Laws of the People's Republic of China

The State Administration of Foreign Exchange

Circular of the State Administration of Foreign Exchange (SAFE) on Reform of Mode of Exchange Administration related to Domestic Foreign Exchange Loans

HuiFa [2002] No.125

December 6, 2002

SAFE branches and exchange administration offices in all provinces, autonomous regions and municipalities directly under the Central Government, and SAFE branches in Shenzhen, Dalian, Qingdao, Xiamen and Ningbo; designated Chinese-funded foreign exchange banks:

For the purpose of facilitating the availability of domestic foreign exchange loans (DFEL) to domestic corporate companies and the management of loan assets by financial institutions, SAFE has decided to implement a nation-wide reform of the mode of exchange administration related to DFELs (the Reform), on the basis of experience acquired from experimental reforms in parts of the country. Relevant matters are notified hereunder:

1.

The reform intends to change the current mode of handling registration of DFELs by borrowers on a case-by-case basis, to the mode of periodic aggregate registration by lenders of DFELs at SAFE branches or sub-branches or exchange administration offices (hereinafter referred to as SAFE offices). The Chinese-funded banks extending DFELs shall register periodically their foreign exchange loans with SAFE offices, report on the change of their DFELs, and be responsible on their own for examining the authenticity and compliance related to opening of special foreign exchange accounts for DFELs and debt service payments, and need not ask for approval from SAFE offices.

2.

The reform shall be limited to self-managed proprietary foreign exchange loans extended by Chinese-funded financial institutions (hereinafter referred to as the lender or lenders) to non-financial domestic entities (hereinafter referred to as the borrower or borrowers). On-lending of external debt is excluded.

3.

Registration of DFELs. All lenders shall register their DFEL transactions with SAFE offices according to relevant requirements, that is, they shall, within the first 5 working days of each month, fill in the Form of Lender's Aggregate Registration of DFELs (Attachment 1), the Feedback Form on the Change of DFELs (Attachment 2) and the Aggregate Data Form on DFEL Transactions (Attachment 4) for such transactions carried out in the previous month, and submit them to relevant SAFE offices.

4.

Special foreign exchange accounts for DFELs (SACC). The lender is authorized to examine and approve the application by the borrower for opening or cancelling a SACC, and shall, within the first 5 working days of each month, report to relevant SAFE office by filling in the Monthly Report of SACCs (Attachment 3) and the Aggregate Data Form on DFEL Transactions (Attachment 4).

When the lender is a bank, the borrower is required to open a SACC only in the lending bank or a bank located in the city where the borrower is incorporated; when the lender is a non-bank financial institution, the borrower is required to open a SACC only in the lender's agent bank or a bank located in the city where the borrower is incorporated.

If the lender is not the bank with which the borrower has opened a SACC (the account bank), the lender shall write a letter of notification for SACC to the account bank, signed, stamped with its business seal, and marked with these words: "The authenticity and compliance of the transaction have been examined in accordance with exchange regulations on DFEL issued by the State Administration of Foreign Exchange. (Name of the account bank) is kindly asked to open (or cancel) a SACC for the borrower." The account bank shall open or cancel the SACC for the borrower only upon the presentation of the lender's letter of notification for SACC.

The receipts to and payments from a SACC shall be limited to: on the credit side, DFEL proceeds and the borrower's funds transferred to the account for debt service; on the debit side, borrower's debt service, payments made by the borrower under current account and approved payments under capital account. The borrower's funds for debt service purposes shall be transferred to the SACC no earlier than 5 working days before the loan maturity date or the date when the relevant debt service payment is to be actually made. Only one SACC is permitted for each DFEL, and shall be cancelled when the implementation of the loan contract is completed.

5.

Debt service for DFEL. When the borrower services a DFEL with its own foreign exchange or by purchasing foreign exchange, the lender is responsible for examining the authenticity and compliance of the repayment transactions and reporting monthly (attachment 2) to the SAFE office in the city where it is located. The lender shall require the borrower to present proving documents such as foreign exchange account statements and Confirmation for Enterprise's Own Foreign Exchange (attachment 5). The borrower shall first use its own foreign exchange for debt service; and may purchase foreign exchange only when shortfall occurs.

