China Foreign Exchange Administration Policy Express

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1 China Forex China Foreign Exchange Administration Policy Express With the gradual deepening of reforms on China s foreign exchange administration system, the State Administration of Foreign Exchange (SAFE) has introduced a series of policies to create a favorable environment for trade and investment. J.P. Morgan has partnered with China Forex Magazine to launch this newsletter, which features dialogues with policy makers on the most recent hotspot issues. It is aimed at helping corporates stay current on the development and trends of foreign exchange administration, and better understand the background and practices of these policies. J.P. Morgan, with our long-standing commitment to the China market, is dedicated to providing first-class services to our clients. This publication aims to provide you with timely, comprehensive and insightful interpretation of China's foreign exchange administration policies. We trust it will help you better navigate the constantly evolving regulatory environment in China, and ultimately deliver more efficient treasury management strategies and solutions. Michael Nelson, Managing Director and Head of Corporate Sales, China, J.P. Morgan China has been pushing forward the reform of foreign exchange management aggressively, releasing a wide range of policy measures recently to further facilitate trade and investment. The deepening reform requires banks and corporates to fully understand the changing regulations, and ensure effective management and practice of foreign exchange issues. China Forex Magazine is the only professional magazine specialized in China foreign exchange management regulations. We trust that China Forex, functioning as a bridge between regulators and corporates/banks, can be a useful tool to banks and businesses in legitimating operations and ensuring regulatory compliance. Rong Rong, Editor-in-Chief, China Forex Magazine Background China s State Administration of Foreign Exchange (SAFE) recently released the Measures for Foreign Exchange Administration in Special Customs Supervision Zones (HUI FA [2013] No. 15) and a Circular on Improving Foreign Exchange Control over Current Accounts in Special Customs Supervision Zones (hereafter SCSZs ) (HUI FA [2013] No. 22). These two new policies are effective from June 1, The Evolution of Foreign Exchange Administration in the SCSZs Foreign exchange administration policy in China s SCSZs has undergone three evolutionary stages. The first stage lasted from the 1990s until September 2007, during which time a number of administrative policies were developed based on SCSZ type. Corporations based in SCSZs were exempted from foreign exchange receipts and payments verifications for cross-border trade, while corporations outside - 1 -

2 SCSZs were responsible for foreign exchange receipt and payment verifications for trade activities with companies inside and outside the SCSZs. During this period, foreign exchange administration in the SCSZs was dominated by outflow controls, where receipts and settlements were unrestricted, whilst payments and foreign exchange purchases were strictly managed. The second stage began in October 2007 and lasted until the implementation of the foreign exchange administration reforms for merchandise trade. With the need to broaden and transform the functions of the SCSZs and facilitate trade investment by corporations in the SCSZs, SAFE introduced the Bonded Area Foreign Exchange Management Measures and Operational Guidance in 2007, which consolidated foreign exchange administration policies for different types of SCSZs. While preserving certain special policies, these changes aligned the different sets of foreign exchange purchase and settlement policies for inside and outside the SCSZs. The outward payment verification process was also further streamlined. The third stage lasted from the foreign exchange administration reform for merchandize trade to the present. Reforms created new policy imbalances, where greater benefits were given to enterprises outside the SCSZs. After the verification requirements were removed, merchandise trade total verification was carried out by matching total foreign exchange receipts and payments against overall goods imported and exported. Supporting document checks for foreign exchange receipts and payments have also been simplified based on the philosophy of balanced administration. In the SCSZs, payment controls are a focus of foreign exchange administration for merchandise trade, and information on the customs forms and commercial documents need to match in order to pass inspection. Therefore, foreign exchange administration in the SCSZs clearly lags behind administration outside them, in terms of philosophy and approach. 2. Formation of Policies First, these policies are a response to the Eighteenth Party Congress, with a focus on deepening economic reform, promoting the overall improvement of China's open economy, and propelling financial innovation based on improved financial oversight. Tests and trials of certain reform measures were conducted and administrative approvals were reduced, which will allow market forces to play a more important role in resource allocation and support accelerated economic transformation. Second, the new policies were introduced to fill gaps in existing SCSZ policies and provide greater trade convenience. The launch of merchandise trade foreign exchange administration reform further expanded the convenience gap between SCSZ and non-scsz trade, which can be seen in the following areas: 1. Delayed SCSZ reform has provided non-scsz companies with more benefits. 