Key Points

  • Concept of “domestic master account for foreign exchange funds” and “international master account for foreign exchange funds” explained
  • Foreign exchange funds in domestic master account and international master account can flow freely within quota amount
  • Centralized Receipts and Payments of Foreign Exchange allows a multinational company to control foreign exchange risks at the headquarters level and reduce its financial burden

Background to the Development of Centralized Operation and Management of Foreign Exchange Funds by Multinational Companies

On 28 February 2014, SAFE Shanghai Bureau issued the Implementation Rules on Foreign Exchange Control to Support the Development of China (Shanghai) Pilot Free Trade Zone (“FTZ Rules”), with its appendix I focusing on centralized operation and management of foreign exchange funds in the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”). On 16 May 2014, the Shanghai FTZ pilot program was officially launched, with the first batch of bank-enterprise cooperation agreements on centralized operations and management of foreign exchange funds for headquarters of multinational companies in Shanghai FTZ being signed. A total of 21 enterprises signed cooperation agreements with 13 banks, marking the beginning of implementation of this important foreign exchange measure in the Zone.

On 1 June 2014, Provisions on the Centralized Operation and Management of Foreign Exchange Funds by Multinational Companies (“SAFE Provisions”) issued by SAFE took effect, so that such foreign exchange reform has been extended to a national level. In terms of the applicability of SAFE provision and FTZ Rules, the SAFE provision shall apply nationwide except for in the Shanghai FTZ area, whereas the FTZ Rules shall govern the centralized management of foreign exchange funds for multinational companies if their headquarters or financial companies in charge are located in the Zone.

Introduction to Several Key Aspects of SAFE Provisions

Domestic Master Account for Foreign Exchange Funds and International Master Account for Foreign Exchange Funds

The first aspect is the concept of “domestic master account for foreign exchange funds” and “international master account for foreign exchange funds”. Domestic master account allows a multinational company to collect the foreign exchange funds of its domestic member enterprises and put them under centralized operation and management by its headquarter or financial company in China. International master account allows a multinational company to collect the foreign exchange funds of overseas member enterprises and put them under centralized operation and management. In the past, the international master account of a multinational company used to be opened in areas such as Hong Kong, but can now be opened in domestic China.

Centralized management of account can allow the multinational company to establish their so-called internal bank, so as to have better control over its financial risk and have more efficient and effective internal financial management.

The multinational companies must meet the following requirements in order to be qualified to open the two accounts:

  1. They should have authentic business needs;
  2. They should have the sound management structure and internal control system for foreign exchange funds;
  3. They have established the corresponding electronic system for internal management;
  4. The scale of foreign exchange receipts and payments in the previous year shall exceed US$100 million (calculated on a consolidated basis of all domestic member enterprises); and
  5. They must not have committed any grave violations of laws or regulations on foreign exchange in the last three years.

The qualified multinational companies shall make a filing with their local tax bureaus. The local tax bureaus shall complete the filing- record procedure within 20 working days and issue a filing notice. The multinational companies may then apply for the opening of domestic mater account and international master account with qualified banks.

Connection of the Domestic Master Account and the Overseas Master Account

The second key aspect is the connection of the domestic master account and the overseas master account. The foreign exchange funds in domestic master account and international master account can flow freely within quota amount. However, the multinational company may need to report the fund flow between the domestic master account and international master account on a monthly basis.

The quota amount for net inflow of foreign exchange funds from international master account to the domestic master account shall not exceed the combined foreign debt quota of domestic member enterprises. The combination of foreign debt quota, instead of spreading the foreign debt quota among domestic member enterprises, allows multinational company to allocate the foreign debt more flexibly and effectively, and can reduce its financial cost.

The quota amount for net outflow of foreign exchange funds (or overseas lending) from domestic master account to international master account should, in general, not exceed 50% of the combined owners’ equity of its domestic member enterprises. According to the previous SAFE regulations, the previous overseas lending quota is 30% of the owners’ equity. Such an increase is particularly relevant for Chinese outbound investment, as a Chinese headquarter may lend more money to finance their overseas subsidiaries, which may face difficulties in obtaining bank loans from overseas banks. On the other hand, the loosening of overseas lending can also be used as a means to properly use some of China’s large amount of foreign reserve, according to a SAFE official.

The connection of the domestic master account and overseas master account can, in general, allow international companies to allocate their internal capital more freely and reduce their costs.