When the lender is a bank, the borrower is required to purchase foreign exchange and make debt service payments only in the lending bank or a bank located in the city where the borrower is incorporated; when the lender is a non-bank financial institution, the borrower is required to purchase foreign exchange and make repayments only in the lender's agent bank or a bank located in the city where the borrower is incorporated.

If the lender is not the bank where the borrower purchases foreign exchange or makes debt service payments, the lender shall write a letter of notification for debt service to the borrower, signed, and stamped with its business seal, and marked with these words: "The authenticity and compliance of the transaction have been examined in accordance with exchange regulations on DFELs issued by the State Administration of Foreign Exchange. (Name of the bank) is kindly asked to sell foreign exchange to or make payments for the borrower." The bank shall sell foreign exchange to or make payments for the borrower only upon the presentation of the lender's letter of notification for debt service.

Application for purchase of foreign exchange related to debt service shall be filed by the borrower. However, if the lender acquires Renminbi funds previously owned by the borrower, by legal means such as court's verdict, judgement of an arbitrator, liquidation of secured assets or seizure of bond deposits, and the borrower is not in a position to make an application for purchasing foreign exchange due to justified reasons, the lender is permitted to apply on behalf of the borrower to the SAFE branch in the city where the lender is located for purchasing foreign exchange. The SAFE branch shall examine the authenticity and compliance of the purchase according to relevant rules, approve the transaction, and then cancel or reduce the related DFEL registration records.

6.

DFEL funds shall not be permitted to be converted into Renminbi by the borrower, with the exception of outward documentary loans and packing loans whose conversion may be authorized by the lender.

7.

SAFE offices and lenders conducting DFEL business shall complete preparatory work for the change of the mode of DFEL registration before December 31, 2002. For the implementation of this reform, SAFE offices shall strengthen the training of lenders' staff responsible for foreign exchange transactions, and urge lenders to reconcile their records of DFELs and SACCs with SAFE offices before the reform. All of borrowers' registration records for DFELs shall be cancelled by SAFE offices when the reform starts, and no longer serve as proving documents for borrowers to apply for purchasing foreign exchange or making payments.

8.

Lenders shall put in place sound internal control rules on DFELs, and report to relevant SAFE offices for record. SAFE offices shall conduct periodic or occasional reviews on the implementation of lenders' internal control rules, statistics and reporting rules, staff's competency and foreign exchange business. Where there is irregularity, the SAFE office shall order the lender to correct in a time limit; if correction is not made in due time, criticize the lender in a public circular, or impose penalty on it in accordance with relevant regulations.

9.

SAFE offices shall strengthen post supervision on lenders, and urge them to report required data on time. SAFE offices shall conduct regular off-site review on data relating to DFELs reported by lenders, and conduct periodic or occasional on-site review on operations such as lender's aggregate registration, opening or cancellation of SACCs and examination of debt service payments.

10.

Lenders shall report data to SAFE offices in the cities where they are located according to relevant regulations. Lenders shall report data via the Management Information System for Foreign Exchange Accounts in cities where the system has been in operation. In cities where the system is not in place, lenders shall report data by providing soft disks or by filling in forms made of paper. Lenders shall make vigorous efforts to realize electronic connection with SAFE offices as soon as possible.

11.

SAFE branches shall report DFEL data to the Head Office according to relevant regulations via Forms on the Statistics and Monitoring System for Capital Account Transactions.

12.

SAFE branches shall give wide publicity to the DFEL reform through local media.

13.

This Circular shall enter into force as of January 1,2003. Circular on the Experimental Reform of Domestic Foreign Exchange Loan (HuiFa [2001] No.142) promulgated by the SAFE on August, 2001 shall be nullified. Where previous provisions contradict with this Circular, this Circular shall prevail.

Attachment:

1. Form of Lender's Aggregate Registration (Omitted)

2. Feedback Form on Change of DFEL (Omitted)

3. Monthly Report on SACCs (Omitted)

4. Aggregate Data Form on DFEL Transactions (Omitted)

5. Confirmation for Enterprise's Own Foreign Exchange (Omitted)