2. Comprehensive and effective electronic information on the flow of goods and funds is lacking. 3. Corporations in the SCSZs are supervised by business type, which is different from the general regulatory philosophy of comprehensive oversight. 4. Foreign exchange administration policy needs to be updated, in order to keep pace with the increased functions of the SCSZs. As these functions continue to expand in both scale and scope, new business forms have emerged. In response to this, foreign exchange administration policy must be updated completely and promptly to provide consistent and continued support to economic activities in SCSZs. Policy Adjustments 1. In principle, the adjustment will align policies for SCSZ and non-scsz companies Unless otherwise specified by SCSZ policies, non-scsz policies will generally apply to corporations in SCSZs, including policies on capital accounts, international balance of payments, foreign exchange business with financial institutions, incident investigations, and retained trade export income overseas. Currently, the main administrative difference between SCSZs and non-scszs lies in the management of current account activities, including foreign exchange pricing and settlement, settlement methods for inconsistent goods and funds receipts and payments, trade-related pre-purchase of foreign currencies, and outbound payments for services. For other current account activities having implicit requirements provided by SCSZ policies or lacking established guidelines, non-scsz policies shall apply

3 2. Preserving Certain Favorable Policies for SCSZs First, SCSZ corporations are allowed to perform foreign currency settlements. For many years, there has been demand and precedent for the use of foreign currency by SCSZ corporations in bonded manufacturing, logistics, and trade settlements. Second, SCSZ corporations are allowed to have an imbalanced flow of goods and funds, which is common within SCSZs. Imbalanced receipts and payments of goods and funds are allowed as long as the transactions are authentic and valid. Third, the filing rules for foreign exchange receipts and payments have been clarified. SCSZ corporations must make international balance of payment reports when conducting first tier activities. They should prepare domestic balance of payment reports and statistics for second tier activities and trade between companies within the SCSZs. Fourth, supporting document checks for service trades have been simplified. SCSZ policies that are more favorable than non-scsz policies shall be implemented. In principle, financial institutions do not need to verify transaction documents for single transactions equivalent to USD 50,000 or less by institutions within the SCSZs. 3. Filling Policy Gaps First, Foreign Exchange Registration Certificates for Bonded Areas are now no longer required. Corporations in the SCSZs simply need to register with the Foreign Exchange Trade Receipts and Payments Enterprise Directory according to trade regulations. Second, inter-city payments are permitted. Corporations in the SCSZs can make payments to provinces and cities outside the jurisdiction of the SAFE branch in the locale where the corporation is incorporated. Third, keeping offshore earnings offshore is permitted. Fourth, the approval process for foreign exchange earnings settlements in current accounts is now no longer required. Financial institutions can directly process foreign exchange earnings settlements for institutions in SCSZs by checking the relevant documents in accordance with regulations. 4. Simplification of Document Checks for Merchandise Trades First, corporations in SCSZs must provide valid certificates and commercial documents for merchandise trades settlements, in accordance with rules and regulations. Second, customs declaration forms required by trade regulations can be replaced by a list of imported or exported items registered with customs. Third, financial institutions do not need to prepare an imported goods registration list, nor verify or close the original e-accounts and declaration documents for imported goods. Fourth, the pre-purchase of foreign exchange for goods imports is permitted. 5. Risk Prevention and Control First, a financial institution must verify and confirm whether an institution inside a SCSZ is indeed a SCSZ corporation by using the Merchandise trades Foreign Exchange Monitoring System, before processing foreign exchange receipts and payments for a company. Financial institutions are not allowed to directly process foreign exchange receipts and payments for institutions that are not listed. Second, when SCSZ companies process foreign exchange payments and receipts for merchandise trade, if the entity name on the original customs declaration form or inbound goods registration list is not the company making the payment, the company must provide a written explanation of the inconsistency, receipts that prove the authenticity of the trade and the inconsistency, and relevant customs oversight documents. All documents will be kept for future examination. Financial institutions also need to verify those documents according to regulations. Third, SCSZ corporations must conduct payments and foreign currency pre-purchases for imported goods through a single financial institution. Fourth, for foreign exchange payments and receipts activities involving funds of an undetermined nature, financial institutions must require onshore institutions to submit transaction documents for review. For a single service transaction valued at USD 50,000 or more, SCSZ corporations must submit tax certificates after transaction documents are verified according to regulations

