2nd Annual China Trade & Export Finance Conference Structuring cross-border PRC trade finance transactions Jolyon Ellwood Russell, Partner James Willcock, Registered Foreign Lawyer Gulong Ren, Legal Officer
Agenda Experiences on the challenges faced when working in the local marketplace FX control - Capital account vs current account Regulatory changes latest reform and current system PRC security Approaches for structuring transactions in both RMB and FX Warehouse finance Prepayment Deferred payment Potential hurdles in ensuring compliance with capital controls Structures of financing under capital account Latest regulatory developments taking place and their impact on trade deals Internationalization of RMB 2
Regulatory framework - capital account vs current account Capital v. Current Account Transactions Capital Account Transactions - investment, loans SAFE APPROVAL/REGISTRATION REQUIRED (BORROWING GAP) RMB/FX Current Account Transactions - import/export, services, rent, dividend, royalties, interest SAFE APPROVAL NOT REQUIRED 3
Cross-border trade settlement latest reform new reform on management of FX settlement in cross-border trade ( 关于货物贸易外汇管理制度改革的通知 ) issued by SAFE, GAC and SAT in June 2012 effective since 1 August 2012 simplified procedures, dynamic monitoring, different approaches Classification of PRC importer/exporter Grade A: good record Grade B: slight breach of SAFE regulations Grade C: serious violation of SAFE regulations Administration on FX payment/receipt 外汇收支管理 reporting of specified business, such as prepayment (over 30 days), deferred payment (over 90 days), usance LC, LC refinance or trade finance (over 90 days) registration: Grade C: each payment/receipt shall be registered with SAFE Grade B: payment/receipt of FX that exceeds its payment/receipt quota shall be registered with SAFE 4
Current system for cross-border trade settlement export Current Account: Goods Export Foreign Buyer Tax 2 3 Bank Customs 1 ONSHORE 6 4 PRC Exporter SAFE FX Remittance For grade A&B PRC Exporter 5 RMB Remittance 0. PRC Exporter & Foreign Buyer enter into contract in RMB 0. PRC Exporter & Foreign Buyer enters into contract in FX 1. Customs declaration 2. Exports goods 3. Foreign Buyer wires FX into bank in China 1. PRC Exporter makes custom declaration 4. PRC exporter applies to its Bank for receiving the payment 2. PRC Exporter exports the goods 5. PRC Exporter reports the receipt at payment to SAFE for 3. Foreign Buyer remits RMB into China receipt of prepayment (over 30 days) or deferred payment (over 90 days);grade B export register FX that exceeds its quota4. PRC Exporter applies to its Bank for receiving the 6. PRC Exporter applies to tax authority for tax refund payment (and reports to RCPMIS 跨境人民币收付信息管理系统 ) 5. Report to SAFE? check with local SAFE Grade C PRC exporters are subject to stricter controls by SAFE 5. Requested to perform SAFE registration prior to each receipt 6. PRC Exporter applies for tax refund with tax authority 5
Current system for cross-border trade settlement import Current Account: Outbound Payment of Imported Goods Foreign Seller 3 SAFE 5 FX Remittance For grade A&B PRC importer: 1 PRC Importer Bank 0. PRC Importer & Foreign Seller enter into contract in FX 1. Foreign Seller delivers goods into China at the custom port 2. PRC Importer makes import declaration with Customs provided with (a) Customs Declaration Form, (b) invoice and import contract, (c) Bill of lading (d) import license/permits (where applicable), (e) other documents as requested by Customs, and settles customs duty and import VAT 3. Customs issues Customs clearance documents to the PRC Importer and releases the goods 4. PRC Importer requests the Bank to make payment out to the Foreign Seller, provided with (a) import