Laws of the People's Republic of China

Notice of the State Administration of Foreign Exchange on Issues Concerning the Management of Internal Operation of Foreign Exchange Funds of Transnational Companies

No. 104 [2004] of the State Administration of Foreign Exchange October 18, 2004

The branches and the foreign exchange administrative departments of the State Administration of Foreign Exchange (hereinafter referred to as the branches or FEADs) of all provinces, autonomous regions and municipalities directly under the Central Government,the branches of the State Administration of Foreign Exchange in Shenzhen, Dalian, Qingdao, Xiamen and Ningbo, and all designated Chinese-funded foreign exchange banks:

With the view of optimizing the allocation of foreign exchange resources, facilitating and supporting the utilization of foreign exchange funds and business operations of the transnational companies, the following issues concerning the management of internal operation of foreign exchange funds of transnational companies are notified hereby according to the Regulation of the People's Republic of China on Foreign Exchange and other relevant laws and regulations:

1.

Fundamental Definitions and Management Principles

(1)

The term "transnational company" as mentioned in the present Notice refers to an enterprise group concurrently possessing of member companies both at home and abroad and one of whose member companies at home exercises the global or regional (including China) investment management function. Such an enterprise group may be a Chinese-invested holding enterprise group (namely Chinese-invested transnational company) or a foreign-invested holding enterprise group (namely foreign-invested transnational company).

The term "member companies" as mentioned in the present Notice refers to all companies with independent juridical person qualification within an enterprise group and with the relationship of one's holding of the shares of another or held by it.

This Notice shall not apply to transnational financial institutions.

(2)

The term "internal operation of foreign exchange funds" as mentioned in the present Notice refers to an investment financing approach of a transnational company by lending of foreign exchange funds among the domestic member companies or between a domestic member company and an overseas member company in order to decrease financial costs and increase the fund utilization efficiency according to he provision of the present Notice foreign exchange.

(3)

The lending of foreign exchange funds between two member companies may be conducted by a finance company established upon the approval of the financial competent department according to the Measures for the Administration of Financial Companies of Enterprise Groups. It may also be conducted by authorizing a designated bank for foreign exchange business to grant loans according to the General Principles on Loans. Where a domestic member company of a transnational company intends to lend foreign exchange funds to an overseas member company and the requirements as stipulated in the present Notice are met, it may do so by way of direct lending.

A domestic member company of a transnational company shall abide by the relevant provisions of China on the Management of Foreign Debts when it borrows foreign exchange funds from an overseas member company and repays the principal and interests of the aforesaid fund.

(4)

Where a member company of a transnational company lends foreign exchange funds to another, both parties shall stipulate on the lending interest rate pursuant to the rate of commercial loans of the same period in the international financial market. Such lending interest rate shall not be abnormally high or low.

(5)

The foreign exchange funds used for internal operation of a transnational company shall be confined to the self-owned foreign exchange funds which refer to the funds coming from the capital fund account or current foreign exchange account of the domestic member companies of a transnational company and can be disposed of freely.

(6)

The funds of entrustment lending by a transnational company within China shall not be used for the settlement of foreign exchangeor be used as a pledge of RMB loan.

(7)

Where a domestic member of a Chinese-invested transnational company lends any foreign exchange fund to any overseas member company, the balance of foreign exchange lending shall not exceed 20 % of the owner's rights and interests.

Where a domestic member company of a foreign-invested transnational company lends money to any overseas member company, the balance of foreign exchange lending shall not exceed the aggregate amount of the part of profit in the previous year that has been distributed but hasn't been remitted abroad to foreign investors plus the undistributed enterprise profit that shall be taken by foreign investors in proportion to their investment.

(8)

When engaging in internal operation of foreign exchange funds, the transnational company shall stick to the principle of payment according to income. Without permission, it shall not deduct or offset the domestic and overseas the account receivable and the account payable or make any net settlement.

(9)

When engaging in internal operation of foreign exchange funds, a transnational company shall comply with the present Notice and other provisions concerning the management of foreign exchange and shall be subject to the administration, supervision and inspection of the State Administration of Foreign Exchange (hereinafter referred to as the SAFE) and its branches and FEADs.

2.

