PRC Foreign Exchange Administration Regulations Revised
October 15, 2008 | BY
clpstaff &clp articles &China's currency has undergone fundamental changes along with the rapid economic development both domestically and in global markets. In order to adapt to today's financial and currency markets, the State Council has adopted a revision of Foreign Exchange Regulations of the People's Republic of China on August 5 2008. Foreign companies need to be familiar with the newly revised foreign exchange regulations.
By Amy Chen and Jonathan Selvadoray, CMS Legal, Shanghai office*.
According to the Foreign Exchange Regulations of the People's Republic of China 《中华人民共和国外汇管理条例》(Regulations) before the recently introduced revision, the foreign exchange administration focused on its outflow in order for China to obtain more foreign exchange reserves. However, due to the pressure arising from the large size of China's foreign exchange reserves, the revised Regulations adopt a way of balancing the administration on foreign exchanges. They therefore tighten restrictions on foreign exchange inflow and relax the approach to foreign exchange outflow.
The revised Regulations provide that China may take necessary protective and restrictive measures relating to their foreign exchange balance in case there is any imbalance or a national economic crisis.
Foreign exchange incomes under revenue account items
According to the revised Regulations, foreign exchange income of Chinese organisations and individuals may be either remitted back to China or deposited overseas, subject to the relevant conditions and terms as stipulated by State Administration for Foreign Exchange (SAFE). This is contrary to the Regulations before the revision, which required a mandatory return of such foreign exchange income back to China.
In addition, the revised Regulations allow foreign exchange income under revenue account items to be either retained in such a foreign currency or converted into RMB, which reiterates the rules provided for in the Notice on Retaining of Foreign Exchange Income under Revenue Account Items by Chinese Organisations issued by SAFE on August 12 2007 (the Notice). Before the issuance of the Notice, such retaining was generally prohibited according to the Regulations before revision.
It is not specifically outlined in the revised Regulations that the payment and settlement procedures of foreign exchange under revenue account items are being simplified. However, SAFE's specific rules promulgated recently have reflected such a change.
Foreign exchange incomes under capital account items
The general rule that the obtaining or conversion of foreign exchange income under capital account items shall be subject to the approval of SAFE or its local counterparts, remains unchanged.
In addition, according to the revised Regulations, banks are allowed to directly grant overseas loans within their approved business scope. Moreover, the revised Regulations add a new rule, which provides that other Chinese organisations that grant loans to overseas enterprises shall handle relevant approval and registration formalities with SAFE or its local counterparts. As a result Chinese organisations are allowed to grant overseas loans; however, since this is a general rule the exact details are yet to be revealed.
According to the revised Regulations, foreign exchange under capital account items or their converted funds shall be used for the approved purpose, and SAFE and its local counterparts are entitled to carry out supervision and examination for such purposes. On August 29 2008, SAFE issued the Notice on Several Operational Issues relating to the Improvement of Administration on Payment and Settlement of Foreign Invested Enterprises (FIE) Foreign Exchange Capital Funds, with the aim to regulating the use of FIEs' foreign exchange capital funds.
Overseas investment
The revised Regulations add a new rule, which provides that Chinese organisations or individuals may carry out direct overseas investments or invest in overseas securities, subject to the approval and registration formalities with SAFE or its local counterparts. This rule has been repeated in other SAFE regulations (for example, SAFE Circular 75 and the Individual Foreign Exchange Administration Measures and their implementation details).
However, overseas direct investments by Chinese individuals are still impractical in practice due to the lack of details on operational rules. It is understood that SAFE is studying such detailed operational rules in order to open the door for Chinese individuals' overseas investments.
RMB exchange rate
According to the revised Regulations, China shall adopt an administrated floating system on the basis of market supply and demand to decide the Renminbi exchange rate. Therefore, China will link its Renminbi to major foreign currencies, rather than the US dollar solely.
SAFE is entitled to adjust the foreign exchange market according to China's monetary policy.
Monitoring and enforcement
In general, SAFE and its local counterparts are the competent authorities in charge of overseeing and enforcing the revised Regulations which bestow stronger specific regulatory powers to SAFE. These powers include but are not limited to entering relevant business premises for on-the-spot examination and/or evidence collection purpose, interrogating relevant individuals and reviewing and copying related transactional and financial documents.
In particular, the revised Regulations expressly require that foreign exchange income and expenses under revenue account items shall have a genuine and legitimate transaction basis. Hence, accordingly, the revised Regulations entitle SAFE and its local counterparts to monitor and examine this.
The revised Regulations also provide for various penalty measures for violation of the Regulations. These penalty measures are more itemised than those before the revision, and focus on both inflow and outflow of foreign exchange, rather than emphasising outflow as stipulated in the Regulations before revision.
Conclusion
As the umbrella law on foreign exchange, the revised Regulations reflect the current trend of China's monetary policies. However, since they provide only for general rules and principles relating to foreign exchange, more detailed rules on relevant issues are outstanding following such revision, despite the fact that some have already been promulgated, in order for the Regulations to be implemented smoothly. Foreign investors intending to make investment in China should keep a close eye on foreign exchange related policies and regulations in order to avoid any regulatory risks.
*CMS Shanghai Office is an alliance between CMS Bureau Francis Lefebvre, CMS Hasche Sigle and CMS Cameron McKenna.
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