The State Administration of Foreign Exchange (“SAFE”) and the People’s Bank of China (“PBOC”) issued new rules in relation to the centralized operation and administration of funds in Renminbi and foreign currencies of multinational companies (groups). The National Development and Reform Commission (“NDRC”) facilitated the administrative reform of the filing and registration system for the issuance of foreign debts by enterprises. PBOC permitted foreign central banks (monetary authorities) and other official reserve management agencies, international financial institutions and sovereign wealth funds (collectively, "Overseas Central Banking Institutions") to directly enter China’s interbank foreign exchange market.
1. SAFE and PBOC issued new rules adjusting the centralized operation and administration of funds in Renminbi and foreign currencies of multinational companies (groups)
In order to further facilitate trade and investment and serve the real economy, SAFE issued the revised Administrative Provisions on the Centralized Operation of Foreign Exchange Funds of Multinational Companies (Hui Fa [2015] No. 36) (“SAFE Circular No. 36”) on 5 August 2015. On 5 September 2015, PBOC issued the Circular on Further Facilitating Multinational Corporation Groups to Develop Cross-border Two-way Renminbi Capital Pool Business (Yin Fa [2015] No. 279) (“PBOC Circular No. 279”), which adjusts the previous requirements regarding the cross-border two-way Renminbi capital pool and further allows multinational corporation groups to develop cross-border two-way Renminbi capital pool businesses.
1.1 Centralized operation and administration of foreign exchange funds of multinational companies
(1) Background
Early in 2010, the People’s Government of Guangdong Province expressed its intent to support member corporations of multinational corporation groups to develop the centralized operation of foreign exchange funds.[1] At the central government level, the rules on the centralized operation and administration of foreign exchange funds by multinational corporations were first introduced in the Reply regarding the Pilot for Centralized Operation and Administration of Foreign Exchange Funds by Headquarters of Multinational Corporations (Hui Fu [2012] No. 167) (“Reply on Pilot”) issued by the SAFE to the SAFE Shanghai Branch and the Beijing Administration Department of Foreign Exchange on 12 September 2012. In such Reply on Pilot, the SAFE agreed, in principle, to choose 13 companies in Shanghai and Beijing to launch a pilot reform on the centralized operation and administration of foreign exchange funds by the headquarters of multinational corporations. The main business items of the pilot include: pilot for special foreign exchange accounts, pilot for foreign exchange administration for current accounts and pilot for foreign exchange administration for capital accounts.
Based on its experience with such pilots, the SAFE issued the Administrative Provisions on the Centralized Operation of Foreign Exchange Funds of Multinational Companies (for Trial Implementation) (the “Trial Provisions”) in April 2014. The Trial Provisions formally set out the requirements for applying for the centralized operation and administration of foreign funds and basically followed SAFE’s policies in the Reply on Pilot. Such Trial Provisions also specified the materials to be filed with SAFE and its branches and the filing procedures, the detailed rules on the management of domestic and international primary accounts for foreign exchange funds, as well as the detailed rules on the management of central receipts and payments of foreign exchange and the netting and settlement business.
(2) Legal Review
The SAFE Circular No. 36 basically follows the previous management approach, with slight adjustments to the previous provisions, including the following highlights:
The SAFE Circular No. 36 extends the definition of multinational corporations on the basis of the Trial Provisions, by deleting the previous exclusion of financial institutions other than financial companies from the member corporations. The China Foreign Exchange, an official journal sponsored by SAFE, pointed out in an interpretation of the SAFE Circular No. 36[2] that such deletion meant that non-banking financial institutions may also apply for the centralized administration of foreign exchange funds.
The SAFE Circular No. 36 changes the previous concept of simply allocating the approved quota of foreign debts among member corporations of multinational corporations in order to borrow foreign debts, initiates a pilot program for “self-regulation of the proportion of foreign debts”, and begins to calculate the total scale of foreign debts of a multinational corporation by multiplying its net assets by its financial leverage ratio and macro-prudential adjustment parameters. The SAFE Circular No. 36 also clearly specifies that member corporations with the same amount of total investment and registered capital may be counted in the calculation of centralized foreign debt quota by using its net assets as a calculation factor. This measure will to a certain extent break through the barrier existing for years that a domestic enterprise with no foreign debt quota may not incur foreign debts.