Qualifications for Internal Operation of Foreign exchange funds of Transnational Companies

(1)

In order to engage in entrustment lending of foreign exchange funds within China, the domestic member companies of a transnational company shall meet the following requirementsforeign exchange:

(a)

Both the entrusting lender and the borrower shall have been lawfully set up upon registration, and their registered capitals have been fully paid in due time; and

(b)

The principal and proceeds of the previous entrustment lending of foreign exchange funds between the entrusting lender and the borrower of domestic member companies foreign exchange have been repaid in the promissory time limit.

(2)

In order to engage in lending of foreign exchange funds to the overseas member companies, the domestic member company of a transnational company shall meet the following requirements besides the requirements as mentioned in the first paragraph of Article 2 :

(a)

A Chinese-invested transnational company shall have at least 3 member companies abroad;

(b)

A foreign-invested company shall have at least 3 member companies within China; and

(c)

The domestic member company of a China-invested transnational company, whch exercises the global and regional investment management function of the transnational company, shall have invested at least 5 million dollars in total into the overseas counterpart(s)which were rated as Class II or higher in the latest joint annual inspection over overseas investments;

(d)

As for a domestic member company of a foreign-funded transnational company that provides the lending funds, the ratio of its foreign exchange receivable of the previous year to its total foreign exchange asset shall be lower than the normal or average level of the foreign-funded enterprises of the same industry of the previous year; the amount of bank foreign exchange settlement conducted by the company in the previous year shall be bigger than its foreign exchange purchase amount; or the margin between the purchase amount and the settlement amount of the bank shall be lower than the normal or average level of the foreign-funded enterprises of the same industry of the previous year; the rights and interests of the owner shall not be less than US$ 30 million and the ratio of net asset to the total asset shall not be less than 20 %;

(e)

As for a member that has been allowed to lend foreign exchange funds to its overseas counterparts, it shall have taken back the principal and proceeds of the previous fund lent abroad within the promissory time limit.

3.

The Application for Internal Operation of Foreign exchange Funds of Transnational Companies

(1)

Where a transnational company plans to engage in entrusted foreign exchange lending within China, the domestic member company as the entrusting lender shall file an application to the bank where its capital account or current foreign exchange account is opened. After the opening bank examines the qualifications of the domestic member company of the transnational company pursuant to requirements of the present Notice, if it accepts the application, it shall, as the entrusted bank, sign a contract on foreign exchange entrustment lending with the entrusting lender and the borrower.

The entrusted bank shall, according to the requirements for the "creditors" as mentioned in the Notice of the State Administration of Foreign Exchange on Reforming the Foreign Exchange Administration of Domestic Foreign Exchange Loans (No. 125 of the State Administration of Foreign Exchange [2002]), perform the corresponding duties for the operation, supervision and reporting for the record of the entrusted lending business.

(2)

Where a transnational company plans to engage in entrusted outbound foreign exchange lending, after concluding a lending agreement, its domestic member company that offers the lending funds shall submit the following materials to the SAFE for examination and approval via the local branch or FEAD:

(a)

An application (See Attachment 1);

(b)

The lending agreement concluded by the lender and overseas borrower, or by the lender, overseas lender and the entrusted financial institution within China;

Where the overseas borrower plans to use the foreign exchange funds it borrows to invest in the operation of stocks, bond, futures etc., the lending agreement shall clearly stipulate that the lender entrusts the overseas borrower to make investments;

(c)

The lender's financial audit report on the foreign exchange incomes and expenses during the recent year;

(d)

The latest capital verification report of the lender;

(e)

The descriptions about the overseas lending and repayment that has been done;

(f)

In addition, a Chinese-invested transnational company shall offer the name list of its overseas member companies, a copy of the approval certificate issued by the commerce competent department of every overseas member company, financial accounting statement of the recent year of the overseas borrower(s) and the joint inspection report over the overseas investments directly related to the overseas borrower(s); and

(g)

In addition, a foreign-invested transnational company shall offer the name list of its domestic member companies, a copy of foreign exchange register certificate of every domestic member company and a letter issued by the overseas holding parent company for guaranteeing the safety of the lending funds (for ensuring full repayment of the principal of the loan offered by the domestic lender and further investment operation by using such lending funds).

After the branch or FEAD receives the materials submitted by the lender, it shall complete the preliminary examination within 10 working days and shall report it to the SAFE. After the SAFE receives the aforesaid integrated application materials and confirms them inerrant upon examination, it shall, within 20 working days, issue an approval to the lender and shall send a copy to the branches or FEADs where the lender and the enterprises participating in the lending are located. Upon the strength of the approval document, the branches or FEADs, where the lender and the enterprises participating in the lending are located, shall respectively issue documents of approval of opening bank account, domestic transfer or overseas payment of foreign exchange under capital foreign exchange business to the lender and the enterprises participating in the lending.

