The State Administration of Foreign Exchange (SAFE) recently issued the Circular Concerning the Issuance of Provisions on Foreign Exchange Management for Cross-border Guarantees (HuiFa [2014] No. 29) and a person-in-charge at the SAFE accepted an interview with the media on the Provisions on Foreign Exchange Management for Cross-border Guarantees (hereafter referred to as the “Provisions”).
I. What is the background to the promulgation of the Provisions?
The previous regulations regarding foreign exchange management pf cross-border guarantees included: the Administrative Measures on External Guarantees by Domestic Institutions (YinFa [1996] No. 302), the Rules for Implementation of the Administrative Measures on External Guarantees by Domestic Institutions ([97] HuiZhengFaZi No. 10), the Circular Concerning Issues related to the Management of External Guarantees by Domestic Institutions (HuiFa [2010] No. 39), and the Circular of the State Administration of Foreign Exchange on the Issuance of Administrative Measures for Registration of Foreign Debt (HuiFa [2010] No. 19). During the initial stage after the release of these regulations, they played a positive role in terms of promoting economic and technological cooperation with foreign countries, supporting foreign trade development, facilitating the export of labor services, introducing advanced foreign technologies, equipment, and capital, and smoothly conducting foreign-related financial activities, standardizing the behavior of the external guarantees, and strengthening management of the external guarantees .
With the rapid development of China’s foreign-related economy and the ever-expanding scale of transactions in the balance of payments, the behavior of cross-border guarantees has become increasingly diversified and complex. However, the above regulations only cover external guarantees and domestic loans with offshore guarantees and they fail to include other types of cross-border guarantees, so they cannot satisfy our current requirements for market development. Meanwhile, with regard to the relevant guarantee management policies that have been clarified, the relevant approval and verification procedures are complex, and lag behind in terms of the management mode relative to the market requirements and result in relatively high management costs. Therefore, under the guidance of the “Five Transformations,” the SAFE adjusted its thinking about management, promoted the streamlining of administration and delegation of power to lower levels as well as the transformation of functions, and promulgated the Provisions in good time based on adequate investigations and solicitation of opinions at an early stage in order to facilitate cross-border guarantee activities and to promote capital account convertibility under the guarantee item.
II. What is the main idea behind this reform in terms of the approach to cross-border guarantee management?
The Provisions mainly reflect the following ideas about management:
Firstly, streamlining administration and delegating power to lower levels. Cancelling or substantially cutting back on the scope of control over quantity and the scope of registration of cross-border guarantees, with only the part of “partial cross-border guarantees that generate new liabilities or claims by residents to non-residents upon the compliance of the guarantees” subject to registration on a case-by-case basis. Meanwhile, the laws and regulations have been clarified and consolidated, and twelve normative documents related to cross-border guarantees have been abolished.
Second, functions are transformed. The boundary between foreign exchange management and regulatory responsibilities for cross-border guarantees is now rationally defined. Based on the objectives and responsibilities of foreign exchange management, the scope of foreign exchange management of cross-border guarantees is rationally defined and cross-border guarantees integrated into foreign exchange management shall have the following features: conforming to the requirements in terms of the forms in a legal sense, guaranteeing compliance with payment methods, determining the relative amount in the balance of payments, and so forth. Meanwhile, by giving due regard to higher law, international practices, and market demand, foreign exchange management shall be disconnected from judgments about the effectiveness of contracts on cross-border guarantee transactions. Foreign exchange registration conducted by the foreign exchange authorities in line with their statutory duties for the balance-of-payments statistics is different from the confirmation registration performed by the relevant authorities of the industry in terms of both purpose and effectiveness, and it cannot be used as collateral or for going against a third party.
Third, ex-ante approval is changed to ex-post regulation. All ex-anti approvals have been cancelled and registration has become the major management approach. The ex-ante review and approval procedures for the conclusion and compliance of the guarantee contracts have been cancelled and have been replaced by proportional self- registration management; and most of the business qualification limits have been abolished.
Fourth, risk prevention is strengthened. In parallel with streamlining administration and delegating power to lower levels, efforts are made to prevent cross-border guarantees from becoming a channel for abnormal capital flows by means of support systems and regulatory approaches. The monitoring and analysis responsibilities of the foreign exchange authorities are clarified to emphasize off-site verifications, monitoring, and inspections, and to strengthen investigations of violation responsibilities.
III. What is the content of this reform in terms of foreign exchange management of external loans with domestic guarantees?
In the Provisions, the major content of the management of external loans with domestic guarantees includes:
1. Cancelling the quantity controls for external loans with domestic guarantees. Cancelling the ex-ante approvals or indicator verifications for financing or non-financing of external loans with domestic guarantees of domestic institutions.
