To deepen the reform of the foreign exchange administration system, standardize receipts and payments under cross-border guarantees, and promote investment and financing facilitation for enterprises and the convertibility of the capital account in an orderly manner, the State Administration of Foreign Exchange (SAFE) recently issued the Regulations on Foreign Exchange Administration for Cross-border Guarantees (Huifa No. 29 [2014], hereafter referred to as the “Regulations”). Guo Song, director of the SAFE's Capital Account Management Department, provided an interview on the relevant issues.
Q: What is the background for introducing the reform of foreign exchange administration for cross-border guarantees at this time?
A: The major regulations on foreign exchange administration for cross-border guarantees prior to the reform were developed in the 1990s and they played a positive role in promoting China’s economic and technological cooperation with other countries, supporting the development of foreign trade, facilitating labor service exports, introducing advanced technology, equipment, and funds from other countries, and smoothly conducting external financial activities based on the historical conditions during that time.
With the rapid development of China’s foreign-related economy and the expansion in the size of transactions in the balance of payments, cross-border guarantee activities have become increasingly diversified and complex. The previous regulations, which covered external guarantees and domestic loans with only overseas guarantees, are no longer able to satisfy the development requirements of the market. The relevant policies on guarantee management require redundant approval and verification procedures, and this management approach lags behind market demand. Further, these policies impose many limits on the qualifications for cross-border guarantees involved in domestic and overseas financing by enterprises, resulting in high operating costs for enterprises.
Therefore, against the macro backdrop of promoting the streamlining of administration and decentralization and the liberalization of the capital account, the SAFE has adjusted the management concept under the guidance of the "five changes” and has introduced the Regulations at a proper time based on an adequate survey and solicitation of opinions during the preliminary phase. In the Regulations, the scope of foreign exchange administration for cross-border guarantees is rationally defined based on the objectives and duties of foreign exchange administration, and all types of cross-border guarantees whose form conforms to the legal requirements, use payments as an approach for performance, and may have a significant influence on the BOP are included in the scope of the policy adjustment, thus significantly liberalizing foreign exchange administration for cross-border guarantees, thus addressing the challenges confronted by domestic enterprises, such as the difficult and costly financing, and promoting the general process of the capital account.
Q: What measures have been taken in this reform for streamlining administration and decentralization?
A: The Regulations aim to vigorously promote the streamlining of administration and decentralization to significantly improve the investment and financing policy environment for domestic enterprises. All ex-ante approvals related to cross-border guarantees as well as ex-ante verifications for the performance of guarantees and most restrictions on business qualifications are eliminated and replaced by self-discipline and registration management; only “some cross-border guarantees for liabilities or claims of residents to non-residents newly added after the performance of the guarantees” are integrated into the scope of the deal-by-deal registration. Meanwhile, the relevant laws and regulations are streamlined and integrated and 12 normative documents related to foreign exchange administration for cross-border guarantees are abolished, thus improving the transparency of foreign exchange administration policies.
Q: How will this reform address the problems of difficult and costly financing of domestic enterprises？
A: The reform will unify treatment for domestic and overseas enterprises, providing more financing facilitation for domestic enterprises. Among the external loans with domestic guarantees, the qualification restrictions on the trading players will be abolished and the differences in management policies between the financing guarantees and the non-financing guarantees, and between the banking institutions and the non-banking institutions, will be removed. Further, under the premise of meeting the relevant restrictions, the practice of ex-ante application to the SAFE for the relevant quota will be abolished and Chinese and foreign-funded enterprises will be allowed to sign contracts without submitting an application. Guarantees can be performed within the amount of one time of the net assets so as to unify and significantly improve the policy on domestic loans with overseas guarantees for Chinese and foreign enterprises in China. With guarantees from overseas institutions, domestic enterprises can raise funds from domestic financial institutions more conveniently and at a relatively low cost, which will reduce their financing difficulties and costs.
Q: With the introduction of the Regulations, domestic institutions and individuals will no longer be required to obtain ex-ante approvals when providing external loans with domestic guarantees, and ex-ante verifications will no longer be required when the performance of the guarantee occurs. Will this provide conveniences for domestic institutions and individuals to transfer assets overseas?
