Member Article

The State Administration of Foreign Exchange issued the Notice of the State Administration of Foreign Exchange on Relevant Issues in the Internal Operational Control of Foreign Exchange of Multinational Corporations on 18 October 2004. The Notice, which became effective on 1 November 2004, relaxes some of the restrictions on foreign exchange transfers between subsidiaries of multinational companies. Application The Notice defines a multinational as an enterprise group which has subsidiaries inside and outside China and a subsidiary inside China of which acts as the investment manager on a global level or for a region (which includes China). The definition embraces enterprise groups controlled by Chinese domestic investment as well as those controlled by foreign investment. The Notice does not apply to multinational financial institutions. According to the Notice, the purpose of the internal operational control of foreign exchange of multinationals is an investment and financial management method by which money is loaned and borrowed between subsidiaries inside China and between subsidiaries inside China and subsidiaries outside China in order to reduce financial costs and increase capital efficiency. Lending operations Loans between subsidiaries inside China can only be arranged indirectly either through the establishment of a finance company or through a designated bank via an entrusted loan. The Notice requires such entrusted loan to satisfy the following conditions: • the lender and borrower are both lawfully registered and their registered capital is paid up in full; and • the principal and interest on any prior loan between the lender and borrower has been repaid on time. A subsidiary inside China of a foreign multinational can lend foreign exchange directly to a subsidiary outside China (without need of entrustment) if in addition to the two foregoing conditions, the following conditions are satisfied: • it has at least three subsidiaries inside China; • the subsidiary inside China providing the loan had in the previous year a ratio between foreign exchange receivables and foreign exchange total assets below the normal average level of foreign investment enterprises in its industry, settled more foreign exchange than it purchased or the amount by which the foreign exchange purchased exceeded the amount settled was less than the normal average level of foreign investment enterprises in its industry; • the shareholders’ equity in the subsidiary providing the loan is not less than US$30 million; • the ratio between net assets and overall assets of the subsidiary providing the loan is not less than 20%; • the principal and interest on any prior loan granted by the lender has been repaid on time. Other provisions If a subsidiary inside China borrows from an overseas subsidiary, the loan must comply with China’s regulations regarding the administration of foreign debt. The interest rate of such intra-company loans must comply with the interest for commercial loans on the international market. Subsidiaries may only use foreign exchange funds owned by themselves in the internal operational control of foreign exchange. The Notice stipulates that the balance of the loan granted by a subsidiary inside China to overseas subsidiaries may not exceed 20% of shareholders' equity in the case of Chinese multinationals and the sum of unexpatriated allocated profits and unallocated profits of foreign investors in the proceeding year in the case of foreign multinationals.