By King & Wood’s Banking Regulation & Compliance Practice

A Brief Analysis on the New Administrative Rules on Foreign Exchanges

Background

On August 5, 2008, the Premier of the PRC State Council, Mr. Wen Jiabao, issued the State Council Order No. 532, which promulgates the newly revised “Administrative Rules of the People’s Republic of China on Foreign Exchanges” (hereinafter referred to as the “New Rules”). This document came into force upon its promulgation, and to a large extent changes the rules of the old foreign exchange supervision system. This tremendous change in the regulatory system is for the purpose of accommodating the rapid development of China’s economy and the material transformation in the international economic fields in recent years.

The New Rules amended the old “Administrative Rules of the People’s Republic of China on Foreign Exchanges” promulgated in 1996 (the “Old Rules”).For the purpose of accommodating the fundamental changes in the international balance of China, namely that the foreign exchange (“FX”) reserve of China is no longer short but is increasing too rapidly, the New Rules have adopted a balanced control on both inflow and outflow of FX, which may possibly lead to the conclusion that the conditions for the inflow of FX may be stricter than for the outflow.

The New Rules have also improved the measures for the supervision and management of FX, which, rather than a system based solely on the regulatory authorities, creates a regulatory system involving the regulatory authorities, the financial institutions engaging in FX businesses and the domestic entities engaging in FX transactions. In addition, the New Rules have emphasized supervision in the examination on the authenticity of the underlying transactions.

Furthermore, for the purpose of accommodating the enhancement of supervisions on cross-boarder funds flow and the implementation of the examination on the authenticity of the underlying transactions as required by the New Rules, the State Administration of Foreign Exchange (“SAFE”) promulgated on 2 July 2008 a Circular on Issues concerning Management of the Registration of the Foreign Debts under the Item of Corporate Trade in Goods (the “Circular”) before the promulgation of the New Rules, which provides measures to be carried out for the registration of foreign debts in the form of prepayment and deferred payment arrangements under the trade in goods. We understand that SAFE is aiming to reinforce the authenticity of trades by prescribing additional registration procedures to prepayment and deferred payment arrangements to furtherprevent the flow of hot money under the disguise of trade payments.

We set out below an introduction on the key features of the New Rules, the Circular and their respective relevant provisions. This Bulletin is for general guidance only.

Administration on FX under Current Accounts

  • Remittance back to China of proceeds in FX is no longer required

    The New Rules no longer require a domestic entity to remit its proceeds generated in FX back to China. Instead, it allows both domestic entities and domestic individuals to either keep their FX proceeds in a place out of China or remit the same back to China. The detailed conditions and terms for the reservation of proceeds out of China and for the remittance of proceeds back to China will be specified by the relevant governmental authorities.

  • Exchange of proceeds in FX into RMB is no longer required

    The New Rules do not restrict on international payment or remittance under current accounts, which further enhances the convenience of FX transactions under current accounts. Proceeds in FX are no longer required to be exchanged into RMB. Proceeds in FX may now be retained in FX or sold to financial institutions in exchange of RMB according the relevant rules.

Administration on FX under Capital Accounts

  • Broadening of the channels for capital flowing out of China     The New Rules simplify the administrative method on direct offshore investment. In this regard, instead of the mandatory approval for direct offshore investment, a registration approach is employed. The New Rules also add certain principles for financing in China by foreign entities, for investment on foreign securities and derivatives by domestic entities, and for loans provided by domestic entities to foreign entities. 
  • Revolution in the supervision method for supervising FX under capital accounts

    The New Rules abolish the old default rule that the FX proceeds under capital accounts shall be deposited into FX accounts maintained with the relevant designated FX bank. Instead, except for those FX that do not need to be approved, FX under capital accounts may be retained in FX or be exchanged into RMB upon the approval by the FX supervising authority. With regard to the purchase of FX under capital accounts, such FX may in principle be purchased after the relevant transaction documents are submitted to the relevant financial institution which sells FX.

  • Enhancement of supervision on the utilization of capital remitted into China.