Centralized Receipts and Payments of Foreign Exchange

The third key aspect is Centralized Receipts and Payments of Foreign Exchange as well as Netting Settlement of Foreign Exchange under Current Accounts. The mechanism of Centralized Receipts and Payments of Foreign Exchange allows the PRC headquarters or financial company to handle payment and receipt of foreign exchange funds under current account on behalf of its domestic member enterprises via its domestic master account. This mechanism allows the multinational company to control the foreign exchange risks at headquarter level and reduce its financial burden.

The Netting Settlement mechanism allows the multinational company to consolidate foreign exchange receipts and payments under current account in a certain period as a single foreign exchange transaction. In principle, the netting settlement shall be made at least once a month. Previously, each time a company receives or pays foreign exchange, it has to run through the settlement procedure. The Netting Settlement mechanism can reduce the pressure on the financial staff of the multinational company, and reduce its finance cost accordingly. According to a financial manager of Sony, Sony Shanghai can reduce finance cost up to several hundred thousand US dollars thanks to the Netting Settlement mechanism. The Netting Settlement mechanism is, of course, most conducive to the multinational companies engaging in a great deal of trading business.

The Negative List

The fourth key aspect is the negative list for settlement of foreign exchange by capital fund and foreign debt. The foreign exchange by capital fund and foreign debt in the domestic master account may  be settled on a discretionary basis. The RMB funds obtained from exchange settlement shall be transferred into a special RMB deposit account, and may be directly paid after examining and verifying the authenticity within the business scope of all its member enterprises.

The settlement of foreign exchange funds shall comply with the current regulations on foreign exchange control, and may not be used:

  1. Directly or indirectly for the payments beyond the business scope of enterprises or the scope of usages designated for foreign debt funds or payments prohibited by the laws and regulations of the State;
  2. Directly or indirectly for investment in securities and derivatives, unless otherwise stipulated by laws or regulations;
  3. For disbursing RMB entrusted loans (unless permitted under its business scope), repaying inter-corporate borrowings (including third-party advances) and repaying RMB bank loans that have been sub-lent to third parties; or
  4. To pay for the expenses related to the purchase of real estate not for self-use, unless it is a foreign-invested real estate enterprise.

Comparison of SAFE Provisions and FTZ Rules

In general, the SAFE provisions and FTZ Rules have similar provisions. However, there are differences between the two including i) different qualification requirement, ii) different validity period for filing, and iii) different requirements on banks.

First, the requirements in SAFE provisions and FTZ Rules on the trial qualification for multinational companies are different:

According to the SAFE provisions, multinational companies must satisfy the following requirements:

  1. Have authentic business needs;
  2. Have the sound management structure and internal control system for foreign exchange funds;
  3. Have established the corresponding electronic system for internal management;
  4. The scale of foreign exchange receipts and payments in the previous year shall exceed US$100 million (calculated on a consolidated basis of all domestic member enterprises);
  5. Have committed no grave violations of laws or regulations on foreign exchange in the latest three years.

However, the FTZ Rules does not have the US$100 million threshold as a requirement. Instead, the FTZ Rules requires that the multinational company shall have the certificate issued by the FTZ management committee confirming that it is qualified for the trial program, which leaves the FTZ management committee certain discretionary power.

Second, pursuant to FTZ Rules, the filing with Shanghai SAFE bureau is valid only for two years and may be extended accordingly. However, the SAFE Provisions does not provide for the validity period of filing.

Third, pursuant to FTZ Rules, the bank may review relevant documentations related with Centralized Receipts and Payments  and Netting Settlement of Foreign Exchange under Current Accounts within 30 days after receipts or payments take place. However, the SAFE rule does not have similar requirements, meaning that under SAFE provision, the bank needs to review the documentation before the transactions take place.

Conclusion

With the implementation of SAFE Provisions and FTZ Rules, multinational companies in China can now benefit from the flexibility in allocating their foreign exchange funds, manage the foreign exchange funds at the headquarter level and reduce financial risks, and, most importantly, reduce their overall financial costs. However, to qualify for the trial programs, the multinational companies must, among others, have proper electronic system for internal management and a sound management structure and internal control system for foreign exchange funds. Therefore, multinational companies may need to overhaul the financial management system of their domestic member enterprises, often with the guidance from the cooperating banks, which could be burdensome and costly.

In addition, the implementation of SAFE Provisions and FTZ Rules reflect China’s aim to gradually reduce its foreign exchange restrictions. The trial programs might encourage multinational companies to establish their regional or global headquarters in China. Furthermore, the trial programs might be an important milestone for the internationalization of Renminbi.