A: The Regulations abolish or significantly streamline the ex-ante approval and registration procedures for external loans with domestic guarantees, which is conducive to improving the policy environment for overseas investments and financing by Chinese enterprises and facilitating Chinese institutions and individuals to carry out investment and financing activities reasonably and legitimately in other countries. Therefore, the Regulations are aligned with the general requirement of serving the real economy through financial services. Meanwhile, to prevent domestic institutions and individuals from maliciously leveraging the channels for external loans with domestic guarantees to transfer assets overseas, the Regulations make sure that the potential reputational and financial costs of the guarantors due to malicious defaults will be raised substantially by taking an array of measures, such as disclosures of guarantee information, due diligence investigations by banks, verification of trends in the guarantor’s performance, control over new contracts after default, and off-site verifications and foreign exchange inspections, so as to encourage the guarantor to operate with integrity and in compliance with the laws and regulations.
According to the Regulations, where the guarantor under external loans with domestic guarantees is a non-banking institution, the guarantor is not allowed to sign new contracts for external loans with a domestic guarantee without the approval of the SAFE before the overseas debtor pays off the debts to the domestic guarantor due to the guarantor's performance of the guarantee. To a certain extent, this will prevent domestic institutions and individuals from transferring assets overseas via the performance of the guarantee.
Q: Are domestic organizations allowed to freely sign “other forms of cross-border guarantee” contracts other than those on external loans with domestic guarantees and domestic loans with overseas guarantees?
A: According to the Regulations, with the exception that necessary foreign exchange registration formalities must be carried out and some restrictions on the qualifications must be followed for external loans with domestic guarantees and for domestic loans with overseas guarantees, domestic institutions can freely execute other forms of cross-border guarantee contracts. However, it should be noted that the Regulations only cancel the foreign exchange administration restrictions for the signing of the guarantee, which does not mean there are no restrictions on other fields closely related to the content of the guarantee contracts or that the restrictions have been abolished. For example, there are still necessary restrictive stipulations on foreign debt management, cross-border investments, and security interest.
Therefore, although compliance situations in foreign exchange administration will not affect the effectiveness of the guarantee contracts, if conflicts occur between the contents of the contracts and the regulations on foreign exchange administration or the restrictive stipulations in other fields, the guarantee contracts may cease to be executable. To make sure the creditor under the guarantee can successfully claim guarantee rights and the guarantor can smoothly perform the guarantee performance obligations, the signing of the guarantee contracts must conform to “the principle of no potential conflict." In other words, unless otherwise expressly stipulated under the Regulations, the signing of cross-border guarantee contracts and possible new cross-border claims and debts relationships and the asset ownership relationship established after the performance of the guarantee contract shall not create potential conflicts with the existing stipulations for the capital account or other restrictive stipulations of the relevant departments. The guarantee contract cannot be performed if there is such a conflict and can only be performed if there is no such conflict. Therefore, this will effectively guard against the signing of cross-border guarantee contracts in violation of the relevant stipulations.
Q: How will this reform guard against the risks associated with abnormal fund flows while facilitating cross-border guarantee activities?
A: To address the risks incurred by the drastic increase in external claims and debts arising from the concentrated performance of large-amount guarantees and threatening the BOP, the Regulations take the following risk control measures: first, acquiring guarantee contract signing and performance data which may add to the external claims and debts on a deal-by-deal basis; second, restraining cross-border guarantee transactions among all parties involved via self-disciplinary requirements, such as a review of trends in guarantee performance (a due diligence investigation), temporary suspension of new contract signings after a default and a negative list for fund use; third, reinforcing monitoring and disposal of violations of guarantee activities via claims and debt registration, off-site verifications, and foreign exchange inspections; fourth, retaining the SAFE's power to make timely adjustments to the cross-border guarantee management approaches in accordance with the BOP guarantee clauses. With these arrangements, the risks of cross-border fund flows under guarantees will generally remain under control.
Q: How can one make sure that all parties involved in the guarantee will earnestly perform their self-disciplinary obligations under the Regulations after the ex-ante approvals and verifications are abolished in an all-round way?
