SHANGHAI – On February 28, the Shanghai State Administration of Foreign Exchange (Shanghai SAFE) issued the “ Notice Concerning Support for the Implementation of Foreign Exchange Administration in the China (Shanghai) Pilot Free Trade Zone” (Shanghai Huifa  No. 26, hereinafter referred to as the “Notice”). The Notice aims to simplify the process of foreign direct investment (FDI) and facilitates the management of capital accounts in the Shanghai free trade zone (FTZ) – a 28.78 square kilometer free-trade zone launched in 2013.
These reform measures move China one step closer to the liberalization of foreign exchange capital accounts and carry great importance for foreign investors with an eye on the Chinese market.
The Notice delegates the foreign exchange registration of FDI to banks registered or located within the Shanghai FTZ. Foreign investments outsides of the FTZ must still complete the registration of foreign exchange with the relevant local foreign exchange bureaus, which usually takes more time and effort.
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Under the new Notice, foreign invested enterprises (FIEs) registered in the FTZ are now allowed to make foreign exchange capital account settlement at their own discretion. The measure significantly simplifies the settlement procedure and increases the efficiency of investing and trading activities, as well as enables FIEs in the FTZ to better manage and avoid foreign exchange risks.
Currently, companies outside of Shanghai FTZ can only make foreign exchange settlements with regard to “actual needs” as determined by SAFE, and have to go through a tedious procedure on a case-by-case basis to clarify these “actual needs.”
FIEs in the FTZ may now open corresponding RMB special deposit accounts to hold RMB funds obtained from foreign exchange settlements. These RMB funds may be used to make payments for real transactions. However, the RMB funds are still not allowed to be used for any of the following purposes:
- Directly or indirectly used for the expenditures forbidden by the laws and regulations or out of the enterprise’s business scope;
- Directly or indirectly used for securities investments unless otherwise specified;
- Directly or indirectly used to make RMB entrusted loans (unless permitted in the business scope), repay inter-company loans and make repayment of RMB loans which have been lent to third parties;
- Used to purchase non-self-use real estate (excluding foreign invested real estate enterprises).
Furthermore, the Notice relaxes the restrictions on overseas lending provided by enterprises in the FTZ. The maximum loan size is now increased from 30 percent to 50 percent of the owner’s equity. It also removes the SAFE preliminary administrative examination requirement with regard to collateral offers made to overseas entities and the payment of relevant fees.
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The notice also allows domestic financial leasing businesses to accept rent in foreign currencies and does away with upfront examinations by the foreign exchange bureau on each financial leasing transaction.
To strengthen statistical monitoring and effectively guard against foreign exchange risks, the Notice requires banks and other enterprises to submit their balance of overseas payments, statistical reports, domestic fund transfers and foreign exchange settlement data to SAFE. These banks and enterprises must also report any abnormal or suspicious transactions and take active measures to prevent illegal cross-border capital flows.
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