The State Administration of Foreign Exchange (SAFE) recently issued a circular announcing that the Regulations on Centralized Operations and Management of MNCs’ Foreign Exchange (Interim) (HuiFa No. 23 [2014], hereinafter referred to as the Regulations) will come into force as of June 1, 2014, in an attempt to deepen the pilot reform on centralized operations and management of multinationals’ (MNCs’) foreign exchange based on the early stage of the reform. A responsible person from the SAFE provided an interview to the press.
I. What are the objectives of deepening the pilot reform on centralized operations and management of MNCs’ foreign exchange?
A: The objectives include: first, to serve the real economy. Trade and investment facilitation will be vigorously promoted to further reduce operating costs for enterprises, to help enterprises make full use of the two markets and the two resources, and to support the economic development of MNC headquarters by creating conditions for industrial transformation and upgrading. Second, to further streamline administration and to delegate power to lower-level governments. Efforts will be made to advance the transformation in the concepts and approaches to foreign exchange administration and to make full use of the decisive role of the market in terms of resource allocations. Third, to explore capital account convertibility systems and mechanisms that can be replicated and promoted; to encourage enterprises and banks to make business innovations and to explore exchange facilitation for investment and financing, thus reducing foreign exchange administration costs, enhancing the international competitiveness of enterprises and banks, and continuing to release reform dividends. Fourth, to carry out integrated regulation and to enhance risk prevention and controls. Efforts should be made to conduct macro-prudential administration, to improve the orderly bi-directional flow mechanism for cross-border capital, to enhance analysis of the declaration and monitoring of data, and to firmly stick to our bottom line in terms of guarding against systemic and regional financial risks.
II. According to our understanding, the pilot reform was kicked off at the end of 2012. What are the considerations this time around for deepening the pilot reform?
A: In order to strengthen financial support for cross-border trade investment, since December 1, 2012 the SAFE has carried out three stages in the pilot reform of centralized operations and management of MNCs’ foreign exchange in 12 provinces and cities throughout the country. Seventy-three enterprises have joined the pilot reform (including 2,247 member units both at home and abroad), and 12 domestic and foreign banks have become pilot cooperative banks. The pilot reform, fully following market demand, has produced significant results. First, financial costs for enterprises have been reduced dramatically, thus significantly benefiting the real economy. For example, in Beijing alone, within one year the pilot enterprises delivered more than RMB 100 million in comprehensive returns. Second, the policy environment for a “headquarters economy” has been further optimized, thus promoting an upgrading of the industrial structure. As the pilot reform has proceeded, some MNCs have promoted their financial management centers in China to financial management centers in the Asia-Pacific region, and some have established worldwide regional settlement centers in China. Third, the international competitiveness of banks has been enhanced. Some pilot banks have witnessed a steady increase in market share and have achieved mutual benefits and a win-win situation with enterprises by providing innovative capital management services for the MNCs. Fourth, breakthroughs have been made in the existing framework, thus accumulating rewarding experiences for exploring regulation by market players and capital account liberalization. Fifth, risk prevention and control measures have been put in place, making sure the risks of foreign exchange receipts and payments remain under control.
As the pilot results prove that centralized operations and management of MNCs’ foreign exchange are rather mature and effective and have been well received and supported by enterprises, banks, and local governments, the conditions for further deepening the pilot reform have been met. As a result, the SAFE has introduced these Regulations.