    The New Rules adopt a measure to trace the utilization of foreign capital remitted into China which had not been seen in the old regulatory system. The New Rules require that the FX under capital accounts remitted into China or the RMB proceeds in exchange of such FX shall be used according to the purpose approved by the relevant regulatory authorities. The FX supervising authority is entitled to supervise and examine the utilization of the above mentioned FX and RMB, and on the accounts in which the above FX or RMB are deposited.

Supervision and Administration on FX Transactions and FX Market

  • Power of regulatory authorities has been specified and financial institutions assume the obligation to assist in regulatory supervision

 With regard to the supervision and administration on FX transactions, the New Rules on the one  hand specifically provide that the FX supervising authority is entitled to the supervision and examination on FX transactions and on the other hand establish a system under which financial institutions engaging in FX businesses shall assist in the regulatory supervision by certain measures taken through FX accounts.

  • Permissibility of non-financial institutions to engage in FX businesses

 

With regard to the supervision and administration on FX market, the New Rules ease the requirement on subjects allowed to participate in inter-bank transactions, and permit an entity other than a financial institution to engage in such inter-bank market transaction according to the relevant rules issued by the FX supervising authority as long as such an entity meet the requirements set out by the FX supervising authority.
 

Liabilities and Legal Consequences

The New Rules reduce the punishment scale of illegal outflow of FX, and create punishment on illegal inflow of FX, which aims to balance the control on both inflow and outflow of FX. Meanwhile, the New Rules focus supervision on the authenticity of the underlying transactions. As long as the underlying transaction based on which a FX transaction is to be carried out is authentic, no regulatory punishment would generally be imposed on such a FX transaction. To accommodate the assistance by financial institutions in regulatory supervision, the New Rules increase the punishment level of the punishment for financial institutions and create punishment on the liable personnel in the financial institutions.

Foreign Debt Registration Measures under Trade in Goods

In relation to the enhancement of supervisions on cross-boarder funds flow and the examination on the authenticity of the underlying transactions as required by the New Rules, the Circular issued before the New Rules has already to some extent implemented part of the relevant rules set out in the New Rules.

  • Application

    The registration requirements under the Circular apply generally to enterprises established under PRC law and the individual foreign traders within the PRC, no matter whether the enterprise is registered in any special area, whether the goods in question will be actually in or out of the PRC Customs or whether relevant trade proceeds would be subject to the cross examination by SAFE and the relevant Customs.

  • Registration

    Corporations need to log on the SAFE’s trade credit registration management system and complete the online registration on a case by case basis. No hardcopy documents need to be submitted for such online registration. With regard to the registration for prepayments, where there is a prepayment clause in the export contract, the PRC exporter shall complete the prepayment registration within 15 working days starting from the execution date thereof and complete the prepayment withdrawal registration within 15 working days upon the actual receipt of such prepayment. With regard to the registration for deferred payments (Apply from October 1, 2008), the PRC importer shall, within 15 working days upon either the execution date of an import contract containing a deferred payment clause or the issuance date of the Custom declaration of the importation of goods, the payment in connection with which will not due in 90 days, complete the deferred payment registration, and shall complete the cancellation registration within 15 working days after the registered deferred payment is actually made.

  • Noncompliance

    It’s noteworthy that to make clear the legal consequences for noncompliance with foreign debt management under the Circular, SAFE issued separately a Circular on Issues concerning Penalties on Violating Management of the Registration of the Foreign Debt under the Item of Corporate Trade in Goods (Huifa[2008]No. 34), providing in detail the liabilities of corporations and banks for breaches of the Circular.

Conclusion

The New Rules adopt the experience of supervision gained through the recent revolution and opening of China, and reserves room for the next steps which may make trades and investments in China more convenient, create a more complete supervising system, and grant a safer business environment. In the meanwhile, the Circular implements certain rules of the New Rules on the supervision of cross-border funds flow and the examination on the authenticity of the underlying transactions, which introduces new compliance requirements for adopting prepayment and/or deferred payment arrangements by the PRC importer and/or exporter. Considering that the relevant systems are of their initial launching, it’s foreseeable that both the management measures and the systems would be fine-tuned over time.