Earlier this year, China’s central bank, the People’s Bank of China, authorized the use of special cross-border currency exchange services to help facilitate international trade and further the globalization of the Yuan. The RMB Cross Border Settlement currency exchange program was tested in late 2013 under the Free Trade Zone (FTZ) guidelines titled, “Circular on Supporting the Expansion of RMB Cross-border Business in China (Shanghai) Pilot Free Trade Zone.” According to the guidelines, banks can provide RMB Cross-Border Settlement payment services if they are registered in Shanghai or run subsidiaries in the pilot free trade zone and have payment service licenses.
Currently, there are five major Chinese banks that are operating special RMB Cross-Border Settlement payment accounts with their respective branches in Shanghai. The banks that are authorized to conduct currency exchanges and foreign overseas transfers under the FTZ are: Industrial and Commercial Bank of China, Bank of China, China Construction Bank, China Merchants Bank and China Minsheng Banking.
What do the Free Trade Zone and RMB Cross Border Settlement currency exchange servicesmean for EB-5 investors?
The FTZ’s RMB Cross-Border Settlement currency exchange program is gaining momentum in China, particularly among EB-5 investors. The program provides innovative financial offerings to investors compared to other popular methods used to facilitate the EB-5 investment. Chinese currency laws generally restrict currency exchanges for U.S. dollars to $50,000 per person per year. This makes it nearly impossible for investors residing in China to legally transfer EB-5 funds on their own. Therefore, Chinese investors utilize the “friends and family” approach to transfer funds or transfer funds through a third party in Hong Kong.
Investors who use the “friends and family” approach utilize friends and family members to assist with each transfer of USD 50,000 in order to make a sufficient EB-5 investment. The friends and family members are required to submit bank records evidencing each deposit and transfer, along with affidavits attesting to the transfers. USCIS will issue a Request for Evidences (RFE) if the investor fails to provide the requisite documentation.
The other common method used by investors to facilitate the EB-5 investment is known as the “third party in Hong Kong” method. Here, the investor makes a payment to a third party’s account in mainland China. The third party then transfers his or her own Hong Kong-based funds to the investor’s account in the United States. Investors that use this method must provide bank records to document the transfers as well as an affidavit from the third party to fill in the resulting gap in the transfer of funds, or risk an RFE.
In comparison, the RMB Cross-Border Settlement currency exchange method allows EB-5 investors to make individual direct investments without having to rely on third parties. Under the program, investors need only to apply for the service which exchanges the requisite EB-5 investment funds from Yuan to U.S. Dollars on their behalf. The full EB-5 investment amount is then wired in one transfer from the investor’s RMB Cross-Border Settlement payment account in China directly to the United States.
Therefore, the amount of documentation required to evidence the transfer of funds is significantly reduced when comparing it to the ten to twelve transfers utilized in the “friends and family” method. The program also enables investors to carry out overseas investments directly which eliminated the documentation necessary to explain the gap in the transfer of funds seen in the “third-party in Hong Kong” method. Furthermore, Chinese banks are now able to provide transparency in pricing, a reduction in foreign exchange costs, and locked-in costs and fees under the FTZ’s RMB Cross-Border Settlement currency exchange program. GT will monitor the progress of China’s financial reforms and its impact on the EB-5 program.