PRC foreign exchange administration regulations revised

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.