The State Administration of Foreign Exchange (SAFE) has recently issued the Circular of the State Administration of Foreign Exchange on Further Advancing Foreign Exchange Administration Reform to Enhance Authenticity and Compliance Reviews (Huifa No. 3 [2017]) (hereinafter referred to as Circular). The official of the SAFE has answered press questions on relevant issues.
I. What are the background and logic behind introducing the Circular?
A: For a long time, the SAFE has closely followed the work plans of the CPC Central Committee and the State Council, with a focus on accelerating administration streamlining and power delegation, transforming government functions, breaking new grounds in the reform, reducing institutional transaction costs and promoting trade and investment facilitation. Meanwhile, it has been committed to monitoring and early warning of cross-border capital flows, imposing stringent requirements on authenticity and compliance reviews, maintaining a tough stance on foreign exchange irregularities, and safeguarding the healthy and orderly foreign exchange markets to serve the development of the real economy. The Circular will continue with this logic: first, efforts will be made to systematically advance the reform in key areas, especially the liberalization of the domestic foreign exchange markets, in a bid to promote trade and investment facilitation; second, the capital flow management system will be built and refined under the macro-prudential management framework. Banks and enterprises will be required to observe the existing provisions on foreign exchange administration and make sure transactions are authentic and comply with relevant regulations. The bottom line against risks must be adhered to under the overall principle of reform and opening up to safeguard the order of the foreign exchange markets and guard against cross-border capital flow risks. The cross-border receipts, payments and exchanges that have authentic backgrounds and comply with relevant regulations will not be affected.
II. How will the market benefit from foreign exchange settlements for domestic foreign exchange loans for exports under trade in goods? What attention should be paid?
A: Allowing foreign exchange settlements for domestic foreign exchange loans for exports under trade in goods on the premise of controllable risks will be favorable for addressing difficult and costly financing facing some small and medium-sized importers and exporters and for the development of the real economy. Foreign exchange funds that could be settled include outward documentary bills and export bill discounts under L/C and collection, export commercial invoice discounts, export factoring, forfeiting, order financing, agreed financing, overseas agency payments for exports, packing loans and other domestic foreign exchange loans for exports under trade in goods. To avoid currency mismatches between enterprises and banks, and reduce the impact on the monetary policy from foreign exchange settlements of domestic foreign exchange loans, domestic institutions will be required to use foreign exchange proceeds from exports of goods to repay the domestic foreign exchange loans under which foreign exchange has been settled into RMB. In principle, they are not allowed to make payments through buying foreign exchange, in order to maintain an equilibrium between aggregate supply and demand in the foreign exchange markets.
III. What are the major considerations for allowing funds for overseas loans under domestic guarantees to be transferred back for domestic use?
A: Since the macro-prudential management policy for full-scale cross-border financing was implemented in 2016, Chinese enterprises have been allowed to borrow external debt in proportion to their net assets. Allowing funds for overseas loans under domestic guarantees to be transferred back as external debt for domestic use under the macro-prudential management framework will be favorable for facilitating cross-border investment and financing by enterprises and enable them to ease the difficulties to raise funds, reduce the heavy cost of financing and serve the real economy by using the resources of both domestic and foreign markets. In practice, the enterprises should simply handle the external debt registration in accordance with the existing regulations on external debt management. Moreover, funds for overseas loans under domestic guarantees could also be transferred back for domestic use through equity participation according to relevant regulations.
IV. What new progress has been achieved in supporting centralized operation and management of foreign exchange of multinationals?
A: According to the Regulations on the Centralized Operation and Management of the Foreign Exchange Funds of MNCs (Huifa No. 36 [2015]) issued in 2015, "the deposits attracted by domestic banks through the international foreign exchange master account can be used in China within 50% of the balance of the daily average deposits for the previous six months; over 50% of the deposits attracted through the international foreign exchange master account can be used domestically provided that the quota for outstanding short-term external debt have been used." In practice, the models and paths of domestic use of deposits are based on banks' own operations. The adjustment of the proportion of 50% into 100% this time and the provision that funds for domestic use are not included in the quota for outstanding short-term external debt of banks are for the purposes of motivating banks' initiatives to optimize the functions of the international foreign exchange master account and diversify the channels to use funds.
