For the past two years, China’s economic growth has dazzled the world with growth rates exceeding 10 per cent, accession to the World Trade Organisation (WTO) and an increasingly sophisticated employment market. It has achieved all of this under a highly regulated framework. Recognising the need to liberalise certain areas of its economy, China’s government recently introduced significant changes to China’s foreign currency regulations.
‘Pudong Nine Measures’ Pilot Program
In October 2005, the State Administration for Foreign Exchange (SAFE) and the Shanghai Pudong City Government (SPGC) jointly introduced a pilot program to relax foreign currency restrictions on qualified multinational companies (MNCs).
The program, termed the ‘Pudong Nine Measures’ (see Table 1 below), was designed to comply with SAFE’s stated principles of ‘independent initiative, controllability and gradual process’.
Huang Yiping, managing director and head of Citigroup’s Asia Pacific Economic and Market Analysis, believes that “though the reforms are emerging gradually, they provide the right stimulus at the appropriate time for a smooth transition.”
The Pudong Nine Measures enable multinational corporations (MNCs) with regional headquarters located in the Pudong New Area to run corporate treasury functions more effectively from China. Pudong is Shanghai’s hyper-modern new area, the centrepiece of which is the Lu Jia Zui financial district.
To qualify for and benefit from the Pudong Nine Measures, Chinese or foreign MNCs must:
- Be based in Pudong;
- Own Chinese and foreign subsidiaries; and
- Have a China-based member-company managing the group’s investments globally or for a China inclusive region.
Table 1
Pudong Nine Measures:
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Key changes introduced by the Pudong Nine Measures include permission for qualified MNCs to centralise treasury operations by consolidating foreign exchange management for domestic and foreign subsidiaries. These subsidiaries are now permitted to lend foreign exchange funds to overseas subsidiaries to support international expansion. The reform also eases limitations on foreign currency outflows for Chinese multinationals to support their overseas investments.
SAFE expects that the Nine Measures will improve the MNC foreign exchange management, evaluation and monitoring process. With over 60 regional headquarters located in Pudong, the reforms presented banks in China with long-awaited opportunities to innovate foreign currency solutions for qualified MNC clients.
Chief among the legions of new solutions introduced were foreign currency cash pooling using inter-company entrust loans. Previously prohibited foreign currency hedging instruments are also newly available. The reforms also made Pudong significantly more attractive as a potential location for MNCs to set up shared service centres (SSCs) providing treasury functions.
Relaxation of Foreign Currency Regulations
Though the Pudong Nine Measures have engendered far-reaching change, regulatory reforms have not been limited to the pilot program. The government has also introduced foreign currency reforms affecting a broader section of the China economy. The central bank, or People’s Bank of China (PBOC), has changed the foreign currency control system on nine occasions since its 1994 inception. The latest change brought further relaxation of rules governing the purchase and holding of foreign currency (see Table 2 below). Banks, securities and investment companies wishing to invest overseas welcomed the April 2006 announcement.
In the first place, the reforms make it simpler and easier to open foreign currency accounts, as SAFE approval is no longer required. With less stringent account opening requirements in place, the reforms have effectively eased pressure on RMB appreciation by allowing companies and individuals to purchase and hold foreign currency, instead of requiring that it be converted to RMB.
SAFE has also set new larger foreign currency account cap limits, now 80 per cent of the prior year’s foreign currency income under current account related items plus 50 per cent of last year’s foreign currency payments under current account items. Though extensively affecting China’s finance sector, the reforms also positively affect its international trade flows as shipping and logistics companies may now purchase foreign currency to make overseas payments for freight and related service fees.
These companies may now also collect RMB, rather than only foreign currency, from domestic customers. This dramatically improves the efficiency of fee collections, as China’s RMB clearing system is far superior to its foreign currency counterpart. Similarly, export companies now have more choice when paying freight charges and related service fees; rather than route payments through domestic shipping companies, they may pay directly to the ultimate service provider, the overseas freight company.
Finally, these reforms give companies substantially more choice on collection channels and bank selection. Though the reforms are far reaching, some issues remain unchanged, such as the requirement to convert foreign currency funds to RMB within 90 days of exceeding the cap limit and the need to make a declaration to SAFE for payments above US$100,000 (see Table 1 for details). Further relaxation of the latter requirement is expected soon.
Citigroup’s Huang says: “It’s only a matter of time before the authorities remove further foreign currency controls. But they will do it when the time is right and there is a very small chance of a negative consequence.” Notwithstanding that many consider the pace of reform to be slow, the effects of the reforms are tangible and far-reaching. Such a considered pace echoes the famous proverb ‘we are not so much concerned if you are slow as when you come to a halt.’ And there is certainly no realistic prospect of China’s foreign currency reform doing that.
Table 2
| Eligible Party | Subject | Existing Regulation | New Regulation (Effective 1 May 2006) |
| All companies and institutions | Foreign currency account opening | SAFE approval is required for each FCY account opening. | Registration at SAFE required only for opening the first FCY account. From the second account, no SAFE approval or registration is required. |
| All companies and institutions | Foreign currency account cap | Initial Cap: US$200,000 | Initial Cap: US$500,000 |
| 50 per cent of FCY income (If FCY payments/FCY income < 80 per cent) | 80 per cent of FCY income + 50 per cent of FCY payments | ||
| 80 per cent of FCY income (If FCY payments/FCY income >= 80 per cent) | |||
| All companies and institutions | Foreign currency purchasing and payment | FCY should be paid out to beneficiary immediately after it is purchased. | FCY can be held after its purchase. No need to pay out immediately. |
| All companies and institutions | Foreign currency payment and purchasing under service trade items | Contract, invoice and tax receipts are required. | For amounts up to $50,000 with beneficiary as a company or institution, or $5,000 with beneficiary as individual, only contract or invoice is required. |
| There is no process defined by SAFE for accepting printouts of electronic copy of contract and invoice. | Printout of electronic copy of contract and invoice are accepted as long as certified with the authorized signatures and company chop of the payment applicant. | ||
| For items not covered in the current service trade (non-trade) payment list, payments and FCY purchases larger than US$50,000 need SAFE approval. | SAFE approval is required when amount is over US$100,000 (same treatment as for the treasury centres and research centres registered in Pudong). |
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| Shipping & logistics companies | Cannot purchase FCY for payment of freight and service charges. | Can purchase FCY for payment of freight and service charges. | |
| Exporting companies | Cannot directly pay to overseas shipping companies for freight and service charges. | Can pay to overseas shipping companies for freight and service charges. |