China: New foreign exchange policies on supporting the development of China (Shanghai) pilot free trade zone

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

China: New foreign exchange policies on supporting the development of China (Shanghai) pilot free trade zone

ho.jpg

lu.jpg

Khoonming Ho


Lewis Lu

The Shanghai branch of the State Administration of Foreign Exchange (SAFE) recently issued Huifa [2014] No. 26 (Circular 26) setting out new policies for China (Shanghai) pilot free trade zone (the Pilot FTZ). Circular 26 offers substantive innovation measures to foreign exchange management, allowing foreign investment enterprises (FIEs) to convert an unlimited percentage of their registered capital in foreign currency into RMB. According to the current policy applied outside of the pilot FTZ regarding the conversion of registered capital in foreign currency, FIEs can only apply to convert registered capital in foreign currency into RMB when necessitated by payments to vendors for goods or services. In addition, FIEs are required to submit documents to prove the use of such RMB funds before the next conversion application. Such a policy not only increases the management cost for foreign currency conversion, but also exposes FIEs to exchange losses when exchange rate volatility is high, thus hampering fund management. Circular 26 gives FIEs the option to convert foreign currency capital into RMB at will, thus allowing FIEs to choose which currency they want to hold. However, FIEs should keep in mind that the RMB capital should be mainly used for business operation rather than non-operational investment or loan to others.

The other remarkable point of Circular 26 is the improvement it makes to the pilot policy of foreign currency pool. Before issuance of Circular 26, the policy for pilot foreign currency pool designed for multinationals to centralise their operating cash featured tough access requirements. Circular 26 relaxes the requirements for pilot FIEs to set up foreign currency pool, allowing those with headquarter-like operational centre or international settlement centre within the FTZ to apply for centralised operational management of foreign currency of its member companies inside and outside of China, so that they can enjoy centralised receipt and payment for current account transactions as well as settle payments on a net basis. The current Chinese foreign exchange policy for non-FTZ FIEs requires that cross-border receipt and payment be settled separately. Such practice slows down the cash turnover to some extent as it takes time to provide commercial documents or declare income for remittance, and for funds received from overseas to be usable. Therefore, netting settlement is definitely a great change to foreign exchange management, which allows FIEs to improve efficiency in funds utilisation and reduce remittance costs.

In addition, Circular 26 adjusts the upper limit of lending overseas for companies in the pilot FTZ from 30% of shareholder's equity to 50%. It allows FIEs to directly remit their spare cash to overseas parent company or affiliates in the group rather than in the form of dividend distribution, thus helping the overseas parent company reduce its funding costs and defer Chinese withholding tax payment.

In sum, Circular 26 provides more financing options and efficient foreign currency settlement methods to FIEs in the pilot FTZ. Thus, FIEs can optimise the structure of their various management functions according to the industry they are in, their business development needs and future plans, with a view to increase the competitiveness of their operation in China.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

more across site & shared bottom lb ros

More from across our site

The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
The tax agency has increased compliance yield from wealthy individuals but cannot identify how much tax is paid by UK billionaires, the committee also claimed
Saffery cautioned that documentation requirements in new government proposals must be limited if medium-sized companies are not exempted from TP
The global minimum tax deal is not viable without US participation, Friedrich Merz has argued
Section 899 of the ‘one big beautiful’ bill would have spelled disaster for many international investors into the US, but following its shelving, attention turns to the fate of the OECD’s pillars
DLA Piper’s co-head of tax for the US and Latin America tells ITR about her fervent belief in equal access to the law, loving yoga, and paternal inspirations
Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
Gift this article