- Circular 20 to tackle false trading, reduce large foreign capital inflows into China and slow down the Yuan appreciation.
- Banks must maintain their shares of foreign currency loan balance as a percentage of their foreign currency deposits balance.
- Circular 20 increases scrutiny on exporters who channel money into the country disguised as trade payments.
- The circular also brings in regulations to strengthen the SAFE monitoring and analysis system.
On 6 May 2013, the State Administration of Foreign Exchange (“SAFE”) issued a Circular on Strengthening Administration of Foreign Exchange Capital Inflows (Huifa  20) (“Circular 20”) intended to clamp down on false trading, reduce large foreign capital inflows into China and help decelerate the pace of Yuan appreciation.
Highlights of the Regulations
The new regulations involve three types of subject, commercial banks, companies and SAFE.
How Circular 20 Applies to Banks
According to the circular, each commercial bank’s position of foreign exchange settlement and sale will be determined by its balances of domestic foreign currency loans and foreign currency deposits on the domestic market.
Chinese banks and foreign banks must maintain their shares of foreign currency loan balance as a percentage of their foreign currency deposits balance, set at below 75 percent and below 100 percent respectively. If banks do not meet this requirement, they must adjust limits on positions of foreign exchange settlement and sale. Commercial banks must complete the adjustment of position limits within the first ten working days of each month.
How Circular 20 Applies to Companies
For companies, the circular increases scrutiny on exporters who channel money into the country disguised as trade payments.
SAFE can issue warnings if it finds that a company’s foreign exchange capital flows do not match its trade or that the company is channelling unusually large amounts of money into China. If a company fails to explain the situation within ten working days – providing sufficient evidence and a reasonable explanation – it will be placed on its “B list”, intended for companies that are to be more strictly monitored. The company will only be moved back onto the “A list” if all the relevant indicators return to its normal range for three consecutive months.
Under Circular 20, a B list company’s entrepot trade foreign exchange income must only be settled and transferred after external payments have been made. Entrepot income and expenditure of the same entrepot trade business shall be conducted at the same bank. For newly signed entrepot trade contracts, the settlement currency of income and expenditure shall be the same, whether a foreign currency or RMB.
Extended SAFE powers under Circular 20
The circular brings in regulations to strengthen the SAFE monitoring and analysis system. Where abnormal capital inflows are brought to their attention, SAFE should take the initiative to carry out on-site verification or inspection.
Where a company uses false documents for arbitrage, SAFE can impose severe punishments in accordance with current law. Companies and banks that break the SAFE regulations will be fined or closed, and their practices exposed to the public.