The SAFE No. 16 Circular Unifies Foreign Exchange Settlement for the Capital Accounts of Domestic Enterprises(Mainland China)

James Cheng
On June 6, 2016, the State Administration of Foreign Exchange (hereinafter, the “SAFE”) promulgated the SAFE Circular on the Reformation and Regulation of Policies on Foreign Exchange Settlement for Capital Accounts (Hui Fa [2016] No. 16, hereinafter, the “Circular”). The Circular unifies the requirements for the foreign exchange settlement for capital accounts and for the foreign exchange settlement for foreign debt funds, which previously carried different requirements, and comprehensively implements the policy to permit voluntary foreign exchange settlement so that domestic enterprises can freely choose when they wish to conduct foreign exchange settlement for their foreign exchange revenues. The Circular came into effect on the day of its promulgation and is highlighted below:
1. Unified management of foreign exchange settlement for all kinds of funds in capital accounts
With respect to foreign exchange management, inbound remittances in a capital account may generally be categorized as funds for direct investment, foreign debts in a debt account and funds repatriated from foreign listings. Previously, the SAFE managed the different types of funds in a capital account separately, applied different supervisory systems and had more stringent requirements for the foreign exchange settlement of foreign debts than those for capital.
The Circular now expands the entire nation the mode of foreign exchange settlement for foreign debt funds of enterprises in free-trade zones. From the date of promulgation of the Circular onwards, the foreign exchange settlement formalities for foreign debt funds of domestic enterprises (including Chinese-invested enterprises and foreign-invested enterprises, but not financial institutions) may be handled by way of voluntary foreign exchange settlement, and enterprises may freely choose the timing of foreign exchange settlement of foreign debt funds. As a result, there is a unified policy of voluntary foreign exchange settlement regard regardless of whether the entity is Chinese-funded, foreign-funded, inside or outside free trade zones.
2. Clarified purposes of foreign exchange settlement funds through negative listing
The Circular states foreign exchange revenue that is outside of a capital account must, within the scope of the business operation, comply with the principle of truthfulness and autonomous use, thereby avoid from being directly or indirectly used for expenditures outside the scope of business operation or in ways that are prohibited by national laws. Except as otherwise specifically stipulated, such revenue shall not be directly or indirectly used in investment of securities or financial products other than the principal-protected products offered by banks, nor should they be used for lending to non-affiliated enterprises except under circumstances expressly permitted within the scope of business operation. Lastly, the revenue shall not be used for construction and purchase of real estate that is not for self-use (except for real estate enterprises).
3. Increase of foreign exchange settlement of the monthly reserve of a single entity which cumulatively should not exceed an amount equivalent to US$200,000
In principle, a bank is responsible for verifications when handling the foreign exchange settlement of inbound revenue and payment in a capital account. However, in case of a domestic entity that uses the revenue in a capital account as a reserve, a bank is not required to request such entity to provide materials for verification purposes. Previously, in 2015, the SAFE required in the Circular on Reforming the Management of Foreign Exchange Settlement of Foreign Exchange Capital of Foreign-invested Enterprises (Hui Fa [2015] No. 19) that foreign exchange settlement of a capital reserve shall not exceed an amount equivalent to US$100,000. The Circular raises the upper limit on the cumulative payment amount of the monthly reserve (including voluntary and payment-related foreign exchange settlement) of a single entity to an amount equivalent to US$200,000.