SAFE Expands At Will Conversion and use of Foreign Debt Proceeds

On 9 June 2016, the State Administration of Foreign Exchange (“SAFE”) issued the Notice of the State Administration of Foreign Exchange on Reforming and Standardising the Administrative Provisions on Capital Account Foreign Exchange Settlement 2016, with immediate effect. The notice reforms the settlement and payment by domestic institutions (including foreign invested enterprises and purely domestic businesses and institutions) of foreign debt proceeds.

Specifically, the notice:

  • Implements, on a nationwide basis, certain reforms initially put into practice in China’s four pilot free trade zones that permit the conversion and use of foreign debt proceeds on a discretionary basis, except where that settlement and payment is restricted under other rules.
  • Provisionally caps at will foreign exchange settlements at 100 percent of a domestic institution’s foreign debt proceeds (but retains SAFE’s authority to lower this ratio as necessary in view of China’s foreign exchange reserves).
  • Permits domestic institutions to continue to operate under the old payment and settlement system, which permits conversion in accordance with an institution’s specific payment obligations on the strength of appropriate documentation. However, it restricts the use of Renminbi obtained in settlement to make payments under the new system.
  • Requires capital account foreign debt proceeds to be settled and paid out through a special Settlement and Accounts Payable Bank Account, which can be used to facilitate settlement and payment for all types of capital account needs.
  • Standardises the settlement and payment of capital account foreign exchange funds through the use of a nationwide Capital Account Funds Letter of Payment Order form.

Market Reaction

Zhang Xin, Partner, Global Law Office, Beijing

“The step taken by SAFE to expand the “at will” conversion and use of foreign debt proceeds on a nationwide basis shows an increasing degree of flexibility of the regulator in tackling the PRC’s prominent foreign exchange issues, based on a macro-prudential regulatory approach. While it is quicker than originally expected after SAFE allowed the FTZs to carry out a pilot test in this area, this move should be welcomed by foreign debt borrowers because it not only provides a useful tool for managing foreign debt proceeds onshore but also potentially expands such proceeds’ scope of use.”

Action Items

General Counsel for any company that uses (or that is considering the use of) cross-border debt financing for a China registered subsidiary will want to work with finance colleagues to compare and contrast the new “at will” system with the traditional system for converting and using foreign debt proceeds to determine the most appropriate structure and system for their particular business going forward.