On 15 March 2019, the State Administration of Foreign Exchange (SAFE) promulgated the Administrative Provisions on the Centralised Operation of Cross-Border Funds of Multinational Corporations (《跨國公司跨境資金集中運營管理規定》) (Circular 7), which became effective on the same date. Circular 7 supersedes the Administrative Provisions on the Centralised Operation of Foreign Exchange Funds of Multinational Corporations (《跨國公司外匯資金集中運營管理規定》) (Circular 36) issued on 5 August 2015.
It can be seen that the title of these two circulars are slightly different. The “foreign exchange funds” centralised and operated under Circular 36 has now been changed to “cross-border funds” under Circular 7. The slight revision in the title in actual fact reflects a significant change. According to Circular 7, the currency of the funds maintained in the cash pool’s main account is not restricted to foreign exchange only. That means, multinational corporations (MNC) can now establish a two-way cross-border cash pool to centralise and allocate funds for its member companies denominated in both foreign exchange and RMB.
Prior to Circular 7, two types of cash pool could be set up by a MNC to centralise and allocate funds between accounts of its member companies. Depending on the currency to be managed within the pool, a cash pool would be regulated under different legal regime. One is the foreign exchange cash pool which was regulated by SAFE under Circular 36; and the other is the RMB cash pool which was mainly regulated by the People’s Bank of China (PBOC) in accordance with rules promulgated by PBOC as well as several regional rules applicable only to free trade zones. Since the setting up of multi-currency cash pool covering both RMB and foreign exchange becomes possible pursuant to Circular 7, MNCs can now apply to a competent branch of SAFE to set up a multi-currency cash pool (including RMB) instead of having to set up separate foreign exchange cash pool and RMB cash pool by applying to different supervising authorities and following different rules and regulations.
Apart from the above change, the following relaxations under Circular 7 are also worth noting:
- Circular 7 provides that a MNC shall use the macro-prudential principle when calculating centralised foreign debt quotas and/or outbound lending quotas for its member companies. The formula adopted in Circular 7 is in line with the formula published by the PBOC in 2017 according to the Notice of the PBOC on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing (Yin Fa  No. 9) (《中國人民銀行關於全口徑跨境融資宏觀審慎管理有關事宜的通知》(銀髮 9 號)) ;
- Under Circular 7, a MNC is only required to complete one registration for the centralised foreign debt and/or outbound lending quotas for all of its member companies and there is no need to register each transaction (foreign debt or outbound lending). In addition, the three written reports prescribed under Circular 36 are no longer required to be submitted;
- When using the foreign exchange income derived from capital account, there is no need for a MNC to provide the supporting documents to the PRC bank for verification in advance;
- The concept of international foreign exchange master account under Circular 36 is no longer applicable under Circular 7. In case a MNC still prefers to maintain a separate account for pooling the funds of its overseas members, it may designate an overseas member to open a non-resident account for such purpose.
It is worth noting that despite Circular 7, the RMB cash pool regulated by the PBOC continues to be effective. That means there are now two parallel legal regimes governing the RMB cash pool business. We estimate that further rules and clarifications would be made by the authorities to coordinate these two legal regimes, so that the MNC Cash Pool framework could be more unified and simplified. It is also important to see how Circular 7 will actually impact the operation of banks and how SAFE will exercise its supervision over them, as foreign exchange control often varies in keeping with changes to the economic circumstances.