China: New foreign exchange policies on supporting the development of China (Shanghai) pilot free trade zone
The Shanghai branch of the State Administration of Foreign Exchange (SAFE) recently issued Huifa  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 (firstname.lastname@example.org)
KPMG, China and Hong Kong SAR
Tel: +86 (10) 8508 7082
Lewis Lu (email@example.com)
KPMG, Central China
Tel: +86 (21) 2212 3421