9 August, 2016
The People’s Bank of China announced the Measures for Administration of Bank Card Clearing Institutions (the “Measures”), providing in detail the administrative licensing conditions and procedures for establishing a bank card clearing institution.
The State Administration of Foreign Exchange issued a circular to promote the reform on measures for control over the foreign exchange settlement of foreign debts by enterprises and to unify the policy for discretionary foreign exchange settlements of foreign exchange receipts by domestic entities under the capital accounts.
The China Securities Regulatory Commission permits foreign invested enterprises to apply to the Asset Management Association of China for registration as private securities investment fund managers.
1. The PBOC announced the Measures for Administration of Bank Card Clearing Institutions
On June 7, 2016, the People’s Bank of China (“PBOC”) announced the Measures, providing in detail the administrative licensing conditions and procedures for establishing a bank card clearing institution.
1.1 Background
On April 9, 2015, the State Council announced the Decision of the State Council on Implementing Access Administration of Bank Card Clearing Institutions (the “Decision”), among the provisions are conditions and procedures applicable to applicants that apply for establishing bank card clearing institutions, business management requirements on bank card clearing institutions and administration of foreign-funded bank card clearing institutions. The State Council requires the PBOC, in conjunction with the China Banking Regulatory Commission (“CBRC”), to formulate detailed rules on administrative licensing conditions and procedures, develop related measures for prudential supervision and administration, issue licences for bank card clearing business to qualified applicants, and implement supervision and administration according to the division of duties.
On June 7, 2016, according to the Decision, PBOC announced the Measures, providing in detail the administrative licensing conditions and procedures for establishing a bank card clearing institution.
1.2 Legal Review
On the basis of the Decision, the Measures impose further requirements for establishing foreign-funded bank card clearing institutions, by requiring foreign institutions that “have significant impact on the stability of the domestic bank card clearing system or the public’s confidence in payment” to establish a domestic legal person so as to lawfully obtain the license for the bank card clearing business. Given that the PBOC will decide whether to approve or deny the application for the establishment of legal person in accordance with the prudential supervisory principles benefiting the fair competition and healthy development of the bank card clearing market, as well as the opinion of China Securities Regulatory Commission (“CSRC”), there is ample opportunity for the PBOC to consider whether the domestic legal persons established by foreign institutions “have significant impact on the stability of the domestic bank card clearing system or the public’s confidence in payment” when they make decisions. However, since the Measures do not mention how to judge whether an institution complies with this precondition, the judgment may be at the PBOC’s discretion.
On the basis of the Decision, the Measures also set higher requirements for the registered capital of bank card clearing institutions and the service qualifications of directors and othe senior executives. As for the registered capital, apart from the requirement on the minimum of RMB 1 billion, it is also required that shareholders shall make capital contributions
with their own funds instead of non-self-owned funds, such as funds held on trust or borrowed funds. As for personnel qualifications, it is required that more than 50% of the directors, including the chairman and vice-chairman of the board of directors, and all senior executives of a bank card clearing institution shall have relevant expertise, more than 5 years of professional experience in banking, payment or clearing business, and a record of good conduct and a high reputation, as well as the independence required by the position, and shall not fall under any other situation as stipulated in the Company Law and the Decision that a person shall not serve as the director or senior executive of a bank card clearing institution.
1.3 Next Steps
The bank card clearing services provided by foreign institutions, which offer foreign currency for cross-border transactions, refers to:
(1) authorizing domestic acquirers to co-operate with domestic bank card clearing institutions so that bank cards issued overseas can be used domestically; and
(2) authorizing domestic card-issuing institutions to issue foreign currency card which can only be used abroad.
Foreign institutions which only provided foreign-currency bank card clearing services for cross-border transactions before the implementation of the Decision shall report to the PBOC and CBRC in accordance with rules of the Measures. Though the Measures do not set a deadline for submitting such a report, the failure to submit the report as required will lead to the risk of administrative penalties. Therefore, it is suggested that foreign institutions which only provided foreign-currency bank card clearing services for cross-border transactions before the implementation of the Decision supplement the report to the PBOC and CBRC as soon as possible.
China thoroughly implements control over the foreign exchange settlement of foreign debts by enterprises and unifies the policy of discretionary foreign exchange settlement of foreign exchange receipts of domestic entities under capital accounts
On June 15, 2016, the State Administration of Foreign Exchange (“SAFE”) announced and implemented the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Administration over Foreign Exchange Settlement under Capital Accounts (Hui Fa No.16 [2016], the “Circular No.16”). In accordance with the Circular No.16, the foreign debts of domestic enterprises (excluding financial institutions) can make foreign exchange settlements at their discretion. Meanwhile, as required by their business operation, domestic institutions are allowed to make foreign exchange settlements with a bank for foreign exchange receipts under capital accounts, such as foreign exchange registered capital, foreign debts, and repatriated foreign exchange funds raised through overseas listing, etc., and the foreign exchange receipts under capital accounts and the settled funds can be used in a wider scope.