V. What are the major considerations for allowing overseas institutions in pilot free trade zones to go through the procedures of foreign exchange settlements through the non-resident account?
A: Building pilot free trade zones is a significant move adopted by the CPC Central Committee and the State Council to deepen reform and opening up under new circumstances. The SAFE has been active in supporting and implementing the measure. According to the Circular of the State Administration of Foreign Exchange on Management of Non-resident Accounts of Overseas Institutions (Huifa No. 29 [2009]), without approval from the SAFE branch and foreign exchange administration department in places of registration, overseas institutions are forbidden from going through foreign exchange settlements of funds in their non-resident accounts directly or in disguise. To seek the experience in monitoring offshore accounts and make further use of the pilot free trade zones in deepening reform and opening up, the Circular allows settlements of foreign exchange funds in the non-resident account (NRA) opened with the banks in the pilot free trade zones. Where the funds are remitted for domestic use after the foreign exchange settlement, the valid commercial documents and vouchers of domestic institutions and individuals concerned will first be reviewed in accordance with the regulations with regard to cross-border transactions and the balance of payments declaration will be made as required. Moreover, the SAFE made clear in 2015 that overseas institutions could engage in spot foreign exchange settlement and sales in accordance with relevant regulations, and the banks registered in the pilot free trade zones could handle RMB and foreign exchange derivatives transactions for them, while allowing foreign exchange settlements in the non-resident account of an overseas institution in the free trade zones could boost the above innovative measures to play their roles.
VI. Why does the Circular stress again that "enterprises shall go through the procedures of foreign exchange receipts and payments under trade in the principle that 'whoever exports shall receive foreign exchange, and whoever imports shall make payments", and are required to undergo the procedures for foreign exchange receipts in time?
A: In accordance with Article 14 of the Guidance on Foreign Exchange Administration under Trade in Goods and Article 2 of the Detailed Rules on the Implementation of the Guidance on Foreign Exchange Administration under Trade in Goods, enterprises shall go through the procedures of foreign exchange receipts and payments under trade in the principle that 'whoever exports shall receive foreign exchange, and whoever imports shall make payments", and collect payments on time and in full as agreed upon in the contracts in export business. In the case of foreign trade agency, the agent shall be responsible for foreign exchange receipts and payments. Where the entity that handles foreign exchange receipts and payments in line with regulations is inconsistent with the importer/exporter, the subject alteration procedures shall be gone through with the local foreign exchange authority. Recently, the SAFE has found from its monitoring and verification that a few enterprises do not collect foreign exchange or collect less foreign exchange than they should, and the foreign trade declarer is inconsistent with the subject engaged in foreign exchange receipts and payments, which have interrupted the order of foreign exchange receipts and payments. Given this, the Circular reiterates the above requirements, warns risks and stresses foreign exchange business should be authentic and comply with regulations, in a bid to further regulate the order in the foreign exchange markets and serve the sustained and healthy economic development.
VII. Why are domestic institutions required to report information on the overseas deposits of the foreign exchange receipts under the current account?