1.2 Centralized operation and administration of Renminbi capital by multinational corporation groups
(1) Background
In December 2013, PBOC permitted corporations in the China (Shanghai) Pilot Free Trade Zone to, according to their own business needs, develop a two-way Renminbi capital pool business within their groups and offer the centralized receipt and payment business under their current accounts for their domestic and overseas affiliated companies. On 11 June 2014, PBOC clearly permitted multinational corporation groups to conduct centralized operations of the cross-border Renminbi capital business in accordance with relevant regulations issued by PBOC.
On 1 November 2014, PBOC issued detailed guidelines for the centralized operation of the cross-border Renminbi capital business carried out by multinational corporation groups, clearly establishing the eligibility for capital pool leaders of multinational corporation groups to participate in the cross-border two-way Renminbi capital pool business and requiring the capital pool leaders to enter into service agreements with the local settlement banks and file records with branches of PBOC at or above the level of sub-provincial cities. PBOC managed this business by setting up a cap, which means that the cap on net inflow of cross-border Renminbi capital equals the owner’s interests appropriated for pooling multiplied by the macro-prudential policy parameter. With respect to the centralized receipt and payment of cross-border Renminbi capital in current accounts, multinational corporation groups may select the capital pool leader or other member corporations to open Renminbi-denominated bank settlement accounts with multiple banks located in their places of incorporation.
(2) Legal Review
The PBOC Circular No. 279 also makes slight adjustments to the previous provisions. By liberalizing the restrictions on the duration of operations and operating revenue in the previous year of member corporations of multinational corporation groups, the PBOC Circular No. 279 lowers the barriers for access to the cross-border two-way Renminbi capital pool business. By raising the macro-prudential policy parameter used to calculate the cap on the net inflow of cross-border Renminbi capital to five times the original amount, it also expands the quota for net inflow into the capital pool.
1.3 Next Step
In the new provisions on the centralized operation and administration of funds in local and foreign currencies of multinational companies (groups), there are still issues to be clarified and resolved with other competent authorities. For example, the SAFE Circular No. 36 mentions that the funds generated from the foreign exchange settlement of foreign debts of multinational corporations may be lawfully used for repaying Renminbi loans or equity investments, but no detailed provisions are included in the circular. Therefore, it remains unknown to what extent the SAFE Circular No. 36 will adjust the restrictions on the use of foreign debt funds under the Administrative Measures for Foreign Debt Registration. Furthermore, according to the provisions on the pilot program for “self-regulation of the proportion of foreign debts”, theoretically, a corporation with no quota for foreign debt may directly borrow international commercial loans with a term of more than one year without approval by the NDRC; the position of the NDRC towards this issue, however, remains unclear.
2. Reform of administration on foreign debt issuance by enterprises with a record-filing system
On 14 September 2015, the NDRC issued the Circular of the National Development and Reform Commission on Promoting the Reform of Administration on Foreign Debt Issuance by Enterprises with a Record-filing system (Fa Gai Wai Zi [2015] No. 2044) (the “Circular on Foreign Debt Record-filing”), abolishing the approval system for the quota for foreign debt issuance by enterprises and initiating an innovative approach for the administration of foreign debts by adopting a record-filing system. According to the Circular on Foreign Debt Record-filing, foreign debts subject to administration based on the record-filing system include debt instruments with a maturity of one or more years issued abroad by domestic enterprises or the foreign enterprises or branches controlled by them, denominated in Renminbi or a foreign currency, under which the principal amount and interest should be paid as agreed (such as, bonds issued abroad as well as medium and long-term international commercial loans).
2.1 Background
Before the Circular on Foreign Debt Record-filing was issued, the NDRC, the PBOC and the SAFE basically managed foreign debts issued by domestic enterprises by classifying them based on the nature of the domestic enterprise, the maturity of the debt, the currency (local or foreign currency), and the type of instrument. Among the authorities, the NDRC possessed relatively expansive administrative functions, including prior review and approval, in relation to various types of foreign debts issued abroad by domestic enterprises.
Prior to the promulgation of the Circular on Foreign Debt Record-filing, the issuance of debt instruments abroad by foreign enterprises or branches controlled by domestic enterprises was nearly unregulated in China (except where a security arrangement for the debt was provided by another domestic entity or the funds raised through the debt were directly or indirectly transferred back to China for use).
2.2 Legal Review
The Circular on Foreign Debt Record-filing, for the first time, includes in the uniform administration, the issuance of foreign debts abroad, denominated in any currency. Also, the Circular on Foreign Debt Record-filing expands the scope of administration to apply to foreign enterprises or branches controlled by domestic enterprises, indicating China’s decision to increase the regulation of debt issuance by enterprises.