contract and commercial invoice, and (b) Customs Declaration Form (foreign exchange payment slip) Grade C PRC importers are subject to stricter controls by SAFE in the FX payment 5. Requested to perform SAFE registration prior to each outbound payment transaction 3 2 Customs RMB Remittance ONSHORE 0. PRC Importer & Foreign Seller enter into contract in RMB 1. PRC Importer delivers the goods into China at the custom port 2. PRC Importer performs Customs declaration 3. PRC Importer requests the Bank to remit RMB to Foreign seller's account 4. The Bank remits the payment (and reports to RCPMIS 跨境人民币收付信息管理系统 ) 6
Taking PRC security in cross-border trade finance form of security Pledge over goods Possessory security - Collateral Management Agreement Customs approval for goods in bonded warehouse; Pledge over warehouse receipt not document of title "belt and braces" Pledge over receivables Pledge over bank account "Fixing" pledged cash Practical alternatives Mortgage over goods Non-possessory security Registration problems - SAIC 7
Taking PRC security in cross-border trade finance enforcement Enforcement by way of: "conversion in value" - borrower transfers title to bank to discharge indebtedness owed to bank to extent of value of goods borrower's consent required; private sale - borrower consent required? auction - borrower consent required? Enforcement by court difference between the pledge and mortgage Bonded goods further customs approval required for disposal unless court involvement 8
Structuring cross-border transactions- PRC warehouse financing ONSHORE OFFSHORE US$ BORROWER BANK A/C US$ BANK LETTER OF CREDIT C. PLEDGE OVER RECEIVABLES D. PLEDGE OVER BANK ACCOUNT 1 US$ FACILITY AGREEMENT BUYER 3 COMMODITY SPA2 BORROWER 2 COMMODITY SPA1 CASH ADVANCE SUPPLIER COMMODITY WAREHOUSE D COMMODITY COMMODITY B. PLEDGE OVER GOODS A. PLEDGE OVER GOODS/BILLS OF LADING 9
Structuring cross-border transactionsprepayment (export) ONSHORE OFFSHORE SELLER (BORROWER) 1 PREPAYMENT AGREEMENT US$/RMB 2 OFFTAKE AGREEMENT - COMMODITY BUYER (BANK) 10
Structuring cross-border transactionsdeferred payment (import) 11
Financing under capital account RMB foreign debt and security: RMB debt owed by a PRC resident to a non-prc resident arising from a crossborder trade transaction (including usance letter of credit, import bill refinance or reimbursement, deferred payment, etc.) not treated as foreign debt and security (PBOC Circular [2011] 145) RMB loan shall be administered as foreign debt (SAFE Circular [2011] 38) Offshore loans to PRC borrower FIE - SAFE approval not required, provided within its borrowing gap ( 投注差 ), being the difference between its total investment amount ( 投资总额 ) and its registered equity capital approved by MOFCOM registeration with SAFE Non-FIE get approval from NDRC and SAFE (if the loan period is over 1 year);or within a short term foreign debt quota from SAFE (if the loan period is 1 year or less). 12
Regulatory development - RMB settlement in cross-border trade July 2009: PBoC, MOF, MOFCOM, GAC, SAT, CBRC issued regulation for pilot RMB trade settlement scheme Trade settlement pilot launched for Shanghai and Guangdong province trading with HK, Macau and ASEAN June 2010 extended 20 provinces with all countries/regions August 2011 extended national wide 13
Regulatory development offshore RMB market and investment RMB Deposit in HK (as of July 2012) 14
Regulatory development offshore RMB market and RMB investment Offshore RMB products RMB bonds: first issue in July 2007 RQFII: Circular jointly issued by PBOC, CSRC, SAFE in Nov 2011 RMB ETF: first trade in Feb 2012 (Hang Seng RMB Gold ETF) RMB FDI Oct 2011: MOFCOM: RMB FDI Circular ( 关于跨境人民币直接投资有关问题的通知 ) PBOC: RMB FDI Settlement Circular ( 外商直接投资人民币结算业务管理办法 ) 15
Q&A? 16