4 Q&A Q1. What documents are required for foreign exchange earnings settlements for merchandise trade performed by SCSZ corporations? A1: According to merchandise trade regulations, SCSZ corporations must process foreign exchange earnings settlements for goods through financial institutions with the submission of required documents. Financial institutions must carry out reasonable inspections based on regulations. Q2: Is the Total Verification Principle applicable to SCSZ corporations? A2: The Total Verification Principle is not entirely applicable to SCSZ corporations. Q3: For SCSZ foreign exchange management issues, can SCSZ corporations contact local SAFE offices or should they still contact the SCSZ SAFE branches? A3: Only a few SAFE branches have an SCSZ division. For queries, please consult with the local SAFE branch. Q4: As SCSZ corporations are required to complete balance of payment reports for receipts and payments between SCSZ and offshore corporations, are these reports also necessary for receipts and payments between SCSZ corporations and non-scsz Chinese corporations or between different corporations within the SCSZ? Are these reports classified under cross-border or onshore receipts and payments? A4: SAFE reporting by the domestic participant(s) is required for cash receipts and payments in connection with merchandise trade between SCSZ and non-scsz corporations or between SCSZ corporations. Receipt and payment application forms should be submitted by both the SCSZ and non-scsz corporations for capital receipts and payments between SCSZ and non-scsz corporations or between SCSZ corporations. Q5: SCSZ corporations must settle foreign exchange income from merchandise trades through financial institutions by providing corresponding documents in accordance with merchandise trades regulations. Does this suggest that trade income from both bonded and non-bonded goods by SCSZ corporations has to be credited to the verification account first? A5: First, SCSZ corporations need to provide the documents required by merchandise trades regulations to financial institutions for the settlement of their foreign exchange income. Second, export income verification accounts (hereafter verification accounts ) are not mandatory for Type A SCSZ corporations, but existing verification accounts can be retained. With Type A corporations, merchandise trade income need not pass through the verification account, and can be directly settled or deposited into the current account. Type B and Type C enterprises are required to open verification accounts, and deposit their export income first from merchandise trades into the verification account. In addition to the reasonable inspections of relevant trade documents and foreign exchange flow consistency required by regulations, financial institutions are also required to verify electronic data when settling foreign exchange or transferring foreign exchange funds for verification accounts held by Type B and Type C corporations. Q6: The previous Foreign Exchange Administration Measures for Bonded Areas allowed no foreign exchange purchases for trade payments between SCSZ corporations. Such payments need to be made in RMB or funds from the corporation s foreign exchange bank account; the company cannot purchase foreign currency for the payment. Are foreign currency purchases now permitted for transactions between SCSZ companies? A6: Merchandise trade regulations are also applicable to trades between SCSZ corporations. Payments for genuine trade activities between SCSZ corporations can be made with purchased or owned foreign exchange funds. Q7: After June 1, do corporations still need to provide banks with foreign exchange payment certificates and commercial documents for advance payments processed prior to that date? For corporations failing to submit the required documents and requiring case-by-case review and approval by SAFE, how will foreign exchange receipts and payments be processed for merchandise trades after June 1? A7: With effect from June 1, 2013, SCSZ corporations and banks are required to process foreign exchange receipts and payments for trade activities in SCSZs in accordance with HUI FA [2013] No. 15, HUI FA [2013] No. 22 and applicable merchandise trades regulations. For payments that were processed prior to - 4 -

5 June 1, 2013 and lasting less than 90 days as at June 1, 2013, SCSZ corporations do not need to provide banks with foreign exchange payment certificates and commercial documents. For payments that were processed prior to June 1, 2013 and lasting more than 90 days as at June 1, 2013, failure to provide valid documents to the banks is considered non-compliant with foreign exchange administration regulations. The list of SCSZ corporations requiring case-by-case review and approval by SAFE for receipt and payment authenticity will no longer be effective starting June 1, SAFE will manage SCSZ corporations foreign exchange receipts and payments from merchandise trades by category, through offsite supervision and on-site checks for unusual or suspicious incidents. Foreign exchange receipts and payments for Type B and Type C SCSZ enterprises must comply with relevant merchandise trades regulations. Q8: The previous Foreign Exchange Administration Measures for Supervised Bonded Zones and the related operating rules allowed non-scsz corporations to purchase merchandise in SCSZs that