A: On the one hand, this reform cancels all restrictive stipulations on foreign exchange administration and ex-ante approvals for contract signing; on the other hand, in order to retain “teeth” and satisfy the risk prevention requirements, a number of self-disciplinary restrictive stipulations which may lead to administrative penalties in cases of violations are retained.
The above management approach features both delegation of powers and self-discipline and comes closer to the management concept under a market economy. It has clear self-disciplinary stipulations for relevant entities of cross-border guarantees, such as temporary suspension after defaults, verification of performance trends, restrictions on the use of funds, due diligence investigations, obligations of truthful statements and moral restrictions, and it sets out corresponding penalties so as to achieve the purpose of “ex-ante measures against gentlemen and ex-post measures against villains."
Q: Currently, China’s foreign exchange receipts and payments are still under pressure from net inflows. Do the Regulations make any policy arrangements for this?
A: With regard to the net inflow pressures on China’s foreign exchange receipts and payments, this reform has adopted differentiated institutional arrangements for different types of cross-border guarantees: the complex management formalities for external loans with domestic guarantees (creating external claims after performance of the guarantee) will be cancelled; proper standards and restrictions will be retained for domestic loans with overseas guarantees (generating external debts after the performance of guarantees) which may cause fund inflows.
Q: We have noticed that in 2009 the SAFE put forward the “Five Changes" with respect to the concept of and approaches to foreign exchange administration, and has taken the “Five Changes” as its work priority since the very beginning of this year. How is this effort reflected in this reform?
A: The introduction of the Regulations represents a crucial step in implementing the “Five Changes” in capital account management. Specifically, this reform has abolished the approval and verification of cross-border guarantees and has shifted work priority to the monitoring and analysis of cross-border capital flows, thus achieving the change from focusing on “approvals” to focusing on “monitoring and analysis.” While abolishing the quota verifications and approvals on a deal-by-deal basis, ex-post verifications of cross-border guarantee entities and behavior have been strengthened to realize the change from focusing on "ex-ante monitoring" to focusing on "ex-post management." The Regulations have weakened deal-by-deal compliance management for guarantee transaction behavior and have put more emphasis on management of domestic entities for guarantee transactions. While simplifying the standards for classifying the transaction entities, differentiated classified management is conducted for different types of entities. For example, management of banks is more liberalized than that of non-banking institutions, and management of large institutions is more lenient than that of small- and medium-sized institutions, thus achieving the transition from "behavior management" to "entity management." The qualification limitations in the ex-ante verifications for cross-border guarantees are canceled, the registration steps for certain types of guarantees are defined as a “procedural review,” and investigations of the violations are shifted to ex-post off-site verifications and foreign exchange inspections, thus achieving a change from “guilty until proven innocent” to “innocent until proven guilty.” Under the premise of significantly liberalizing cross-border guarantees, a “negative list” is proposed for fund use under the cross-border guarantees, thus achieving the change from a “positive list” to a “negative list.”
Q: The Regulations have been officially implemented for over two months; could you please tell us something about their implementation?
A: Since the official implementation of the Regulations on June 1, banks and enterprises have embraced this reform. Banks report the reform offers both challenges and opportunities, and Chinese enterprises have seen a remarkably shorter time for the handling of business with the local foreign exchange bureaus. Given the growth in business volume, the cross-border guarantee business has been operating smoothly. Among the external loans with domestic guarantees and domestic loans with overseas guarantees, the two types of cross-border guarantees that have been integrated into the registration management, the guarantee balance of the former is growing faster, with no abnormal growth in the performance of the cross-border guarantees.
Q: What measures will the SAFE take to deepen this reform during the next step?
A: During the next step, the SAFE will continue to pay close attention to market feedback and further satisfy policy appeals, promote investment and financing facilitation, and earnestly service the real economy. Meanwhile, cross-border guarantee statistical monitoring will be strengthened and off-site inspections and risk management will also be enhanced to lay a solid foundation for further deepening the reform of the foreign exchange administration system and for accelerating the convertibility of the RMB under the capital account.
(Reporter: Xu Zhiping)
(August 20, Financial News)
