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Guangdong FTZ Promotes "Voluntary Settlement" in Forex Reform

It was learned from the Guangzhou branch of the People's Bank of China (PBOC) on 21 January 2016 that the Guangdong branch of the State Administration of Foreign Exchange (SAFE) had recently issued the Implementation Rules for Promoting the Pilot Reform for Foreign Exchange Administration in the Guangzhou Nansha New Area and Zhuhai Hengqin New Area of the China (Guangdong) Pilot Free Trade Zone. These rules cover innovations in forex management for current accounts, capital accounts, the forex market, and the centralised operation and management of forex funds of multinational companies.

PBOC issued the Guiding Opinions on Financial Measures to Support the Development of the China (Guangdong) Pilot Free Trade Zone on 9 December 2015. The Guangdong Free Trade Zone (FTZ) will shoulder several tasks in deepening the forex reform, including the promotion of trade and investment facilitation, capital account convertibility within limits, macro-prudential management of foreign debt, development of headquarters economy and settlement centre, and support for development of renminbi and foreign currency derivatives business by banks.

The idea of "voluntary forex settlement" espoused in this reform is that enterprises within the FTZ can make forex settlement at a time of their choice in response to exchange rate fluctuations and deposit the settled funds into their renminbi account for direct payment when necessary. This practice has three benefits: First, they can freely choose the settlement time according to the exchange rate situation and avoid losses resulting from exchange rate fluctuations. Second, after settlement they can put the renminbi funds into their fixed deposit account for higher return on funds. Third, the negative list approach is practised in the management of the settled funds, which means these can be used for all purposes other than those outside of their scope of business or expressly prohibited by laws and regulations.

According to these rules, there is no need for enterprises classified as Class A enterprises for trade in goods within the FTZ to open "to-be-verified accounts". Simpler forex settlement formalities mean it will take them a shorter time to receive forex payment than enterprises outside of the FTZ. This will greatly increase their work efficiency and lower their operating cost and will contribute positively to the development of foreign trade in the FTZ.

The threshold for the centralised operation and management of forex funds by multinational companies will be lowered from US$100 million to US$50 million. More medium-sized enterprises in the FTZ will benefit from the pilot forex reform policies through this, such as the policy of allowing domestic enterprises to borrow foreign loans based on the principle of autonomy proportional to size. This will effectively raise the fund operation efficiency of large and medium-sized enterprises in the FTZ, increase their international competitiveness and create conditions for industrial transformation and upgrade.

Financial leasing companies in the FTZ can receive rentals in foreign currency if over 50% of their funds for the purchase of leasing equipment come from domestic or offshore foreign currency loans, thus effectively averting exchange rate risks. This will also facilitate cross-border investment and financing and boost the development of financial leasing in the FTZ.

These rules specifically indicate that banks in the FTZ can handle renminbi or foreign currency derivatives transactions for overseas institutions in accordance with relevant regulations. This will not only increase the competitiveness of the forex products of domestic banks but will extend their target customers of banks in the FTZ to overseas institutions, thus giving a further boost to the FTZ's international financial business.

The Guangdong branch of SAFE disclosed that its policies of voluntary forex settlement and allowing banks to handle forex registration for foreign direct investment for Guangzhou's Nansha New Area and Zhuhai's Hengqin New Area have been extended to the rest of the country.

Content provided by Picture: HKTDC Research
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