China: New Direction On Cross-Border Use Of RMB In Shanghai Free Trade Pilot

Last Updated: 2 June 2014
Article by Rose Zhou, Roy Zhang, Wilfred Chiu and Julie Zhang

Upon the approval by the head office of the People's Bank of China, Shanghai Head Office of People's Bank of China issued Notice of Efforts to Expand Cross-border Use of RMB in China (Shanghai) Free Trade Pilot Zone (hereinafter "the Notice") on February 20, 2014. The Notice further simplifies procedures for cross-border use of RMB under the current and direct investment accounts in Shanghai Free Trade Pilot Zone (hereinafter "SFTPZ"), and clarifies upper limit and usage of the cross-border RMB loan.

We will share with you in this alert our observations and insights on the Notice.

Cross-border use of RMB is expanded to below fields:

  • Cross-border RMB settlement under current and direct investment accounts in SFTPZ;
  • RMB settlement in personal account in SFTPZ;
  • Overseas RMB loan in SFTPZ;
  • Cross-border mutual RMB cash pooling in SFTPZ;
  • Centralized collection and payment of cross-border RMB under current account in SFTPZ;
  • Cross-border RMB settlement for e-business;
  • Transaction services for cross-border use of RMB.

Implementation rules

  • Cross-border RMB settlement under current and direct investment accounts and RMB settlement in personal account in SFTPZ
    • Individuals working in SFTPZ are allowed to open settlement accounts to process RMB cross-border collection and payment in accordance with the relevant provisions. Where foreigners are involved, valid residence permit shall be presented at the mean time.
    • According to the three principles of "know your client", "know your business" and "due diligence", banking financial institutions in Shanghai can directly handle cross-border RMB settlement business under current and direct investment accounts based on the collection and payment instructions submitted by enterprises or individuals in SFTPZ (excluding the enterprises on the key monitoring list of RMB settlement for exportation). Where the Negative List is triggered, the approval issued by competent authorities is additionally required.
  • Upper limit and usage of overseas RMB loan
    • Upper limit:

  • Usage scope:

    Enterprises in SFTPZ can open a deposit account in Shanghai specially for RMB loan from overseas in accordance with the implementation rules. Such funds can only be used in SFTPZ and out of China, including areas such as business operations, project construction, and etc. However, it is not allowed to be used in negotiable securities, including wealth management products and other asset management products, derivatives or entrusted loans.
  • Cross-border mutual RMB cash pooling within group in SFTPZ
    • Clarify that "group" includes finance company in SFTPZ;
    • The group's headquarters shall designate an operating membership registered in SFTPZ to select a bank to open the special RMB deposit account, the funds in which account shall be separately managed;
    • The RMB funds in the cash pool should be generated from production, operation and industrial investment, the funds generated from financing activities should not be pooled.
  • Centralized collection and payment of cross-border RMB under current account in SFTPZ
    • The group's headquarters shall designate an operating member registered in SFTPZ to select a bank to open the RMB deposit account, specially for centralized collection and payment under current account between the Chinese and overseas affiliated enterprises.
  • Cross-border RMB settlement for e-business
    • In terms of real cross-border e-business, banks in Shanghai are encouraged to cooperate with payment institutions in SFTPZ which obtained the Internet Payment Business Permit, and to directly provide cross-border RMB settlement services to cross-border e-business operators in SFTPZ;
    • Banks shall enter into an agreement on cross-border e-business RMB settlement with payment service institutions and complete registration in Shanghai Head Office of the People's Bank of China;
    • The Shanghai Gold Exchange (SGE) and the China Foreign Exchange Trade System (CFETS) can provide trading of financial assets and precious metal in RMB.

Grant Thornton observations

The announcement of the Notice provides detailed guidance and implementation rules in relation to the cross-border use of RMB, including opening special RMB settlement account, examination procedures of banking financial institutions, usage scope of funds and the upper limit of overseas RMB loan. According to the Notice, enterprises registered in SFTPZ can apply for the cross-border use of RMB based on its own business needs. Meanwhile, investment information sharing system between Shanghai Head Office of People's Bank of China and Administration Committee of Free Trade Zone is also proposed by the Notice to serve commercial banks.

However, we are still waiting for further clarification in certain areas provided by following regulations, such as whether there is any conflict between the upper limit of RMB loan and quota of foreign loan, and whether independent bank account should be opened for different usage of RMB. Therefore, a proactive communication with banking financial institutions is recommended to smooth the practical implementation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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