2.1 Background
After the implementation of the Measures for Administration of Foreign Debts Registration in May of 2013, only foreign invested enterprises (excluding financial institutions) can use funds from foreign debts after foreign exchange settlement, and the application for foreign exchange settlement must be based on actual needs. By the end of 2015, the policy of “discretionary foreign exchange settlement” was successively implemented for pilots in Shanghai, Tianjin, Guangdong and Fujian pilot free trade zones, in which enterprises, regardless of being foreign invested or not, are allowed to choose the timing of making foreign exchange settlements of foreign debts.
In April of 2016, the SAFE announced the Circular of the State Administration of Foreign Exchange on Further Promoting Trade and Investment Facilitation and Improving Authenticity Review (Hui Fa No.7 [2016], the “Circular No.7”), first declaring that the policies on the administration of foreign exchange settlements of foreign debts applicable to Chinese-funded and foreign-funded enterprises shall be unified, and providing that foreign debts of Chinese-funded enterprises (excluding financial institutions) may be settled in accordance with the provisions on the administration of foreign debts of foreign-funded enterprises. However, the Circular No.7 contains no more detailed and practical provisions in this regard.
The release of the Circular No.16 further unifies the policies on the administration of foreign exchange settlements of foreign debts applicable to Chinese-funded and foreign-funded enterprises as initiated in the Circular No.7. Given that the policy of discretionary foreign exchange settlements of the foreign exchange registered capital and repatriated foreign exchange funds raised through overseas listings, both being foreign exchange receipts under capital accounts, has been implemented nationwide, the Circular No.16 further unifies and regulates the administration over the discretionary foreign exchange settlements of foreign exchange receipts under capital accounts.
2.2 Legal Review
The Circular No. 16 accommodates and facilitates the operation and capital demands of domestic enterprises after the implementation of the new cross-border financing regulations. In April of 2016, the PBOC announced the Notice on Implementing Nationwide Full-coverage Macro Prudential Administration of Cross-Border Financing (Yin Fa [2016] No.132), setting unified regulations on cross-border financing by domestic enterprises, significantly simplifying the procedures of borrowing foreign debts for both domestic funded enterprises and foreign funded enterprises. On this basis, the scale of overseas financing of Chinese enterprises is expected to further expand. Since the implementation of the Circular No.16, the foreign debts of domestic enterprises nationwide (excluding financial institutions) may be settled at their discretion, which entitles the enterprises the right to choose the timing of foreign exchange settlements and increases their flexibility of capital arrangements.
The Circular No.16 adopts a “negative list” approach to implement the unified administration of the usage of domestic institutions’ foreign exchange receipts under capital accounts and the funds settled therefrom, and expands the scope of usage of foreign exchange receipts under capital accounts and the funds settled therefrom. In accordance with the Circular No.16, the domestic institutions’ foreign exchange receipts under capital accounts and the funds settled therefrom shall not:
(1) be directly or indirectly used for the payment beyond the business scope of the enterprises or any payment prohibited by national laws and regulations;
(2) be directly or indirectly used for securities investment or other investment and financing except for the principal-safeguarded bank wealth management products;
(3) be used for granting loans to non-affiliated enterprises, unless expressly permitted by the business scope of the enterprises;
(4) be used for constructing and purchasing real estate not for their own use, except in case of real estate enterprises; or
(5) be used beyond the scope as agreed in the contract between the domestic institution and other parties.
Except for the purposes on the negative list or which are otherwise prohibited by the SAFE, domestic enterprises are allowed to use foreign exchange receipts under capital accounts and the funds settled therefrom within their business scope based on actual needs and for their own use. The range of usage of such funds is therefore broadened. The highlights of the Circular No.16 include but are not limited to clearly pointing out that foreign exchange receipts under capital accounts and the funds settled therefrom may be used for granting loans to non-affiliated enterprises and investment in principal-safeguarded bank wealth management products to the extent permitted by their business scope.
According to the Circular No.16, if domestic institutions use the receipts under capital accounts as petty cash, they may not be required to provide authentic certifications to the bank, and the maximum amount of the accumulated monthly payment of petty cash for a single institution (including funds settled under the approach of “discretionary foreign exchange settlement” and “settle-to-pay”) shall be an amount equal to US$ 200,000, far higher than the previous maximum amount of US$ 100,000.