The major change in the Circular on Foreign Debt Record-filing is the change of the previous approval system to a record-filing system for administration on the quota for foreign debt issuance by enterprises, under which enterprises must, before issuing foreign debt, file records with the NDRC and submit reports on each issuance to the NDRC after the completion of each issuance. The Circular on Foreign Debt Record-filing also follows the NDRC’s policy for segmented administration on medium and long-term international commercial loans implemented on a trial basis in certain provinces and municipalities since 2014. Under such policy, the development and reform commissions of Shanghai, Tianjin and other municipalities may, within the annual authorized quota, approve applications for borrowing medium and long-term international commercial loans submitted by enterprises within their jurisdiction. Such pilot provinces and municipalities also issued interim measures. After the issuance of the Circular on Foreign Debt Record-filing, the development and reform commissions of such pilot provinces and municipalities will, on the basis of the previous segmented administration, accept applications for record-filing submitted by enterprises and financial institutions within their jurisdictions.
In addition, the Circular on Foreign Debt Record-filing also provides that the NDRC will control the scale of foreign debts issued by enterprises, and the NDRC will, after accepting applications for record-filing, issue the Certificate on Record-filing of Foreign Debts Issued by Enterprises within the quota for total scale of foreign debts, by which issuers of foreign debts may deal with relevant formalities for the outflow and inflow of foreign debt funds in accordance with the relevant regulations. When the total scale of foreign debt exceeds the quota, the NDRC will make a public announcement and will cease accepting any applications for record-filing.
2.3 Next Step
The Circular on Foreign Debt Record-filing is applicable to a wide range of debt issuers. According to the consultation with the NDRC, the term “domestic enterprises” may likely include foreign-funded enterprises, in respect of which the NDRC previously exerted few administrative functions. If this is the case, the Circular on Foreign Debt Record-filing will result in more administrative costs for foreign-funded enterprises to borrow medium and long-term international commercial loans.
Even though the Circular on Foreign Debt Record-filing has changed the approval system to a prior record-filing system for quota administration and it also emphases that it is important to “prevent exerting the approval function in the disguised form of record-filing”, record-filing is still a prior procedure for issuing foreign debts and the issuance of the certificate on record-filing is subject to the total scale of foreign debts. Therefore, enterprises may still feel like “applying for an approval” when completing the record-filing.
3. PBOC Permits Overseas Central Banking Institutions to enter China’s interbank foreign exchange market
To allow Overseas Central Banking Institutions to lawfully participate in transactions in China’s interbank foreign exchange market, PBOC issued a circular permitting the Overseas Central Banking Institutions to enter China’s interbank foreign exchange market (the “Circular No. 31”) on 30 September 2015.
3.1 Background
On 29 November 1996, PBOC issued the Interim Provisions on the Administration of Interbank Foreign Exchange Market, under which only domestic financial institutions, including banks, non-banking financial institutions and foreign-funded financial institutions, which have obtained the SAFE’s approval for foreign exchange business, may conduct transactions between Renminbi and foreign currencies through the China Foreign Exchange Trading System.
To promote the opening of China’s foreign exchange market, PBOC issued Circular No. 31 on 30 September 2015, permitting Overseas Central Banking Institutions to enter China’s interbank foreign exchange market.
3.2 Legal Review
Overseas Central Banking Institutions may enter China’s interbank foreign exchange market by one or more of the following ways: (i) entrusting PBOC as agent; (ii) entrusting a member of China’s interbank foreign exchange market as agent; or (iii) directly becoming a member of China’s interbank foreign exchange market. Like domestic financial institutions, Overseas Central Banking Institutions only need to complete the record-filing with the China Foreign Exchange Trading System in order to conduct business on China’s interbank foreign exchange market.
The scope of business of Overseas Central Banking Institutions includes various types of foreign exchange transactions, such as spot trades, forwards, swaps and options, which may be conducted by way of price inquiry or price-matching and are not subject to any limit on quota.
3.3 Next Step
It is worth watching how PBOC will further open China’s interbank foreign exchange market for participation by overseas financial institutions.
1.See Several Opinions of the People’s Government of Guangdong Province on Further Promoting Introduction of Foreign Investment (Yue Fu [2010] No. 117).
2.The China Foreign Exchange, 2015, Issue 19.