China’s New Foreign Exchange Rules to Ease Cross-Border Transactions
- China’s new foreign exchange measures will ease financing controls on cross-border trade and investment activities to create a better business environment for domestic enterprises and overseas investors.
- The new measures took effect October 23, with the exception of the new online reporting system, which will commence January 1, 2020.
- The new measures introduce relaxations on foreign exchange control while extending the scope and application of existing pilot schemes.
On October 23, China’s State Administration of Foreign Exchange (SAFE) issued a notice Huifa  No.28. The new announcement covers 12 facilitation measures, which ease the controls surrounding cross-border trade and investment financing requirements and aims to provide a better business environment for domestic enterprises and overseas investors.
Most of the provisions of this article will take effect on the issuing date, except the new online foreign exchange reporting system for businesses engaged in the trade of goods, which will take effect from January 1, 2020. While some of the provisions will apply nationwide, many others will apply solely in the pilot area.
We highlight and break down the six measures for cross-border trade and cross-border investment in this article.
Cross-border investment financing
- Remove the restrictions on domestic equity investment of capital fund of foreign investment enterprises not engaging in investment activities
The announcement states that foreign investment enterprises that do not engage in investment activities are allowed to make domestic equity investment with capital fund on the premise of not violating the current special administrative measures for foreign investment access (2019 Negative List) and that the projects invested in China are verified and compliant.
Prior to these new rules foreign investment enterprises not engaging in investment activities could only make new equity investment in other enterprises with retained profit, which limited further investment to be made in China where the enterprise was short on cash or retained profit. The new rules therefore offer more flexibility in the investment structure for foreign investors.
- Expand the pilot scheme to facilitate foreign exchange of capital
Eligible enterprises in the pilot area can use capital fund, foreign debt, and funds raised by overseas listing for domestic payment without providing supporting documents to the bank to prove the authenticity of the transaction on case-by-case basis before the foreign exchange settlement. However, SAFE will more closely monitor the use of funds during and after this process.
The new rules reduce the processing time of transactions using the capital fund as it is no longer necessary to provide information before the settlement of the capital. This is particularly efficient for newly set up companies who are only financed by capital funds from the shareholder, and experience difficulty in obtaining supporting documents (such as invoices from suppliers) requested by the bank during the start-up period.
At present, this pilot scheme has been carried out in 12 free trade zones, and several provinces and cities, such as Fujian, Zhejiang, Jiangsu, Shenzhen. The reform will expand the scope of the pilot scheme to cover six new free trade zones established in 2019 and the whole jurisdiction of Shanghai.
- Ease the restrictions on the use of foreign exchange settlement of capital account
The new rules speed up the equity transactions between Chinese businesses and foreign investors. It also further simplifies the use efficiency of foreign exchange funds as deposit and reduces the capital occupation of foreign investors.
According to the announcement, restrictions placed upon the use of foreign exchange settlement in the domestic asset realization account will be removed. Now when the domestic equity transferor receives the consideration for the equity transfer of the foreign investor, it can directly handle the procedures of account opening, capital remittance, and settlement in the bank with the relevant business registration certificate.
There will also be an easing of restrictions surrounding the use of foreign investors’ deposit account. Foreign investors’ deposit fund can be used to make investment in China and make payments.
- Reform the registration of foreign loan
Non-bank debtors can now go directly to the bank to cancel their foreign debt registration, instead of dealing with SAFE, thereby reducing the overall time needed for foreign debt deregistration.
The case-by-case basis registration of non-financial enterprises’ foreign debts with SAFE will now be cancelled under the pilot scheme – this will apply on a trial basis in Hainan province and the Guangdong-Hong Kong-Macao Greater Bay Area. Non-financial enterprises within the pilot area can now register foreign debts up to twice their net assets at the local foreign exchange bureau. The non-financial enterprises can borrow the foreign debts within the registered amount and handle the procedures for remitting the funds with the bank directly, replacing the old rule of case-by-case registration with SAFE for each loan.
- Remove limits to the number of foreign exchange accounts opened for capital
Eligible enterprises may open multiple foreign exchange capital accounts, according to their actual business needs, but the number of accounts opened shall meet the requirements of prudential supervision
- Expand the pilot plan of domestic credit assets transfer to foreign countries
Under the new rules, the channels, types of domestic credit assets, and scope of persons able to participate in the overseas transfer will be expanded in the pilot area within the Hainan Province and the Guangdong-Hong Kong-Macao Greater Bay Area.Foreign investors will now be able to carry out cross-border transfers of non-performing assets and can use foreign capital to directly participate in China’s non-performing asset market – changes that will undoubtedly enrich the investment channel available to them.
Cross-border trade financing
- Facilitate foreign exchange receipts and payment for trade
The new rules implement a pilot scheme that facilitates foreign exchange receipt and payment for service trade. Banks can now handle the foreign exchange relating to the trade of goods and services for enterprises with good credit, according to three principles of “understanding customers”, “understanding business,” and “due diligence.”
In addition, the following measures will be implemented to facilitate the foreign exchange receipts and payment for goods trade:
- The verification of foreign exchange receipts and payments documents will be optimized;
- The registration of special foreign exchange refund business will be cancelled; and,
- The verification process of import payment of foreign exchange will be simplified.
These measures were previously piloted in Shanghai, Zhejiang, and Guangdong-Hong Kong-Macau Greater Bay Area, but now will be extended to all provinces in the country.
This reform will give banks more flexibility in terms of the administrative formalities relating to foreign exchange. However, under the new rules, banks will also focus on the authentication of the transaction and compliance requirements. Enterprises may now be under an even stricter scanner with initial transactions subject to more detailed investigation from the bank before a trusted relationship is built between the bank and the enterprises.
Regarding the scope of the pilot scheme, no specific cities were mentioned; instead, the application of the policy will depend on the actual needs of the locality to be decided and announced later by the government bureau.
- Simplify the receipt and payment of the cross-border e-commerce trade for small-to-micro enterprises
Small and micro cross-border e-commerce enterprises that handle the collection or payment of foreign exchange of trade of goods less than US$200,000 accumulated per year, are exempt from the registration of “list of enterprises engaged in foreign exchange trade receipt and expenditure.”
According to SAFE, it is expected that this policy will benefit more than 95 percent of cross-border e-commerce enterprise.
- Optimize the foreign exchange reporting method of trading businesses
The previous requirements to report to SAFE for foreign exchange transactions during the counseling period have now been removed. Business reports, such as trade credit and trade financing, can now be handled online through the foreign exchange monitoring system for trade of goods, without the need to report to the local foreign exchange bureau on site (except for certain special business). This rule will take effect January 1, 2020.
- Ease the opening of to-be-verified accounts for export earnings
Under the new rules, enterprises can decide whether to open a to-be-verified account for export earnings. If businesses choose not to open such an account, the income arising from trade in goods will be subject to bank review, and then be able to have direct access to the foreign exchange account. If the income declaration form of the to-be-verified account is required to be submitted to the foreign exchange bureau under the current rule, the enterprise may be exempted from this step in the future.
- Facilitate the registration of enterprise branches
When an enterprise branch registers, changes, or cancels their registration procedures with SAFE, only the original or duplicate of the Business License of the branch is needed.
- Allow contracted engineering enterprises to open overseas account for capital centralized management
The contracted engineering enterprises can manage and allocate the funds of different overseas engineering projects in a centralized way to facilitate the cash flow efficiency and develop in overseas markets. The overseas fund centralized management account shall comply with the laws and regulations of the country (or region) where the overseas account is located.