4.

Procedures for the Internal Operation of Foreign Exchange Funds of Transnational Company

(1)

After a entrustment lending agreement is concluded among the domestic member company which serves as the entrusting lender of a transnational company, the domestic member company which serves as a borrower and the entrusted bank, the entrusted bank may, pursuant to the Notice of the State Administration of Foreign Exchange on Reforming the Foreign Exchange Administration of Domestic Foreign Exchange Loans (No. 125 of the State Administration of Foreign Exchange[2002]), open an foreign exchange loan exclusive account for the borrower, go through the formalities for transferring the lending funds, repayment of the principal interests. No approval of the SAFE is required when the entrusted bank conducts transfer of lending funds or repayment funds between the entrusting lenders' capital account or current foreign exchange account and the borrower's foreign exchange loan exclusive account.

The entrusted bank shall regularly report to the local branch or FEAD the changes of the domestic credits of the transnational company by referring to the formats and contents of Attachments 1-4 (inserting a column titled "entrusting lender" after the final column of each statement as shown in Attachments 1-3; inserting a sub-item titled "domestic entrusting lending" for each item under "Credit" Item in Attachment 4) as listed in the Notice of the State Administration of Foreign Exchange on Reforming the Foreign Exchange Administration of Domestic Foreign Exchange Loans (No. 125 of the State Administration of Foreign Exchange[2002]) foreign exchange.

(2)

As to a transnational company's entrustment lending of foreign exchange funds within China, if the term of the loan expires or the borrower requests for making repayment by installments or ahead of schedule, the entrusted bank shall supervise and assist the entrusting lender and borrower to repay the loans by following steps: First, transfer the repayment of foreign exchange funds to the original capital account till the amount of repayment is equal to the amount transferred out of the original capital account. Then, according to the principle of proportioning the interests to the principal, transfer the remaining part of the principal and interest of the loan into the current foreign exchange account, out of which the original fund is transferred. Where the repayment is made at the expiration of the loan, the steps mentioned above shall be achieved within 20 working days as of the day when the lending period expires. As to the repayment by installments or ahead of schedule, the formalities mentioned above shall be timely achieved as well in light of the time limit and way as stipulated by three parties.

(3)

When applying for engaging in overseas lending of foreign exchange funds, the transnational company shall submit the following materials to the local branch and FEAD for opening an overseas lending exclusive account:

(a)

An application for opening a bank account; and

(b)

The document issued by the SAFE for approving its overseas lending.

After the local branch or FEAD confirms the materials mentioned above as inerrant, it shall issue the lender an approval document for opening a bank account. The bank shall go through the formalities for opening an account for the lender upon the strength of the aforesaid approval document. The income of the overseas lending exclusive account shall be limited to the foreign exchange funds transferred to this account from capital account or current foreign exchange account of the lender or other domestic member companies with approval of the branch or FEAD, the repayment of the principal and interest of the fund lent abroad and the deposit offered by the overseas controlling parent company for the fulfillment of contract; the expense shall be limited to funds of the overseas lending with approval of the SAFE and funds transferred back from the corresponding capital account or current foreign exchange account.

(4)

A transnational company may, within 6 months as of the day when the SAFE approves it to engage in overseas lending, remit foreign exchange funds in approved amount abroad in a lump sum or several times with approval of the local branch or FEAD.

(5)

The time limit for each overseas foreign exchange loan of a transnational company shall not exceed two years. Where the term of the loan expires or the overseas borrower requests for making repayment by installments or ahead of schedule, the overseas borrower shall remit the foreign exchange funds for repayment to the original overseas lending exclusive account. With approval of the branch or FEAD, it first shall transfer foreign exchange funds for repayment back to the original capital account till the amount of repayment is equal to the amount transferred out of the original capital account; then, pursuant to the principle of proportioning the interests to the principal, transfer the remaining part of principal and interest of the loan into the current foreign exchange account out of which the original funds are transferred. If it is necessary to extend the term of the loan, the lender shall file an application to the local branch or FEAD within 1 month prior to the expiry date.

