SAFE’s new measures on optimising administration of foreign exchange to support foreign-related businesses

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Myles Seto               
Deacons, Hong Kong
myles.seto@deacons.com
 

Lynn Lin
Deacons, Hong Kong
lynn.lin@deacons.com

On 10 April 2020, China’s State Administration of Foreign Exchange (SAFE) released the Circular on Optimising Administration of Foreign Exchange to Support the Development of Foreign-related Businesses ('Circular'). Its measures came into effect that day, except for Measure 3 below which will become effective on 1 June 2020.

In the Circular, SAFE further introduces eight facilitation measures following on from the introduction of 12 cross-border trade and investment facilitation measures on 23 October 2019 and shortly after this year’s introduction of green channels for foreign exchange policy, to support the prevention and control of Covid-19 and increase of the macro-prudential adjustment parameter for full scale cross-border financing from one to 1.25. The Circular covers four measures for each of the two aspects, covering both capital account and current account items, namely, optimising the administration of foreign exchange businesses and improving foreign exchange services. The eight facilitation measures introduced are specified as follows:

1. Introducing nationwide reform for facilitation of capital account receipts and payments

Eligible enterprises using income under capital accounts such as capital funds, foreign debt and overseas listing for domestic payments are no longer required to provide banks with materials for proof of authenticity for each payment in advance. This measure had previously been implemented on a pilot basis in certain pilot regions in Guangdong, Beijing and Shanghai. Enterprises outside the pilot regions shall provide the banks with proof of authenticity case-by-case when using income under capital accounts to make domestic payments. Following this reform, the measure is extended nationwide. This measure will save enterprises time in preparing the relevant materials for proof and bank verification, facilitate the use of enterprises’ foreign exchange capital under capital accounts and enhance the operational efficiency of enterprises’ foreign exchange capital.

2. Cancelling registration requirement for special foreign exchange refund businesses

Enterprises classified as category A in the Directory of Enterprises for Foreign Exchange Receipts and Payments under Trade in Goods can handle a single foreign exchange refund in an amount up to US$50,000 directly with a financial institution without having to apply for prior registration with SAFE. That is, provided the interval between the refund date and the date of the original receipt or payment is more than 180 days or if the foreign exchange cannot be refunded via the original route due to special circumstances, but a note of ‘special foreign exchange refund’ is marked on the Report Form for foreign receipt and payment transaction. ‘Cancelling registration requirement for special foreign exchange refund’ was proposed in the 12 facilitation measures released by SAFE in 2019, which did not provide definition or specification. Prior to this reform, ‘special exchange refund’, took no consideration of the amount of a single refund. It could only be handled by banks after registration with SAFE. The background of the measure introduced by SAFE is mainly based on the fact that many small and medium-sized enterprises in China are affected by Covid-19 causing special foreign exchange refund, with a single special foreign exchange refund in an amount of up to US$50,000 representing a large proportion. Cancellation of ‘special foreign exchange refund’ registration requirement helps improve the efficiency of capital use of the affected enterprises and ease their cash flow for resuming work and operation.

3. Simplifying registration administration for certain capital account businesses

The powers to cancel registration of qualified onshore securities for offshore loans and offshore lending, which previously had to be handled at local SAFE branch, is delegated to banks under the jurisdiction of the local competent SAFE sub-bureau. The conditions for such a delegation are as follows: in relation to onshore securities for offshore loans, the repayment obligations under the offshore loans, which are secured by onshore securities given by non-financial enterprises, have already been discharged with no performance for the obligations under the onshore securities for offshore loans having been triggered; or, in the case of offshore lending, the term of the non-financial enterprise’s offshore lending is owed with the principal and interest of the offshore lending duly recovered. Handling by a local SAFE branch would still be necessary if the performance of securities obligations under the onshore securities for offshore loan is triggered and if the principal or interest of the offshore lending cannot be recovered when due. This measure will simplify the relevant cancellation of registration procedure, saving enterprises’ time and effort.

4. Relaxing requirements on purchasing foreign exchanges for repayment of domestic foreign exchange loans by exporters

Where an enterprise negotiates export documentary credit with a bank to borrow domestic foreign exchange loan, which is credited in the foreign exchange settlement account as current account item and the loan proceeds are converted into RMB according to the regulations, the enterprise shall, in principle, repay such loan with its foreign exchange fund or foreign exchange income received from exports. In the event of an enterprise being unable to receive foreign exchange from export when due and there are no other foreign exchange funds available to repay the loan, the lending bank may, in accordance with the principle of prudent business development, handle the formalities for the enterprise to purchase foreign exchange for repayment. Prior to this reform, where the loan proceeds of such domestic foreign exchange loans were converted into RMB, the purchase of foreign exchange for repayment was generally not allowed. In view of the delay in receiving foreign exchange by enterprises from their exports under the impact Covid-19, this measure can help such enterprises maintain a good credit record with the banks, enabling them to continue obtaining finance and also reduce banks’ risk on capital loss. Given China’s foreign exchange control and the potential risk of the foreign exchange loss, it remains to be seen whether the measures will be retained or tightened following the Covid-19 pandemic.