III. What improvements and innovations are now being made in terms of deepening the pilot reform?
A: This reform, unlike the existing management system that distinguishes the current account from the capital account, breaks down the regular boundary between the current account and the capital account, centralizing management of the foreign exchange of domestic and overseas member enterprises respectively by engaging MNCs that have a relatively sound corporate governance structure and reducing overall settlement and exchange costs and providing enterprises with wider space for capital operations, thus reflecting the servicing of the real economy. First, by making innovations to the MNCs’ account system. MNCs are allowed to open either domestic or international accounts, or both, for foreign exchange to carry out centralized foreign exchange management of domestic and global member enterprises. The master account for international foreign exchange may be used free of charge for overseas transfers without quota limits, and the funds under the domestic and international accounts may be conditionally transferred among one another. It is advised that funds be transferred in line with the specified limits for the external debt and outbound lending so as to provide financing benefits to domestic and overseas members. Second, facilitating the centralized utilization of funds by MNCs. MNCs can carry out centralized collections of funds from different member enterprises and of funds of different natures under the same account. They can handle receipts and payments of funds under the current account for domestic member enterprises, carry out centralized fund receipts and payments and netting settlements, and engage in direct investments, external debt, and outbound lending to reduce their financial costs. Third, further simplifying the document review process. Banks should process the receipts, settlements, purchases, and payments of foreign exchange under the current account in line with the principles of "understanding the customers," "understanding their businesses," and “carrying out due diligence reviews." A form must be filed for recording taxes for outbound payments under trade in service items. Fourth, limits on the external debt and outbound lending may be utilized in a coordinated manner. MNCs can either manage or utilize all limits on the external debt and outbound lending of member enterprises in a centralized manner, or can centralize some of the limits on the external debt and outbound lending to facilitate adjustments to the surpluses and deficits among member enterprises. Fifth, managing capital fund and external debt settlements of foreign exchange based on a "negative list" approach. The foreign exchange of capital funds and external debt may first be settled by entering the special RMB deposit accounts opened by the enterprises and it may be paid after verification of its authenticity.
IV. To which market players is the policy for deepening the pilot reform applicable, and what are the application procedures?
A: MNCs (member enterprises are consolidated for calculation), or single enterprise groups with foreign exchange receipts and payments equal to or exceeding USD 100 million in the prior year, whether China-funded or foreign-funded, can engage in the pilot reform on centralized operations and management of MNCs’ foreign exchange if they have real business requirements and specified management measures and approaches, have no material behavioral violations with respect to foreign exchange, and their trade in goods are classified as Category A. However, deepening the pilot reform cannot be completed once and for all; it should be advanced in phases, with priority given to those enterprises with significant business requirements, sound internal-control mechanisms, and strong risk-control capabilities. Based on the demands of the real economy, the pilot reform will be able to meet the development requirements for foreign exchange receipts and payments and to follow the principles for progressive development and smooth and steady implementation, without mandatory participation by enterprises. Enterprises that plan to carry out the pilot reform should submit in advance the documents to be filed with the branches of the SAFE and upon filing they can start up such businesses. The SAFE branches will provide supervision by strengthening monitoring and analysis.
V. How does one apply for the filing procedures to engage in the pilot reform?
A: The filing procedures are divided into two parts. First, the operations procedures of the SAFE branches for filing with the SAFE. If the branches plan to carry out centralized operations and management of MNCs’ foreign exchange in their respective jurisdictions, they should formulate and refine their operations procedures, such as the conditions for access based on the Regulations and the actual local situation, and should implement the procedures after filing with the SAFE according to the procedures. In order to ensure that the centralized operations and management of MNCs’ foreign exchange are conducted smoothly and to provide facilitation to enterprises to engage in such business, the branches should complete the filing procedures by June 1, 2014. Second, MNC filing with the SAFE branches. MNCs, such as those in the Shanghai Pilot Free Trade Zone, should file with the local SAFE branches before engaging in such business. MNCs that had already started this business prior to implementation of the Regulations do not need to file with the branches if they plan to continue their previous framework and policies for centralized operations and management of foreign exchange; if they plan to adjust the pilot plan in accordance with the Regulations, they only need to submit to the branches those materials, such as their modified business requirements, rather than those materials that have already been submitted. The branches shall complete the filing procedures and issue the notice of filing within 20 days upon receipt of the filing of the completed application materials.
VI. After starting the pilot reform, how will MNCs carry out the centralized receipts and payments of foreign exchange and netting settlements under the current account?
A: MNCs can designate a sponsor to carry out the foreign exchange receipts and payments under the current account on behalf of the domestic member enterprises in a centralized manner, to centralize the accounting of foreign exchange receivables and payables under the current account during a certain period of time, and to settle the net amount after the receipts and payments are offset. In principle, the netting settlement should be conducted at least once every calendar month. The procedures for foreign exchange collections and settlements, as well as for purchases and payments, have been significantly streamlined, and the administering banks should conduct the relevant business in line with the principles of “understanding the clients,” “understanding their businesses,” and “carrying out due diligence reviews.”