is owned by non-scsz Chinese corporations using foreign currency. Are non-scsz corporations still allowed to do so after June 1, 2013? A8: Domestic non-scsz companies must handle receipts and payments according to merchandise trade regulations. Non- SCSZ corporations must purchase merchandise in SCSZs that is owned by non-scsz Chinese corporations using RMB. J.P. Morgan Insight Sarah Zhou, Head of Cash and Liquidity Management Products, J.P. Morgan China Treasury Services SCSZ corporations are different from non-scsz corporations in the customs supervision of their businesses, goods, logistics, import and export customs declarations, tariffs, and export rebates. When it comes to foreign exchange administration, regulators want to minimize the differences between SCSZ and non-scsz corporations by applying a coherent set of policies. By introducing Measures for Foreign Exchange Administration in Special Customs Supervision Zones and the Circular on Improving Foreign Exchange Control over Current Accounts in Special Customs Supervision Zones, SAFE has provided a simplified foreign exchange flow procedures for SCSZ corporations, representing greater policy coherence and allowing for operational consistency between SCSZ and non-scsz corporations. These documents set out clear and coherent principles for foreign exchange administration in connection with the service and capital account activities of SCSZ and non-scsz corporations. With the newly released regulations, SCSZ corporations must follow a clearer and more coherent set of foreign exchange administration regulations that are also applicable to non- SCSZ corporations, which allow them to more conveniently manage foreign exchange receipts and payments, enjoy lower administration and operational costs, and benefit from streamlined foreign exchange administration and operation procedures. Prior to the new regulations, there had been different SCSZ requirements for bonded areas and export processing areas. The newly-released regulations stipulate that companies foreign exchange receipts and payments from merchandise trades in both bonded areas and export processing areas under special customs supervision must follow the Foreign Exchange Administration Guidelines for Merchandise trades, which were released in August 2012 and are only applicable to non-scsz corporations. The new regulations help increase efficiency by providing a coherent set of administrative standards for enterprises with business operations spanning different SCSZs. The new enterprise directory, the new receipt and payment certificate reviews, advance foreign exchange purchases, interregion foreign exchange payments, and offshore export income deposits are part of new policy efforts to streamline receipts and payments for merchandise trade in SCSZs. With respect to service trade, the review process for single foreign exchange receipts or payments of USD 50,000 or less has also been simplified under the new policy. Enterprises should note that after the new regulations are introduced, due to unmatched goods and capital receipts and payments and inconsistencies between customs data and international balance of payments declarations, total trade verification by the regulator is not completely applicable to SCSZ corporations and may not cover all bonded and nonbonded goods trade by SCSZ corporations in the near term. In - 5 -

6 addition to the necessary certificates and trade information checks required by the banks, SCSZ corporations should also strictly comply with customs and SAFE regulations, ensure trade authenticity and the timely submission of declaration information, and communicate promptly with banks and regulators when necessary. J.P. Morgan also offers comprehensive support to help businesses simplify operational procedures and reduce costs, while complying with foreign exchange regulatory requirements. Disclaimer J.P. Morgan is a marketing name for J.P. Morgan Chase & Co. and its subsidiaries worldwide. This presentation is for general information purpose only. J.P. Morgan makes no direct or indirect representation and warranty and accepts no liability, for the completeness, accuracy or reliability of information, or the legal, tax or accounting effects of matters contained herein. This presentation shall not constitute a solicitation under any jurisdiction or to any person, if such solicitation under such jurisdiction or to such person would be unlawful. All products and services contained herein are subject to applicable laws/regulations and services provisions. References herein to "J.P. Morgan" shall mean J.P. Morgan Chase & Co. or any of its affiliates or subsidiaries. The content of this presentation is owned by J.P. Morgan Chase & Co., and shall not be used without consent from the firm. The presentation is subject to change without notice. (C) 2013 J.P. Morgan Chase & Co. All rights reserved. China Forex is a public name owned by China Foreign Exchange Journal. The Newsletter makes no presentation of stands or opinions of the regulatory authorities and shall only be used for reference. China Forex is not liable for any operation risk. China Foreign Exchange Journal makes no warranty and accepts no liability, for the accuracy and completeness of information, or laws and regulations contained herein. Without permission, no institution or individual shall use, reproduce, modify, copy, or disseminate, or use and distribute with other products, in part or in whole, any contents or pictures, contained herein in any manner or with any reason. (C) 2013 China Foreign Exchange Journal. All rights reserved