Foreign companies need to be familiar with the
newly revised foreign exchange regulations. China has undergone
fundamental changes in its currency with the rapid economic
development in both China and the international regime for the past
decade. In order to adapt to the current national and international
economic, financial and currency markets, the State Council has
adopted a revision of Foreign Exchange Regulations of the
People’s Republic of China (the “Regulations”) on
5 August 2008, which became effective on the same day.
Foreign exchange balance
According to the Regulations before revision, the
foreign exchange administration was focused on its outflow in order
for China to obtain more foreign exchange reserves.
However, due to the pressure arising from the large
size of China’s foreign exchange reserves, the revised
Regulations adopt the way of balance administration on foreign
exchanges. Hence, they tighten restrictions on foreign exchange
inflow and relax the approach to foreign exchange outflow.
The revised Regulations provide that China may take
necessary protective and restrictive measures relating to foreign
exchange balance in case there is any imbalance or national
economic crisis.
Foreign exchange incomes under revenue account items
According to the revised Regulations, foreign
exchange income of Chinese organisations and individuals may be
either remitted back to China or deposited overseas, subject to the
relevant conditions and terms as stipulated by State Administration
for Foreign Exchange (“SAFE”). This is contrary to the
Regulations before revision, which compulsorily required such
foreign exchange income to be remitted back to China.
In addition, the revised Regulations allow foreign
exchange income under revenue account items to be either retained
in such a foreign currency or converted into RMB, which reiterates
the rules provided for in the Notice on Retaining of Foreign
Exchange Income under Revenue Account Items by Chinese
Organisations issued by SAFE on 12 August 2007 (the
“Notice”). Before the issuance of the Notice, such
retaining was generally prohibited according to the Regulations
before revision.
It is not specifically reflected in the revised
Regulations that the payment and settlement procedures of foreign
exchange under revenue account items are being simplified. However,
SAFE’s specific rules promulgated recently have shown such
change.
Foreign exchange incomes under capital account items
The general rule that the obtaining or conversion
of foreign exchange income under capital account items shall be
subject to the approval of SAFE or its local counterparts, remains
unchanged.
In addition, according to the revised Regulations,
banks are allowed to directly grant overseas loans within their
approved business scope.
Moreover, the revised Regulations add a new rule,
which provides that other Chinese organisations that grant loans to
overseas enterprises shall handle relevant approval and
registration formalities with SAFE or its local counterparts. This
appears that Chinese organisations are allowed to grant overseas
loans. However, since it is a general rule, detailed rules shall be
awaited.
According to the revised Regulations, foreign
exchange under capital account items or their converted funds shall
be used for the approved purpose, and SAFE and its local
counterparts are entitled to carry out supervision and examination
for such purpose. On 29 August 2008, SAFE issued the Notice on
Several Operational Issues relating to the Improvement of
Administration on Payment and Settlement of Foreign Invested
Enterprises’ (“FIE”) Foreign Exchange Capital
Funds, with the aim to regulating the use of FIE’s foreign
exchange capital funds.
Overseas investment
The revised Regulations add a new rule, which
provides that Chinese organisations or individuals may carry out
direct overseas investments or invest in overseas securities,
subject to the approval and registration formalities with SAFE or
its local counterparts. This rule has been repeated in other SAFE
regulations (for example, SAFE Circular 75 and the Individual
Foreign Exchange Administration Measures and their implementation
details).
However, overseas direct investments by Chinese
individuals are still impracticable in practice due to the lack of
details on operational rules. We understand that SAFE is studying
such detail operational rules in order to practically open the door
for Chinese individuals’ overseas investments.
RMB exchange rate
According to the revised Regulations, China shall
adopt an administrated floating system on the basis of market
supply and demand to decide RMB exchange rate. Therefore, China
will link its RMB to major foreign currencies, rather than the U.S.
dollar solely.
SAFE is entitled to adjust the foreign exchange
market according to China’s monetary policy.
Monitoring and enforcement
In general, SAFE and its local counterparts are the
competent authorities in charge of overseeing and enforcing the
revised Regulations.
The revised Regulations bestow more and stronger
specific regulatory powers to SAFE for this purpose, which include
but is not limited to entering relevant business premises for
on-spot examination and/or evidence collection purpose,
interrogating relevant individuals and reviewing and copying
related transactional and financial documents.
In particular, the revised Regulations expressly
require that foreign exchange income and expense under revenue
account items shall have a genuine and legitimate transaction
basis. Hence, accordingly, the revised Regulations entitle SAFE and
its local counterparts to monitor and examine this.
The revised Regulations also provide for various
penalty measures for violation of the Regulations. These penalty
measures are more itemised than those before the revision, and
focus on both inflow and outflow of foreign exchange, rather than
emphasising particular on outflow as stipulated in the Regulations
before revision.
Conclusion
As the umbrella law on foreign exchange, the
revised Regulations reflect the current trend of China’s
monetary policies. However, since they provide only for general
rules and principles relating to foreign exchange, more detailed
rules on relevant issues shall be awaited following such revision,
even though some have already been promulgated, in order for the
Regulations to be implemented smoothly. Foreign investors intending
to make investment in China shall keep close eyes on foreign
exchange related policies and regulation in order to avoid any
regulatory risks.