Although the MNCs’ foreign exchange receipts and payments under the MNCs’ current account have been greatly facilitated, banks and enterprises should perform their corresponding legal obligations to ensure the authenticity of the transactions. When a bank verifies the authenticity, it should retain the documents for five years for future review; and the enterprise should retain the receipt-related and payment-related documents for each transaction for five years for future review. For both the actual receipt and payment data of the sponsors and the original receipt and payment data of the member enterprises prior to the centralized receipts and payments or netting settlements, the BOP statistical declaration and the information on the verification declaration on the trade in goods should be carried out as per all the relevant stipulations. All SAFE branches should enhance off-site monitoring and on-site verifications and examinations by making full use of technologies, such as the monitoring and analysis platform for cross-border capital flows.
VII. As the pilot reform is conducted, how will the MNCs handle voluntary foreign exchange settlements under the external debt and foreign direct investments (FDI)?
A: When MNCs operate and manage foreign exchange under the external debt and FDI in a centralized manner, they can make adjustments in the use of funds among the domestic member enterprises and can voluntarily settle the foreign exchange. Foreign exchange under FDI includes foreign exchange capital funds, funds under the asset realization account, as well as funds under the domestic reinvestment account. The following regulations should be followed with respect to foreign exchange settlements: First, foreign exchange settlements should be conducted by the sponsor designated by the MNCs via the master domestic account that they have opened for the foreign exchange. Second, RMB funds obtained from the foreign exchange settlement should be transferred to the corresponding special RMB deposit account opened by the sponsor (capital account—the account for payment after the settlement of the foreign exchange). When the use of funds is applied, the opening bank should make direct payments upon verifying the authenticity and should retain the relevant documents for five years for future review. The relevant documents may be those involving items that fall within the business scope of the sponsor or those involving items that fall within the business scope of the member enterprises. In principle, the documents should be submitted by the fund user. Third, the use of funds after the settlement of the foreign exchange should follow the prevailing regulations on foreign exchange administration and should not be used for purposes prohibited by the laws and regulations. Fourth, banks and enterprises should submit foreign exchange settlement and payment data to the relevant business information system of the foreign exchange authorities in a timely and accurate manner as per the regulations.
VIII. After the MNCs carry out the pilot reform, how should they declare the BOP?
A: The sponsor and member enterprises for the centralized operations of the MNCs’ foreign exchange should declare to the banks the nature of the cross-border fund receipts and payments as per the stipulations and should declare the BOP statistics. First, the receipt and payment of cross-border funds via the master domestic and international accounts for foreign exchange should be declared in accordance with the BOP declaration requirements for cross-border fund receipts and payments. The fund receipts and payments between the master domestic and international accounts for foreign exchange and domestic non-residents should be declared based on the requirements for transactions between domestic residents and domestic non-residents. Second, capital transfers between principal domestic and international accounts for foreign exchange are not subject to BOP declarations, but the relevant data should be submitted based on the requirements for foreign exchange transfers between domestic residents. Third, with respect to the BOP declaration for centralized receipts and payments or netting settlements under the current account, declaration of the actual payment data and the original receipt and payment data that are recovered from each deal should be differentiated.
IX. What measures will be taken to prevent and control risks from deepening the pilot reform?
A: First, the “valve” for controlling and regulating the limits will continue to be rigorously implemented. Transfers between the master international and domestic accounts will be conducted within the specified limits for the external debt and outbound lending. Second, data monitoring will be strengthened. Special account codes will be assigned to the master domestic and international fund accounts to collect foreign exchange receipt and payment information; data recovery declarations will be conducted for centralized receipts and payments as well as for netting settlements. Third, the responsibilities of banks and enterprises will be stressed. Banks and enterprises will sign confirmation letters to ensure business compliance. Fourth, verifications and inspections will be enhanced. When banks and enterprises conduct the relevant business, they will be required to retain the relevant documents for future review and to strengthen statistical data monitoring and analysis via the cross-border fund monitoring platform of the foreign exchange authorities to ensure the controllability of risks.
