Recently the State Administration of Foreign Exchange (SAFE) promulgated the Provisions on the Centralized Operations and Administration of Foreign Exchange Funds of Internal Members of Domestic Enterprises (hereinafter referred to as the Provisions), and a relevant responsible person of the SAFE was interviewed concerning the Provisions.

Q: What is the background and significance of the promulgation of the Provisions?
A: In the current context of gradual globalization and integration of the world economy and finance, domestic enterprises have greater requirements to optimize the allocation of foreign exchange resources and to improve the efficiency of the utilization of foreign exchange funds. In order to support and facilitate the utilization and operations of foreign exchange funds by domestic enterprises, as well as to conform to the requirements of adapting to the balanced management of the balance of payments, in recent years the SAFE in succession promulgated a series of policies and measures to reform and normalize the centralized operations and administration of the foreign exchange funds of enterprises. For example, the Circular of the SAFE Concerning Relevant Issues on the Internal Operation and Administration of Foreign Exchange Funds of Multinational Companies (Huifa [2004], No. 104) and the Circular of the SAFE Concerning Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68).
In order to further lower the admittance threshold for centralized operations and administration of foreign exchange funds of domestic enterprises, to clarify the operation methods of foreign currency fund pool business in China, to normalize and improve the laws and regulations on the centralized operations and administration of foreign exchange funds, and to promote the putting in order and amending of laws and regulations on foreign exchange administration, the SAFE drafted the Provisions on the Centralized Operations and Administration of Foreign Exchange Funds of Internal Members of Domestic Enterprises, with comprehensive reference to the opinions of banks and enterprises. The Provisions were promulgated on October 13, 2009 and implemented on November 1, 2009.
Implementation of the Provisions will further normalize and systematize the collective operations and administration of foreign exchange funds, thus conforming to the current state of economic development. And it will facilitate improvements in the efficiency of utilization of funds by domestic enterprises, reducing costs and enhancing competitiveness. Meanwhile, this implementation is also conducive to promoting cooperation between banks and enterprises as well as to business innovation, thus accelerating the linking of Chinas financial services industry and international operations.

Q: What are the major reforms set forth in the Provisions?
A: First, they relax the limits stipulated for the qualifications of business entities. Second, they clarify the operational methods for foreign currency fund pool business in China, normalize the relevant content concerning the foreign currency fund pool business in China, such as basic principles, business structure, examination procedures, and specify that entrusted banks (finance companies) that implement the plans shall be responsible for the application and relevant statistics and filing and reporting. Third, they further delegate relevant powers. Issues such as the examination of foreign exchange administration prescribed in the Provisions shall fall under the jurisdiction of the AFE branches (administrative departments), and the SAFE will no longer process the specific examinations and verifications of the applications. Fourth, they normalize and reinforce the laws and regulations on the centralized operations and administration of foreign exchange funds. The Circular Concerning Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68) incorporates and improves the framework of the Provisions, thus further promoting the putting in order and amending of the laws and regulations on foreign exchange administration. Meanwhile, they further simplify the relevant procedures for examination and approval of foreign exchange business. Issues related to the business of centralized operations and administration of foreign exchange funds, such as the opening of relevant accounts and domestic foreign exchange transfers, can be processed by entrusted banks (finance companies) on behalf of the enterprises with the approval documents for the business qualifications, and no approval from the AFE branches is required.

Q: What is the main content included in the centralized operations and administration of foreign exchange funds of internal members of domestic enterprises?
A: According to the Provisions and other relevant regulations on foreign exchange administration, the centralized operations and administration of foreign exchange funds of internal members of domestic enterprises include inter-company lending/borrowing of foreign exchange among internal members of domestic enterprises, implementation of administration of foreign currency fund pool business, and the business of spot purchases and sales of foreign exchange via internal finance companies.

