On December 17, 2015, the Shanghai Branch of the State Administration of Foreign Exchange issued the Circular on Issuing Detailed Rules to Further Promote the Implementation of Pilot Foreign Exchange Reform Progra in the China (Shanghai) Pilot Free Trade Zone (the “Circular”). These are the first set of detailed rules promulgated to carry out the objective of the financial reform under the Circular on Promulgating the Pilot Program for Further Promotion of Financial Openness and Innovation in the China (Shanghai) Pilot Free Trade Zone and Accelerating the Development of the Shanghai International Financial Center (the “40 Financial Reform Articles”) jointly promulgated by seven agencies such as the Ministry of Commerce and the State Administration of Foreign Exchange on October 30, 2015.
Consisting of 18 articles, the detailed rules came into effect on the day of their promulgation. These detailed rules apply to banks, offshore and onshore enterprises, non-banking financial institutions and individuals within the Shanghai Free Trade Zone. The detailed rules contain provisions concerning current account transactions, capital account transactions and foreign exchange services, and the greatest highlight is the adjustments to enterprise recordation cases within the zone, with enterprises receiving and paying over US$50 million within the zone last year being eligible to engage in the pilot centralized foreign exchange operations for multinational companies.
The Circular further distills the detailed rules into five major points. First, non-banking financial institutions within the zone may independently choose to settle foreign exchange with their foreign debts, and eligible financing and leasing institutions within the zone may use foreign currencies as rent. Second, to simplify current account foreign exchange payment and collection procedures, specific enterprises within the zone are no longer required to open accounts that are subject to inspection for their foreign exchange revenues. Banks shall work with enterprises in processing the relevant formalities on one hand while also enhance compliance examination on the other hand. Third, the pilot centralized foreign exchange operations for multinational companies is being promoted, including the support of headquarters economic and settlement centers developed by multinational corporations, and gradual lowering of barriers to entry for multinational enterprises seeking to run centralized foreign exchange operations. Fourth, offshore entities within the zone can not only engage in spot foreign exchange transactions but also RMB and foreign exchange derivatives transactions. Fifth, the risk control for cross-border fund transfers is enhanced, and banks are required to set up a sound internal control system to eliminate foreign exchange businesses being conducted on the basis of sham transactions s. The State Administration of Foreign Exchange is also required to strengthen its supervisory efforts and impose sanctions for violations of the law.
The financial reforms from the promulgation and implementation of the Circular and the detailed rules will allow many multinational corporations to greatly reduce their transactional and financial costs.