On 23 October 2019, the State Administration of Foreign Exchange ("SAFE") officially issued the “Notice on Further Facilitating Cross-border Trade and Investment" ("Notice") which is under the background of and in response to the ongoing US-China trade war. The Notice introduces twelve facilitation measures to ease regulatory controls over foreign exchange. Six of these measures are directly connected with cross-border trade and the other six measures are related to cross-border investment and financing.
It is worth noting that most of the provisions of this Notice will take effect on the issuing date, except for the new online foreign exchange reporting system for businesses engaged in the trade of goods, which will take effect from January 1, 2020. While some of the provision will apply nationwide, many others will apply solely in the pilot area.
This article summarizes the key regulatory changes and sheds light on the specific measures brought by the Notice.
Expanding pilot programs to facilitate foreign exchange payments in trade
SAFE has initiated pilot projects allowing the so-called pilot banks to carry out trials in order to facilitate foreign exchange receipts and payments of trade in goods in Guangdong-Hong Kong-Macau Greater Bay Area, Shanghai and Zhejiang Province at the beginning of this year. These pilot projects have saved more than 50 per cent of the time needed to prepare and review enterprise documents. The Notice will expand the scope of pilot areas and broaden the scope of pilot operations from foreign exchange receipts and payments of trade in goods to foreign exchange receipts and payments of trade in service.
Cancelling the restrictions on domestic equity investments made with capital funds by non-investment foreign-invested enterprises
Prior to the Notice, only the so called “investment foreign-invested enterprises”("InvestmentFIE") or “non-investment foreign-invested enterprises” (“Non-investment FIE”) with “investment” in its business scopeswere allowed to carry out domestic equity investment using their capital funds in China. As a side note, Investment FIEs typically refer to FIEof investment nature, i.e. foreign-invested holding companies and foreign-invested venture capital/private equity investment companies.
As one of the most noteworthy measures under the Notice, any FIE is now allowed to make equity investment using their capital funds in China, no matter whether or not the word “investment” is included in their business scope. However, an investment made by a Non-investment FIEs should meet two prerequisites as follows:
Besides denominating capital funds in Renminbi, the domestic equity investments carried out by either Investment FIEs or Non-investment FIEs are also allowed to use the original currency of the capital fund.
According to official statistics, there are more than 370,000 FIEs registered in China currently, of which only less than 3,000 are Investment FIEs and over 99% are of the non-investment type. Therefore, this policy is expected to benefit a wide range of enterprises.
Relaxing the restrictions on the use of foreign exchange settlement funds under the capital account
Since 2017, pilot work on the facilitation of capital account income payments has been carried out. When the domestic equity transferor receives the equity transfer price from a foreign investor, it may now directly settle foreign exchange in the designated Chinese bank with the relevant business registration proof and certificates. The bank does not need to examine the transaction documents one by one in advance, and may handle it directly with the payment instruction, so as to effectively improve the degree of facilitation of the use of foreign exchange funds by the enterprise.
The Notice further eases the restrictions on the settlement of foreign exchange deposits paid by foreign investors. The deposit remitted from abroad or transferred from domestic accounts within China by the foreign investors may, after the transaction, be directly used for lawful investment within the territory and the payment of consideration within or beyond the territory.
Before the reform, the deposits paid by foreign investors can not be settled for foreign exchange. The deposits are now allowed to be directly settled for foreign exchange payment when the transaction is concluded or when the payment is deducted.
Simplifying the foreign exchange receipt and payments procedures for small and micro cross-border e-commerce enterprises engaging in the trade in goods
According to the Notice, small and micro transnational e-commerce companies, whose annual trade scale of less than USD 200,000, may be exempted from the registration formalities of the “List of Enterprises with Foreign Exchange Receipts and Payments” (“List”). Under the current regulations, after obtaining foreign trade permission, enterprises are obliged to complete registration on the List in foreign exchange authorities. According to local regulations, this requires filing multiple documents and proofs to the foreign exchange authorities in order to complete the registration. Generally, only after such registration, can companies proceed with foreign exchange receipt and payment derived from cross-border trade. Following the Notice, the administrative burden on small and micro transnational e-commerce companies will be lowered. The simplification of registration procedures will then save time and costs of these small and micro businesses. It is expected that more than 95% of transnational e-commerce companies with payment institutions will benefit from this reform.
The foreign exchange authorities may, however, still conduct supervision and inspection over any small and micro cross-border e-commerce enterprises that meet the abovementioned threshold.
In addition to the above four measures, the other measures introduced by the Notice are as follows:
Considering China’s new Foreign Investment Law and the Notice, it is clear that China is paving the way to a more liberal business market. The abovementioned twelve measures demonstrate the opening up of the capital account and a more expedient foreign exchange regime for cross-border trade and foreign investment. On 7 November, the State Council rolled out the “Opinions on further Improvement the Utilization of Foreign Investment”, which explicitly states that China will lower the cost of cross-border use of funds by further introducing detailed measures to support the cross-border use of Renminbi by foreign investors. Buren will keep an eye on the upcoming new rules in this regard.
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Buren has contributed to Agribusiness, a publication by Getting the Deal Through*.
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