Q: Upon implementation of the above-mentioned measures, what are the anticipated risks in terms of the centralized operations and administration of foreign exchange funds? How can those risks be prevented?
A: First, as foreign exchange funds used for inter-company lending/borrowing and the foreign currency fund pool business by internal members of domestic enterprises are from the discretionary foreign exchange funds in their foreign exchange capital accounts  and foreign exchange current accounts, it may be possible that the settlement of foreign exchange capital will be carried out by way of the centralized operations of the foreign exchange funds, thus avoiding the current exchange settlement policies for foreign exchange capital. In order to prevent such a risk, it is specifically prescribed in the Provisions that entrusted loan funds of domestic enterprises shall not be used after exchange settlement, nor shall they be used as pledges for RMB loans. Should it be necessary that they be used after exchange settlement, the domestic enterprises shall transfer the entrusted loan funds from their foreign exchange capital account or current foreign exchange account back to the original accounts thereof, and then carry out the foreign exchange settlement in compliance with relevant regulations.
Second, in the event of centralized operations of foreign exchange funds in the form of foreign currency fund pools, in order to avoid conflicts with the fact examination methods of the exporter shall be the party to collect the foreign exchange and the importer shall be the party to pay the foreign exchangeas prescribed in the current regulations on foreign exchange administration, in the plans for foreign exchange fund pools it is prescribed that: ones own foreign exchange funds for collection shall follow the principle of going through the relevant formalities before centralized operations and administration; the income/expenditure range of the accounts, such as special accounts for foreign exchange entrusted loans, and foreign exchange capital accounts and current foreign exchange accounts, is strictly limited; the principle of full-receipt, full-paymentshall be adhered to; and no net settlement is allowed on its own.
In general, the risks existing from the centralized operations and administration of foreign exchange funds of domestic enterprises are limited, and are also controllable with the implementation of above-mentioned design scheme.

Q: Do the Provisions apply to internal members of domestic enterprises controlled by overseas parent companies?
A: Yes. Article 28 of the Provisions specifies that The Provisions shall apply to internal members of domestic enterprises controlled by the same overseas parent company.

Q: Is approval from the AFE required when domestic enterprises carry out operations of foreign exchange funds business via internal finance companies in the form of collecting the internal membersforeign exchange deposits and granting foreign exchange loans to internal members?
A: If domestic enterprises only conduct the business of foreign exchange funds operations via finance companies in the form of collecting internal members foreign exchange deposits and granting foreign exchange loans to the internal members, no approvals by the AFEs are required. The same case applies in the plan for issues such as the opening of foreign exchange fund accounts and domestic foreign exchange transfers.
However, if foreign currency funds pools are realized within the legal framework of the entrusted loans, they shall be approved by the AFEs and processed in compliance with the Provisions.

Q: Compared with the Circular of the SAFE Concerning Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Conducted by Finance Companies of Enterprise Groups, are there any changes in the Provisions concerning administration of the business of spot purchases and sales of foreign exchange conducted by domestic enterprises via finance companies?
A: There are no changes in the principles, but the contents are more scientific and improved. For example, the Provisions further specify the relevant procedures for the business of purchase and sale of foreign exchange by finance companies, i.e., only after becoming members of the inter-bank spot foreign exchange market can finance companies conduct the business of spot purchases and sales of foreign exchange in compliance with the relevant regulations on the purchase and sale of foreign exchange.

Q: How should we understand the relationship among the Provisions, the Circular of the SAFE Concerning the Relevant Issues on the Internal Operations and Administration of Foreign Exchange Funds of Multinational Companies (Huifa [2004], No. 104) and the Circular of the SAFE Concerning the Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68)?
A: The Circular of the SAFE Concerning the Relevant Issues on the Internal Operations and Administration of Foreign Exchange Funds of Multinational Companies (Huifa [2004], No. 104) and the Circular of the SAFE Concerning the Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68) shall be repealed simultaneously with the date that the Provisions enter into effect.