5. Facilitating the use of electronic documents for foreign exchange businesses

When qualified enterprises handle foreign exchange receipts and payments under trade in goods with qualified banks by submitting electronic documents, the requirements that enterprises should be classified as class A, and must have been established for two years are cancelled. Prior to this reform, the lifting of the aforesaid requirements are only applicable to enterprises in pilot free trade zones. The earlier release of the Circular of the State Administration of Foreign Exchange on Regulating the Review of Electronic Documents for Foreign Exchange Receipts and Payments for Trade in Goods clearly stipulates the statutory access requirements for both enterprises and banks to use electronic documents in handling foreign exchange receipts and payments for trade in goods. However, the access requirements for banks and enterprises in pilot-free trade zones have already been relaxed. At the same time, the requirements for banks to print and retain hard-copy documents when handling foreign exchange receipts and payments under trade in services, primary income and secondary income, as well as individual settlement and sale of foreign exchange business, has been abolished. These measures will enable business transactions to become electronic, thus improving their efficiency.

6. Optimising foreign exchange settlement by banks for cross-border e-commerce

Cross-border settlement for cross-border e-commerce operators are currently handled by payment institutions based on electronic transaction information ('Payment Institution Settlement Channel'). This measure adds a new bank settlement channel to support banks, based on electronic trading information. It will provide foreign exchange settlement, conversion and sale and relevant fund receipt and payment services for cross-border e-commerce market entities under certain conditions ('Bank Settlement Channel'). The measure explicitly supports the Bank Settlement Channel, so as to provide an alternative ‘support’ for cross-border e-commerce foreign exchange settlement and effectively promotes the development of cross-border e-commerce. The Bank Settlement Channel has already been mentioned in the Circular of the State Administration of Foreign Exchange on Issuing Measures for the Administration of the Foreign Exchange Business of Payment Institutions, which was released by SAFE on 29 April 2019 and became effective from that date. However, the Measures for the Administration of the Foreign Exchange Business of Payment Institutions as an annex under such circular mainly regulate the Payment Institution Settlement Channel, with the Bank Settlement Channel merely mentioned by way of ‘reference’ in the circular’s preamble.

7. Simplifying the endorsement formalities for business reviews

When auditing foreign exchange receipts and payments under current account items in accordance with relevant regulations, financial institutions may, in accordance with the requirements of internal control and actual business needs and under the principle of substantive compliance, independently decide whether or not to sign and endorse the amount and date of the foreign exchange receipt and payment on the original documents and affix their official company stamp/seal (known as ‘company chop’). However, material which has been examined should be kept for reference in accordance with current regulations. Prior to this reform, financial institutions had to examine relevant documents, sign and make the relevant endorsement on the original documents and seal. This measure will enhance banks’ autonomy to review documents and shorten processing time for bank business settlements.

8. Supporting banks in modernising financial services

The supported modernisation of financial services for banks includes the following: encouraging banks to evaluate scientifically the credit status of enterprises in various ways; differentiating and classifying enterprises’ difficulties in foreign-related receipt and payment due to objective uncontrollable factors; extending loans and simplifying procedures to medium, small and micro-sized foreign-related enterprises with good development prospects; making use of information from the digital foreign exchange administration platform to carry out compliance operation and business innovation; and to undertaking financial services for medium, small, and micro-sized foreign-related enterprises. This measure is committed to solving the financing difficulties of medium, small and micro-sized foreign related enterprises during the Covid-19 pandemic. At the same time, it also emphasises the use of SAFE’s digital foreign exchange administration platform for online financial services to meet their difficulty effectively in raising funds to resume work and production.

Conclusion

The Circular aims to simplify procedures for handling foreign exchange businesses, optimise foreign exchange business services, enhance cross-border trade and investment facilitation, actively support the resumption of work and production during the Covid-19 pandemic, as well as promoting high-quality development of the overseas-related economy. At the same time, the Circular promotes the digitalisation of businesses, reducing the use of paper documents (as described in Measures 5, 6 and 8), which is also conducive to reducing the risk of infection through paper documents during the Covid-19 pandemic. It is expected that SAFE will release a series of foreign exchange reform and facilitation policies to promote the development of the real economy.