overseas lending granted by domestic enterprises can be considered a part of overseas claims and jointly constitutes the overseas investment. According to the prevailing overseas direct investment administration framework, overseas direct investment shall be ratified or put on the record by Chinas relevant departments for overseas investment. Therefore, the Circular stipulates that the prerequisite condition for overseas lenders are: all overseas direct investment projects by the lender during the past years have been ratified by the relevant domestic departments for direct overseas investment and the foreign exchange registration procedures have been fulfilled at the foreign exchange administrations, and the lender was graded at or above Grade Two in the last joint annual inspection of overseas investment.   
Q: What approaches are applicable in the Circular for providing overseas loans?
Q: Overseas lending can be provided in the forms of: (p) direct lending, i.e., the lending is granted directly by domestic enterprises to their wholly-owned subsidiaries or share-holding enterprises legally established abroad; (q) granting lending by entrusting designated foreign exchange banks. In addition, if the group company that the domestic enterprise is affiliated with has a financing company with qualifications to conduct foreign exchange business, the enterprise can provide lending by means of entrusted lending through the financing company.  
Q: What is the relationship between the Circular and the Circular of the SAFE on Issues Regarding the Management of Internal Operations of Foreign Exchange Funds of Transnational Companies (Huifa No. 104 [2004])?
A: The lending granted by domestic enterprises (including foreign-invested enterprises) to their wholly-owned subsidiaries and share-holding enterprises legally established abroad is subject to the provisions of this Circular. The lending granted by foreign-invested enterprises to other overseas related-party companies shall be subject to the relevant provisions in the Huifa No. 104 [2004] document.

The English translation may only be used as a reference. In case a different interpretation of the translated information contained in this website arises, the original Chinese shall prevail.

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