Improving the Verification of Foreign Exchange Settlement for Capital Account Items and the Administration of Foreign Debt Registration of Foreign-invested Enterprises Circular

(Issued by the State Administration of Foreign Exchange on May 17 2004 and effective 45 days after the date of issue.)

Hui Fa [2004] No.42

To the branches and offices of the State Administration of Foreign Exchange of all provinces, autonomous regions and municipalities directly under the central government, and Shenzhen, Dalian, Qingdao, Xiamen and Ningbo municipal branches:

In order to encourage a reasonable and orderly flow of foreign capital in China so as to safeguard and promote the balance of international payments, matters concerning the verification of foreign exchange settlement for capital account items and the administration of foreign debt registration of foreign-invested enterprises are hereby notified as follows:

I. When handling exchange settlement of capital funds of foreign-invested enterprises, each branch of the State Administration of Foreign Exchange (hereafter, SAFE Branches) and authorized designated foreign exchange banks, in addition to carrying out verification in accordance with requirements of the State Administration of Foreign Exchange, Issues Relevant to Improving Foreign Exchange Control on Foreign Direct Investment Circular (Hui Fa [2003] No.30) and the State Administration of Foreign Exchange, Reforming the Mode of the Administration of Foreign Exchange Settlement of Capital Funds of Foreign Investment Circular (Hui Fa [2002] No.59), shall request the enterprises applying for a single foreign exchange settlement of an amount exceeding US$200,000 to provide an exchanged funds usage written payment order, and such capital shall be directly paid to the payee designated by the same. For an enterprise's small payments for wages, fund reserves or foreign exchange settlements with an amount less than US$200,000 (including US$200,000), it is permitted not to require a written payment order, and to insert the funds from foreign exchange settlement into the renminbi account of the applicant enterprise, but when that enterprise is making its next exchange settlement request, it shall provide a detailed breakdown of the exchanged funds' usage from the previous settlement.

II. When a SAFE Branch is handling procedures for verification of exchange settlement of foreign debt funds of a foreign-invested enterprise, it shall carry out their verification duties by strictly adhering to the current operation rules and the requirements stipulated by Item One hereof, and if the exchange settlement of foreign debt funds of foreign-invested enterprises is to be used to repay renminbi debts, the SAFE Branch shall not grant approval.

III. The sum of the aggregate amount of medium and long-term foreign debts and the balance of short-term foreign debt borrowed by a foreign-invested enterprise shall be strictly kept within the difference between the examination and approval department approved total investment and registered capital. Except upon approval by the original examination and approval department of a change to total investment, the SAFE Branch must not handle procedures for foreign debt registration and exchange settlement verification for a foreign-invested enterprise's excess portion of foreign debt remitted in. If a foreign-invested enterprise's foreign debt funds inward remittance is already in excess, it shall conscientiously go to the original examination and approval department to handle retrospective verification of change in total investment, and the SAFE Branch will allow the enterprise to keep the foreign debt funds within a three-month period. If this period is exceeded, the SAFE Branch shall through a capital account item foreign exchange work verification document notify the account-opening bank to send back the excess portion of funds through the original channel.

IV. Each designated foreign exchange bank shall modify corresponding internal operation flows and apply the above requirements. The SAFE Branches at each level shall be responsible for guiding and supervising the designated foreign exchange banks within their jurisdiction to improve their management of foreign exchange settlement for capital account items as well as the management of inward and outward foreign debt funds remittances.

V. The aforementioned measures are to further improve and implement current foreign exchange administration regulations on capital account items. The SAFE Branches at each level shall pay attention to dissemination and interpretation, thus assuring the thorough enforcement of the above measures.

VI. This Circular shall take effect 45 days after its issuance. The SAFE Branches at each level shall forward this Circular as soon as possible to all designated foreign exchange banks within their jurisdiction. In the event that any problems arise in the course of implementation, please report to the Department of Capital Account Items of the State Administration of Foreign Exchange in a timely manner.

1 Translation provided by Coudert Brothers LLP.