2. Cancelling unnecessary qualification limits. Except for general restrictive clauses (e.g., on the use of guarantee funds) universally applicable to all institutions, qualification limits are abolished for specific entities (the requirement of the asset and liabilities ratio of the guarantor and the guarantee, or of related-party relationships) or for specific transactions (e.g., non-financing guarantees).
3. Registration is the major mode of management. Statistics and monitoring shall be conducted on external loans with domestic guarantees within the existing capital account information system.
4. Approvals for the compliance of guarantees are cancelled. Banks can handle the compliance of external guarantees on their own, and non-banking financial institutions and enterprises can handle compliance procedures with the banks based on the registration certificate for the guarantee.
5. Where external claims are generated upon the compliance of the guarantee, registration of external claims shall be handled as per the relevant requirements.
IV. What is the content of this reform in terms of foreign exchange management of domestic loans with offshore guarantees?
In the Provisions, the major content with respect to management of domestic loans with offshore guarantees includes:
1. Clarifying the business qualifications. The creditors shall be domestic financial institutions, the debtors shall be non-financial institutions, and the guaranteed liabilities can only be common loans or credit lines in the home currency or in foreign currency.
2. Centralized registration of the creditors. The creditors (i.e., domestic financial institutions) shall handle the filing of the statistics with the foreign exchange authorities via the capital account information system in a centralized manner.
3. The creditors shall handle collection of the payment for the compliance of the guarantees on their own. Domestic financial institutions can handle collection of the payment for the compliance of the guarantees directly with the overseas guarantors.
4. Debtors shall handle the external debt registration upon the compliance of the guarantee. Where external debts are generated upon the compliance of the guarantee, external debt registration shall be carried out, but it will not be subject to the quota for common external debts. With regard to external debts incurred by the compliance of domestic loans with offshore guarantees, the balance of the outstanding principal shall not exceed one time the value of the debtor’s net assets.
V. According to the Provisions, in addition to external loans with domestic guarantees and domestic loans with offshore guarantees, how shall other cross-border guarantee contracts signed by domestic institutions be managed?
According to the Provisions, with the exception of the necessary foreign exchange registration procedures that shall be performed and the certain qualification limits that shall be maintained for external loans with domestic guarantees and for domestic loans with offshore guarantees, domestic institutions can conclude cross-border guarantee contracts in other forms on their own. It should be emphasized that for cross-border guarantee contracts in other forms, the Provisions only abolish the limits on the conclusion of the guarantee contracts in terms of foreign exchange management, and the claim of the guarantee rights by the creditor under the guarantee item and the fulfillment of the guarantee compliance obligations by the guarantor shall still conform to the relevant administrative provisions on the external debt, direct investments, portfolio investments, and so forth.
VI. How shall relevant risks be prevented and controlled after this policy reform?
In order to address the risks from the sharply rising external claims and debts incurred by the large centralized guarantee compliance resulting from exposure to the international balance of payments, the following major risk control measures are adopted by the Provisions: First, statistics on the conclusion and compliance of the guarantee contract, which may lead to newly-added external claims and debts, shall be collected on a case-by-case basis. Second, cross-border guarantee transaction activities of all parties involved shall be restrained by means of guarantee compliance audit reviews (due diligence review), temporary suspension of contract conclusions after default as well as a negative list approach for capital use and other self-disciplinary requirements. Third, monitoring and disposal efforts will be reinforced for guarantee activities in violation of the regulations by adopting measures such as registration of claims and debts, off-site verifications, and foreign exchange inspections. Fourth, rights to conduct timely adjustments to the cross-border guarantee management patterns will remain with the foreign exchange authorities by means of the balance-of-payments safeguard clause. Through the above arrangements, cross-border fund flow risks under the guarantee item can be kept controllable.
VII. In what respects does foreign exchange management reform of cross-border guarantees promote capital account convertibility?
Release and implementation of the Provisions will achieve policy consistency in foreign exchange management for cross-border guarantees and a basic convertibility of cross-border guarantees. These are reflected in the following areas: in the field of domestic guarantees with external loans, although ex-ante approvals, approvals for the guarantee compliance, and most of the qualification limits are abolished, this reform maintains case-by-case registration in the contract conclusion process; while in the field of domestic loans with offshore guarantees, under the premise of conforming to the relevant restrictive conditions, Chinese- and foreign-funded enterprises are permitted to conclude contracts on their own and to handle guarantee compliance that is within one time the value of their net assets. Thus the policies on domestic loans with offshore guarantees for Chinese- and foreign-funded enterprises in China are unified and significantly improved.