(6)

Where a domestic member company of a transnational company grants loans to its overseas counterparts, or grants loans and entrusts its overseas companies to make investment by using the loans, the total amount of the rights and interests generated from the overseas loans as calculated on the last day of annual calculation shall not be less than the corresponding total amount of the principals of the overseas loans.

(7)

Where a transnational company grants loans oversea by using foreign exchange funds, the domestic member company lender shall establish a special ledger for the operation of overseas funds, manage the funds uniformly and conduct the accounting in a centralized way, and shall formulate a monthly Statement of Changes of Foreign Exchange Fund Positions of Overseas Lending Special Accounts and Statement of Operation of Overseas Lending Funds (See Attachment 2).

(8)

Where the repayment funds for the domestic and overseas entrusting foreign exchange loans and overseas loans of a transnational company are remitted or transferred to the capital accounts of the domestic member enterprises, the maximum quota of the capital account shall not be occupied. When the banks, into which the repayments are remitted or transferred, reply the letters of requests for bank confirmation, they shall give a clear indication of the words "Repayment Funds" in the column of "Remarks". No accounting firms may undertake capital verification business of foreign-funded enterprises on the strength of such kind of replies to letters of requests for bank confirmation.

5.

Supervision

(1)

Every branch or FEAD shall, pursuant to the statements submitted by banks within its jurisdiction, insert a sub-item "Domestic Entrustment Lending" under each item "Domestic and Overseas Loans" in the Monthly Statement of Flow and Exchange under Capital Projects and Subordinate Projects, and submit a statement to the SAFE every month.

A transnational company, which engages in internal operation of overseas loans, shall gather the information on the overseas loans of its domestic member companies in June each year and submit it to the SAFE via the local branch or FEAD for examination. The information gathered shall include the following:

(a)

A report on the overseas lending of foreign exchange funds and the operation circumstance of all domestic member companies of the transnational company during the previous 12 months by the end of May of the current year (See Attachment 3 for the reference format);

(b)

The previous 12-month Statement of Changes of Foreign Exchange Funds Positions of Overseas Lending Special Account and Statement of Operation of Overseas Lending Funds of the domestic lending member company of the transnational company;

(c)

The previous 12-month audit report on the domestic foreign exchange lending member company of the transnational company; and

(d)

The previous 12-month capital verification report of the domestic member company of the transnational company engaging in overseas lending (no capital verification reports are required if no capital verification was conducted during the previous year).

(2)

Where the SAFE, within 30 working days after the SAFE receives the complete set of the materials mentioned above, finds upon examination that the overseas lending conducted by the domestic member company of a transnational company falls short of the qualification requirements as prescribed in the Article 2 of the present Notice or the rights and interests derived from overseas loans fail to meet the requirements as mentioned in Article 4 (6), it shall be entitled to disqualify the domestic member company of the transnational company from lending foreign exchange funds abroad. The domestic member company which is disqualified from lending foreign exchange funds abroad shall, within 20 working days, takes back the principal and proceeds of overseas loans into the overseas lending special account. Furthermore, if a foreign-invested transnational company fails to satisfy the requirements as mentioned in Article 4 (6) of the present Notice in getting repayment of loans, the overseas holding parent company who has issued the letter for guaranteeing the safety of the lending funds shall perform the guaranty liability within 20 working days after the domestic member company was disqualified from lending foreign exchange funds abroad. Where a transnational company fails to timely submit the materials as required in Article 5 (2) to the SAFE in light of requirements, it shall be given punishment according to Article 5 (3).

6.

Other Items

(1)

Where a transnational company violates this Notice in its internal operation of foreign exchange funds, it shall be punished by the branch or FEAD pursuant to Regulation of the People's Republic of China on Foreign Exchange.

(2)

As to a domestc enterprise group without any member company oversea, the entrustment lending for foreign exchange funds between its domestic member companies shall be conducted by referring to this Notice.

(3)

The power to interpret this Notice shall remain with the SAFE.

(4)

This Notice shall come into force as of November 1, 2004.

Attachments:

1.

Application of Transnational Companies for Granting Overseas Foreign exchange Loans (for reference of the format)(omitted)

2.

Statement of Changes of Foreign exchange Fund Positions of Overseas Lending Special Accounts and Statement of Operation of Overseas Lending Funds (for reference of the format)(omitted)

3.

Report on Overseas Foreign exchange Loans and Operation (for reference of the format)(omitted)