China's State Administration of Foreign Exchange (SAFE) issued its Provisions on the Centralized Operation and Management of Cross-border Funds by Multinational Companies (SAFE Document No. 7 [2019]) in March in a bid to facilitate cross-border trade，investment，and financing. The business community has offered up a variety of opinions on the policy document，which has also been known as Circular No. 7. Some of the responses have been favorable while others have been critical. China Forex interviewed Ye Haisheng，director general of SAFE's Capital Account Management Department，to address the policy implications of Circular No. 7 and examine what might be in store in the future.

China Forex: In recent years there have been a number of regulatory reforms that have been aimed at facilitating the centralized use of funds by multinational corporations in China. What has been achieved with those measures? Why was a new policy introduced?

Ye Haisheng: In 2012，China launched its pilot programs on the centralized management of foreign currency funds by multinational companies. The program was rolled out nationwide in 2015 under the Provisions on the Centralized Operation and Management of Foreign Currency Funds by Multinational Companies (SAFE document No. 36 [2015])，also known as Circular 36. These measures have been helpful to multinational corporations in developing regional or national headquarters operations，optimizing the allocation of foreign exchange resources，and improving efficiency in the use of foreign exchange. At the same time，they have put in place a foundation for continued reform in foreign exchange management.

China has made further progress in foreign exchange reform and capital account convertibility. But there have been new demands from the business community related to cross-border investment，financing and trade by multinational companies. Circular No. 36 failed to meet these new market requirements. For example，the quota for centralized foreign debt was set too low and was even below the levels applying to enterprises that were not participating in this program. In view of this，SAFE needed to update its regulations covering the centralized management of cross-border funds. The objective was to facilitate cross-border trade，investment and finance.

China Forex: There has been a change in the wording of these documents. Circular No. 36 refers to the "centralized operation and management of foreign currency funds" while circular No. 7 has been changed to the "centralized operation and management of cross-border funds." Why was that change made?

Ye Haisheng: The change in the wording under Circular No. 7 implies that a centralized fund program covers both renminbi and foreign currencies. It is a more convenient and cost-efficient for multinational companies to manage both types of funds.

China Forex: Under Circular No. 36，quota management is conducted through a "channel" between the domestic and international master accounts. What does the Circular No. 7 say about quota management? And is a support system in place?

Ye Haisheng: The registration of foreign debt and overseas lending regarding the cross-border pooling of funds has been simplified under Circular No. 7. To support the upgraded policy，the related documentation system has also been updated. The system can now match information on registration documents with the reporting of balance of payments data by multinational corporations. A sub-system under the capital account will calculate foreign debt and outbound lending quotas. Banks will be able to view this information and that will help them in their supervisory role. This function of the system is already in operation.

China Forex: In Circular No. 7，the foreign debt quota has been increased，while that of overseas lending has been reduced. What is the reason for the changes?

Ye Haisheng: Under Circular No. 36 there was tighter management of foreign debt. There was also more flexibility in overseas lending for enterprises that were included in the cash pooling system than for those companies on the outside. With Circular No. 7，in addition to the simplification of the regulatory requirements，China wanted to unify policies for the use of foreign and local currency and standardize the measures for companies making use of cash pooling and those that did not. 

In the area of foreign debt management，the leveraging ratio for cross-border financing under Circular No. 7 is the same as that stipulated in the Circular of the People's Bank of China (PBOC) on Matters Concerning the Macro-Prudential Management of Comprehensive Cross-Border Financing (PBOC No. 9 [2017]). However，with foreign debt quota centralization，no matter whether the debts are in renminbi or in other currencies，the maximum is set at two times net assets regardless of the maturity of the debt. The quota is managed automatically via an information system. And there is no longer any requirement for maintaining a certain ratio of assets to liabilities.

As far as overseas lending is concerned，leveraging has the following provision in the Circular of the PBOC on Further Clarifying Matters Relevant to Renminbi Overseas Lending Business of Domestic Enterprises. Centralized overseas loans are limited to 30% of net assets.

