• SAFE Further Liberalizes Forex Funds Pools of Multinational Corporations

On 5 August 2015, SAFE promulgated the Administrative Provisions on the Centralized Operation of Foreign Exchange Funds of Multinational Corporations (国家外汇管理局关于印发《跨国公司外汇资金集中运营管理规定》的通知) (Circular 36), effective as of the same date.

Circular 36 replaced the previous Circular of SAFE on Issuing the Administrative Provisions on Centralized Operation of Foreign Exchange Funds of Multinational Corporations (for Trial Implementation) (国家外汇管理局关于印发《跨国公司外汇资金集中运营管理规定（试行）》的通知) (Circular 23) effective as of June 1, 2014.

Under Circular 23, multinational corporations, referring to consortiums composed of a parent company, subsidiaries and other member enterprises or institutions with a capital link as the linkage, could establish a domestic and an international foreign exchange (“forex”) funds pool respectively at a bank in China in order to conduct certain transactions such as centralized receipt and payment of forex funds of current items and net settlement as well as collectively operate and manage forex funds of overseas member enterprises and foreign debt funds.

In simple words, a forex funds pool enables companies to centralize the forex management of their groups through bank accounts maintained with certain banks.

It should be noted that forex cash pools of MNCs are regulated under separate rules than forex funds pools.

Similar to Circular 23, Circular 36 seems to be based on the opinion that an entrustment loan framework is still required for forex fund pools. Probably, the frequent transfer of funds between the member enterprises of a funds pool would be regarded by SAFE as a regulated financial service which may only be carried out by licensed financial institutions. It will be interesting to see how the SPC will treat forex funds pools arranged among enterprises without involving a bank.

The significant liberalization under Circular 36 as compared to Circular 23 is that Circular 36 provides for more flexibility in regard of foreign debt quota calculation and management among member enterprises of a forex funds pool. Usually, without a funds pool, FIEs may only incur foreign debts up to an amount equalling the difference of their approved total investment and registered capital (so-called “borrowing gap”). Under Circular 36 a foreign-invested multinational corporation may wholly or partially centralize the permissible amount of foreign debts of member enterprises participating in the funds pool and may choose among various calculation methods. Circular 36 provides for the following new formula to calculate a group’s centralized foreign debt quota:

Total foreign debt quota of a multinational corporation =  net asset amount x financing leverage ratio (currently 1) x macro prudential ratio (currently 1)

The above formula is applicable provided that the asset debt ratio does not exceed 75%.

In principle, after having opted for one calculation formula, a foreign-invested multinational corporation may not opt for the other calculation method.

It is also notable that Circular 36 explicitly provides for the use of RMB funds settled from forex foreign debt for repayment of RMB loans. Before Circular 36, the use of RMB funds settled from forex foreign debt for repayment of RMB loans was expressly prohibited under the Foreign Debt Registration Administrative Measures（外债登记管理办法）effective as of 13 May 2013. However, according to the banks’ internal regulatory interpretation, the permitted repayment of RMB loans refers to RMB loans granted by financial institutions within China (also entrustment loans) rather than intercompany loans.

Further, Circular 36 expressly mentions that RMB funds settled from forex foreign debt may be used for equity investment. Arguably, this is only possible if the words “equity investment” are included in the business scope of the foreign debt borrower as reflected in its business license, because the foreign debt funds shall be used “within the business scope of the borrower” according to Circular 36. It will have to be observed how long authorities will apply this restrictive interpretation of the circular.

It should be noted that to open a domestic and international forex funds pool, a multinational corporation must fulfil certain qualifications. For example, the income and expenses of the group (in RMB and in forex) must have exceeded USD100 million in the preceding year (consolidated calculation for domestic member enterprises participating in the forex fund pool).

Since the definition of the multinational corporation set forth under Circular 36 does not exclude Chinese-invested companies, and further based on the officially published interpretation of SAFE, we understand that Chinese-invested companies fulfilling the relevant qualification requirements may establish cross-border forex funds pools as well.

For your easier reference, we summarize the key changes in the following table:

Click here to view the table.