SAFE relaxation of capital account foreign exchange settlement
On 9 June 2016, the State Administration of Foreign Exchange ("SAFE") published its Notice on Reforming and Standardising the Administrative Policies on Capital Account Foreign Exchange Settlement (国家外汇管理局关于改革和规范资本项目结汇管理政策的通知) (the "Notice"), which became effective on the same day. The Notice extends nationwide the administrative reform in the four pilot free trade zones in Shanghai, Tianjin, Guangdong and Fujian relating to the onshore remittance and conversion of foreign debt borrowed offshore into Renminbi ("RMB").
In the past, only foreign-invested enterprises ("FIEs") could convert foreign debt borrowed offshore into RMB for their business use in the PRC. PRC domestic financial institutions and PRC-funded enterprises were not allowed to convert such foreign debt into RMB or use such RMB amounts in the PRC. Therefore a PRC issuer/borrower in a direct bond issuance/offshore loan would need to negotiate with the relevant local SAFE on a case-by-case basis in order to take the proceeds onshore. This resulted in a certain level of uncertainty, with inconsistent policies being applied by different local SAFE.
Key Changes and Impact on Offshore Bond Issuances and Offshore Bank Loans
Under the Notice, from 9 June 2016 all onshore enterprises (including both PRC-funded enterprises and FIEs) can convert foreign debt borrowed offshore into RMB for their actual business needs in the PRC. It therefore provides a clear legal basis for a PRC issuer/borrower to remit the proceeds from its offshore direct bond issuance/offshore borrowing back to the PRC and convert such proceeds into RMB for onshore business use.
Going forward, if a PRC issuer/borrower intends to remit the proceeds of its offshore direct bond issuance/offshore borrowing back to the PRC, it would need to ensure that the Enterprise Foreign Debt Pre-Issuance Registration Certificate issued by the National Development and Reform Commission or its local counterpart specifically allows the onshore remittance of the proceeds. Once this condition is met and after the filing of the relevant bond issuance documents/loan agreement with SAFE, such PRC issuer/borrower should be able to open a remittance account with an onshore bank and process the remittance of such proceeds from offshore to onshore.
The implementation of the Notice should encourage more PRC issuers/borrowers to contemplate a direct issuance/direct borrowing instead of using a keepwell structure. Transactions utilising the keepwell structure will still continue to be part of the fund-raising landscape for PRC enterprises. The direct issuance/direct borrowing structure may be less tax efficient from a withholding tax perspective. We have seen high grade issuers/borrowers who still prefer the keepwell structure, as the cost savings from a direct issuance/direct borrowing may not be sufficient to compensate the tax costs.
It is also worth noting that the Notice does not remove the prohibition on the onshore remittance of the proceeds from guaranteed bond issuances (i.e. in relation to offshore bonds directly guaranteed by a PRC issuer). Pursuant to the Regulation on Foreign Exchange Administration of Cross-border Guarantee and Security (跨境担保外汇管理规定) and its operational guidelines issued by SAFE on 12 May 2014 which became effective on 1 June 2014, the proceeds from such guaranteed bond issuances cannot be remitted onshore directly or indirectly without the approval of SAFE.
The other key change under the Notice is that the proceeds that a PRC issuer/borrower receives from offshore bond issuances/offshore borrowings can now be converted into RMB at any time. Under the old SAFE regime, such conversion can only be made at the time that the PRC issuer/borrower uses such proceeds onshore (for instance, making payment to a third party). Such change would help PRC issuers/borrowers to control their foreign exchange risks in relation to the proceeds from offshore bond issuances/offshore borrowings.