China Forex: Circular No. 7 states that non-bank financial institutions (other than finance companies which head pooling operations) are not allowed to participate in the centralized cross-border fund management scheme for multinational companies. Why are financial leasing companies and asset management companies barred from the centralized scheme?

Ye Haisheng: The exclusion of non-bank financial institutions，except for finance companies，is an effort to reduce the costs of capital for the real economy，prevent the accumulation of idle funds in the financial system，and aid in the effort to achieve deleveraging.

China Forex: Circular No. 36 enables multinational groups to consolidate all or a portion of their foreign debt quotas and outbound lending quotas of their domestic member companies. However，partial centralization is in principle not permitted under Circular No. 37. Why is this the case?

Ye Haisheng: Under Circular No. 36，multinational groups which consolidated some of their foreign debt quotas and outbound lending quotas needed to go through a complex process to confirm foreign debt registration information. This was conducted with local foreign exchange authorities when registering foreign debt. For multinational companies，which frequently need to move funds across borders，this was highly inefficient. In consideration of this and other factors，it was determined that the most appropriate policy would be to restrict partial consolidation of foreign debt quotas and outbound lending quotas in principle under Circular No. 7.

For multinational companies which have already established cash pooling arrangements，they are required to contact local authorities again if they plan to continue with the centralized operation of cross-border funds. Once they do this，companies within their organization can choose to place all or none of their foreign debt and outbound lending quotas under the pooling arrangement.  

China Forex: Documentation requirements for the use of foreign exchange income derived from capital account items is also simplified under Circular No. 7. This is an expansion of the measures used in pilot programs. How is this trial operation  going? Will it be expanded nationwide? How will banks respond as far as risk prevention is concerned?

Ye Haisheng: The facilitation policy for capital account payments and settlements has been used in pilot programs in places such as Suzhou since 2017. According to the pilot scheme，when enterprises handle related business at a bank and want to use funds within mainland China，they need only make use of the Pilot Program of Capital Account Revenue Payment Facilitation. They do not need to provide underlying support documents for verification in advance. The measure has been enthusiastically received by the business community and will be expanded in a steady fashion.

Circular No. 7 allows multinational companies to enjoy the benefits of this facilitation policy. Evidence is not needed in advance of the payment via a domestic master account，as long as the companies pledge that the underlying transactions are  authentic and comply with regulations.

As for the banks，they have the responsibility of knowing more about the business of their customers and the transactions in question. Supervisory efforts are needed to ensure that transactions are authentic and comply with regulations. Related documentation material should be kept for future reference.

China Forex: The cross-border two-way renminbi fund pools look at net amounts. Is this true for Document 7 as far as  foreign debt quotas and external lending are concerned?

Ye Haisheng: Document 7 makes distinctions according to the nature of funds involved in transactions and it applies a two-way net management of foreign assets and liabilities. The calculations of foreign debt and external lending are independent of one another. For example，the net capital integration scale under foreign debt，namely foreign debt capital inflows minus foreign debt capital outflows，shall not exceed the balance of foreign debt. The net financing scale of external funds，namely external lending fund outflows minus external lending fund inflows，shall not exceed the foreign lending quota. The movement of cross-border funds needs to be declared according to the nature of the specific funds.

China Forex: For some new types of companies，such as those in the online space，the requirement that annual international revenues and expenditures should be at least US$100 million or the equivalent seems a bit high. Will the threshold be lowered in the future?

Ye Haisheng: For enterprises with special needs，Article 43 of Document 7 can be of help. Considerations would be made based on the need for prudential supervision and full communication with local regulatory authorities. In the future we will see how business develops and make a determination.

China Forex: In your opinion，what more can be done to attract multinational companies to set up regional fund centers on the Chinese mainland，bearing in mind that places like Singapore and the Special Administrative Region of Hong Kong are also quite attractive?