2.3 Next Steps
The SAFE, under the guidance of the three principles of “Know Your Customers” (KYC), “Know Your Business” (KYB) and “Customer Due Diligence” (CDD), requires banks to be responsible for reviewing the authenticity of foreign exchange settlements and payments of foreign exchange receipts under capital accounts of domestic enterprises, and when dealing with each payment first review the authenticity and compliance of the certifications of the previous payment. Therefore, the specific application of the Circular No.16 in the foreign exchange settlements and payments of foreign exchange receipts under capital accounts shall be subject to the banks’ understanding and specific requirements of the three principles.
3. Foreign invested enterprises are permitted to apply for registration as private securities investment fund managers
On June 30, 2016, in a press conference, the CSRC stated that it had agreed the Asset Management Association of China (“AMAC”) to publish a Q&A to clarify the qualification requirements and matters concerning registration and recording of wholly foreign owned and joint venture private securities fund management institutions. On the same day, the AMAC announced the Answers to Relevant Questions Concerning Private Fund Registration and Recording (10th) (the “Q&A”). From this point on, foreign invested enterprises can apply to the AMAC for registration as private investment fund managers when they carry out private securities fund management business in China.
3.1 Background
In all of the versions of the Catalogue of Industries for Guiding Foreign Investment, the securities investment fund management companies are categorized as restricted projects for foreign investment. Moreover, the Catalogue revised in 2007, 2011 and 2015 restricted the maximum shareholding percentage of the foreign investor to 49%.
In the 7th round of the China-US Strategic and Economic Dialogue (“SED”) and the 7th China-Britain Economic and Financial Dialogue (“EFD”) in 2015, it was made clear that eligible wholly foreign owned enterprises and joint ventures would be allowed to apply for registration as private securities investment fund management institutions and conduct private securities investment fund management business including trading securities in the secondary market.
Since the registration and recording of private funds were implemented by the AMAC, as a result of the 8th round of China-US SED, the CSRC authorized the AMAC to announce the Q&A to set rules for foreign invested enterprises applying for registration as private securities investment fund managers.
According to the Q&A, a foreign invested enterprise meeting the following conditions is eligible to be registered as a private securities investment fund manager:
(1) It is a company incorporated in China;
(2) its foreign shareholder is a financial institution approved or licensed by the financial regulator(s) in its home country/region, and the securities regulatory body in its home country/region has entered into securities supervision cooperation memorandum with the CSRC or other organizations recognized by the CSRC; and
(3) neither it nor its foreign shareholder has been subject to any material penalty by their
respective supervisory or judicial authorities in the past three years.
If the foreign funded enterprise has a foreign actual controller, the actual controller shall also meet the conditions under paragraphs (2) and (3) above.
Foreign invested enterprises should observe the same registration procedures as domestic enterprises and should also submit the Legal Opinion on Private Fund Manager Registration issued by a Chinese law firm and its lawyers to the AMAC.
3.2 Legal Review
Foreign invested enterprises should pay careful attention to the following points when applying for registration as private investment fund managers:
Firstly, foreign invested enterprises can only be established in the form of a corporation, instead of partnership.
Secondly, the name and the business scope of the foreign invested enterprises shall contain such words “Investment Management”, “Venture Capital”, etc. as “Fund Management”, Management”, “Assets “Equity Investment” and
Thirdly, private securities investment fund managers conducting business in China should be registered. After completing the registration and establishment in China, foreign invested enterprises should apply to the AMAC for registration for the AMAC to conduct formal examination on the basic information of the foreign invested enterprises. The AMAC will confirm the registration by publishing the basic information of the applicants on its website (http://www.amac.org.cn) within 20 working days.
Finally, foreign invested enterprises can only conduct private securities investment management business after being registered as private securities investment fund managers with the AMAC.
3.3 Next Steps
The market access of foreign invested enterprises is in the charge of the Ministry of Commerce of China and the National Development and Reform Commission. Until there is a change to the 49% cap for foreign shareholding in a securities investment fund management company as stipulated under the Catalogue of Industries for Guiding Foreign Investment, there are still uncertainties for foreign investors conducting private securities investment fund management business in China – including trading securities in the secondary market – by establishing wholly foreign owned enterprises. It is worth keeping an eye on the progress of the State Council, the Ministry of Commerce and the National Development and Reform Commission in changing the existing regulations on market access of foreign investors.
For further information, please contact:
Catherine Miao, Partner, Jun He
miaoqh@junhe.com