A: According to the Circular of the SAFE on Printing and Distributing the Regulations on Foreign Exchange Administration for Trade in Goods (Huifa No. 38 [2012]), and the Circular of the SAFE on Printing and Distributing the Regulations on Foreign Exchange Administration for Trade in Services (Huifa No. 30 [2013]), domestic institutions are required to go through the opening registration or verification procedures for the overseas foreign exchange account with the foreign exchange authority in advance if they want to deposit overseas the foreign exchange receipts generated by trade in goods and trade in services, and timely report the information on the receipts and payments in the overseas foreign exchange account for the foreign exchange authority to conduct off-site monitoring. But the monitoring and verification revealed that individual institutions have failed to go through relevant registration and filing procedures or report information as required for various reasons. To understand and obtain the information on foreign exchange receipts under the current account, collect the data on foreign exchange receipts deposited overseas, standardize data reporting, and refine the management of foreign exchange receipts deposited overseas, the Circular requires that any domestic institution who fails to timely report their overseas accounts and the receipts and payments in the account should actively report the accurate and complete information to the local foreign exchange authority, or have them recorded into the system within one month after the Circular is released, so that relevant information could be obtained in an all-round way. Any domestic institution who fails to go through registration procedures or report information will be punished by the foreign exchange authority in accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration.
VIII. What refinements have been made in the Circular to the management of outward remittances of the profits of domestic institutions?
A: Outward remittances of the profits from direct investments should be recorded under the current account. Since the current account is convertible in China, a domestic institution only needs to follow procedures to present evidencing materials and can complete the procedures of outward remittances directly with the bank without any constraints, provided that the profits are authentic and in compliance with regulations. Pursuant to the Company Law, the Circular further clarifies that domestic institutions should make up for the losses incurred in previous years before remitting the profits overseas, and reiterates the requirement on document reviews for remitting outward the profits in the amount above the equivalent of USD 50,000 (exclusive), and does not require additional new review materials to be submitted. For the outward remittances of the profits in the amount below the equivalent of USD 50,000 (inclusive), the Circular of the SAFE on Printing and Distributing the Regulations on Foreign Exchange Administration for Trade in Services (Huifa No. 30 [2013]) shall continue to be followed, and banks may skip reviewing transaction documents in principle, but shall require domestic institutions and individuals to present transaction documents for reviews in case that the nature of funds is uncertain. Banks shall continue to refine the authenticity and compliance reviews with regard to the outward remittances of the profits of domestic institutions in accordance with the three business operation principles, which is in line with international practices.
IX. What policy adjustments have been made with regard to ODI management?
A: The SAFE has always been supportive to ODI that is authentic and rational. It has been committed to administration streamlining and power delegation with regard to ODI policies in recent years, shifting frequent reviews and verification to registration and filing, and adopted consistent and stable foreign exchange administration policies for ODI. Without changing the regulatory orientation for ODI, the Circular requires domestic institutions to explain to banks the sources and purposes (use plan) of the investment funds, and present to banks the resolutions of the board of directors (or of the partners), contracts and other authenticity evidencing materials, for the purposes of promoting sustained and healthy development of China's ODI to seek mutual benefits and common development through enhancing authenticity and compliance reviews. The authenticity materials could be the resolutions of the board of directors (or of the partners), contracts, or financial statements (with the sources of funds explained), and the fund use plan (with the purposes of funds described).
X. What are the major considerations for managing full-scale overseas loans in domestic and foreign currencies?
A: As the impact of the cross-border flows of RMB and foreign currencies on the balance of payments are the same in nature, the People's Bank of China (PBC) and the SAFE have long been committed to refining the integrated management of cross-border capital in domestic and foreign currencies. In April 2016, the PBC issued the Circular on Implementing Nationwide the Macro-prudential Management of Full-scale Cross-border Financing (Yinfa No. 132 [2016]) to roll out the pilot program of integrated management of full-scale cross-border financing in domestic and foreign currencies to financial institutions and enterprises across the country, in a bid to diversify the financing channels of domestic market players, help reduce financing cost and serve and support the development of the real economy. According to the Circular, the integrated macro-prudential management will be adopted for overseas loans in domestic and foreign currencies of domestic enterprises, which is for the purposes of building and refining the capital flow management system under the macro-prudential management framework, promoting the two-way balance of cross-border capital flows in domestic and foreign currencies, and strengthening and intensifying macro control. This Circular shall prevail in case of inconsistency between other existing provisions on foreign exchange administration and this Circular in the proportion of the owner's equity.