Ye Haisheng: Much work is needed to be done in order to convince companies to set up regional fund management centers on the Chinese mainland. Document 7 facilitates access to cross-border capital flows to a certain extent. There are a number of factors to consider，however，such as the local financial environment，especially the extent of financial market development，as well as tax policies，the convenience of exchanging currency，financial services and infrastructure levels.

As for the management responsibilities of the State Administration of Foreign Exchange，we will actively study the policies in the management of cross-border capital pools，domestic fund pools，cross-border capital pool exchanges and the exchange of foreign currencies. At the same time，we hope that relevant departments and institutions will work together in terms of improving tax policies and capital market operations. This is particularly so in the area of cash management market development，financial infrastructure and the enhancement of financial services so that we can gradually attract multinational companies to set up their regional and even global fund centers on the mainland.

China Forex: The new policies simplify filing procedures and delegate authority to SAFE branch offices. The principle is that whoever handles a filing takes responsibility. For the branch offices，how do you manage risk prevention while enhancing convenience for market participants?

Ye Haisheng: Document 7 has clear requirements for market entry as well as for keeping track of business record changes，foreign debts and external lending. In order to facilitate timely filings by multinational companies，we will delegate to local branches the responsibility for handling such filings. The branch offices will need to make business reviews and provide follow-up supervision. They need to review the materials submitted by the multinational companies according to the management requirements of Document 7. Branch offices shall also conduct risk assessment on a scheduled or irregular basis. If any bank or enterprise is found to be in violation of relevant regulations，the branch offices shall take appropriate measures. This includes case reviews and even the suspension of business in severe cases.

China Forex: Under the new policy framework，how shall banks implement business development standards?

Ye Haisheng: Document 7 does not raise new requirements for banks beyond those of Document 36. Document 7 did scrap  data requirements for internal management rules formulated by cooperative banks and multinational corporations that had been  included in Document 36. Now such information can be kept by the institutions and companies for future reference. Banks must comply with regulations to conduct centralized operations of cross-border capital by multinational corporations，and improve their operational procedures，such as internal control systems and risk prevention and control. In addition，in the context of cross-border capital pooling operations，banks should conduct compliance audits in accordance with the principles of "knowing the customer，knowing the business and due diligence." At the same time banks also need to strengthen communication with local foreign exchange bureaus for timely policy guidance and feedback.

China Forex: What are SAFE's risk prevention and control measures as it seeks to facilitate business?

Ye Haisheng: Document 7 retains risk control measures while relaxing and simplifying management procedures. There are some important restrictions in the qualifications for receiving this kind of favorable treatment. Some requirements are aimed at the level of cross-border payments and there is a negative list system that bars participation in some sensitive industries，such as real estate and government financing platforms. On the other hand，the external debt and external lending adjustment factors have been retained，and the leverage ratio and macro-prudential adjustment parameters can be adjusted based on the overall debt situation as well as the debt maturity and currency structure. In addition，we have strengthened post-event supervision by upgrading the capital project information system. Market entities that violate relevant regulations are dealt with in an appropriate manner. In such cases we interview the subject and can even suspend the business operations of violators.

China Forex: In the early stages of the policy adjustment，SAFE made a thorough market investigation and analyzed  feedback from market participants. This won praise as an indication of SAFE's respect for market requirements. How do you propose to continue this kind of policy adjustment and what future measures can we expect?

Ye Haisheng: We have invited market participants to submit their opinions and most of the suggestions we received were incorporated in the new policy. These ideas included the simplification of the registration process，increases in the external debt quota，and the cancellation of manual reporting. Such measures were adjusted in response to the views of market participants. It is hoped that the adjusted policies will result in even greater facilitation of the centralized operation of corporate funds.

At present，we have already clarified the transition as new policies replace older ones. Multinational companies in each region can complete the transition according to the guidance of SAFE's local branches. In addition，we will respond to policy enquiries and feedback from banks and their customers in a timely fashion.

Moreover，we will review the situation with respect to domestic fund pools. At the same time，we will explore the integration of fund pools in local and foreign currencies，and further relax restrictions according to the real needs of the market for foreign exchange settlement services.