PBOC Promulgating Implementation Rules on Free Trade Account

1. Overview

On 21 May 2014, the People’s Bank of China Shanghai Head Office (“Shanghai PBOC”) released the Implementation Rules on Split Accounting in China (Shanghai) Free Trade Zone (Trial Implementation) (“Implementation Rules”) and the Implementation Rules on Prudential Management of Risks Relating to Split Accounting in China (Shanghai) Free Trade Zone (Trial Implementation) (“Prudential Management Rules”), pursuant to which financial institutions in Shanghai are empowered to provide services in connection with current account items, direct investment and innovative financing and investment services through Free Trade Account (“FTA”). The Implementation Rules and the Prudential Management Rules filled the gaps of the regulations on FTA, created an essential framework for the financial reforms in China (Shanghai) Pilot Free Trade Zone (“FTZ”), and laid a solid foundation for deepening the financial reforms and promoting the innovation of cross-border financing and investment.

2. What is split accounting and FTA?

  • Split accounting refers to Shanghai financial institutions setting up split accounting units and assisting FTZ entities on innovative financing and investment activities available under the FTZ policies or providing financial services to offshore entities available under the pre-entry national treatment, in each case via such split accounting units.
  • FTZ split accounting units (“FTU”) refer to the special free trade accounting system set up within municipal-level branches of financial institutions in Shanghai for the purpose of FTZ split accounting business, which is entirely separated from other business of such financial institutions through the adoption of corresponding mechanisms.
  • FTA are RMB or FX accounts opened at the request of clients by financial institutions under FTU subject to uniform FTU rules. At the moment, only RMB FTA is available and FX FTA will be rolled out at a later stage when conditions are sufficiently mature.

3. Participating entities and the types of FTA

Depending on the account holders, there are five different categories of FTA, each with different requirements on the account holders, different applicable financial institutions and different accounting tags as summarized below:

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4. FTA functions

(1) Currency conversion

  • Conversion freely:

For the existing convertible transactions (including current account transactions and direct investment transactions), funds in FTA are freely convertible.

  • Conversion as needed:

For innovative financing and investment (such as individual cross-border investment, and investment into onshore capital market), funds in FTA are convertible depending on actual business needs.

  • Restricted conversion:

For certain high-risk transactions, funds in FTA can only be converted in accordance with conditions specified in the relevant Shanghai PBOC’s implementation rules.

(2) Transfer of funds

FTA can be used for cross-border settlements of current account transactions and direct investment and the funds transferred thereunder may be transferred freely or with restrictions

  • Transfer freely:

Funds can be transferred freely among FTA, offshore accounts, non-resident accounts outside the FTZ, and other FTA.

  • Restricted transfer:

RMB funds can be transferred between FTA and non-FTA (including the accounts opened by the same entity) of the onshore institutions (including FTZ institutions), provided that such transfer is regulated as cross-border transfer. Subject to authenticity verifications, only the following four types of RMB funds transfer are permitted thereunder: 

  1. current account transactions;
  2. repayment of RMB loans advanced by Shanghai financial institutions to the FTA holder itself with a loan term exceeding six months (exclusive);
  3. industrial investment such as construction of new projects, M&A or capital increase, etc.;
  4. other cross-border transactions permitted by Shanghai PBOC. 
  • Transfer of funds in FTI and FIE is subject to rules that are yet to be promulgated by Shanghai PBOC.

(3) Function Limitation

  • For the prevention of hot money inflow, the Implementation Rules prohibits FTA from being used for cash business.
  • At this stage, foreign currency cannot be deposited in FTA. PBOC and the State Administration of Foreign Exchange may consider allow foreign currency business under FTA system within six months after the promulgation of the Implementation Rules and the Prudential Management Rules.

5. Split accounting management scheme

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6. Implications for cross-border innovative financing and investment

FTA system is a significant instrument or carrier for the promotion of financial reforms such as capital account conversion. Financial institutions will commence setting up the FTZ split accounting management scheme after the promulgation of the Implementation Rules and Prudential Management Rules. It is expected that, once the FTA system is actually set up, the financial environment in FTZ will be highly integrated to the international financial market with controlled connectivity with domestic market outside FTZ. For enterprises, FTA system means they could use capital more efficiently and conveniently and accordingly their international competitiveness could be greatly enhanced. For financial institutions, FTA serves as a basis for designing and producing more flexible structural financing products. Furthermore, the Implementation Rules and Prudential Management Rules are not only applicable to banks. Other types of financial institutions in Shanghai (including non-bank financial institutions such as securities company, futures company etc.) are also permitted to set up split accounting unit and conduct split accounting business, which bolsters broader policy possibilities for further opening up domestic capital market.