Laws of the People's Republic of China

The People's Bank of China, the State Administration of Foreign Exchange

Urgent Circular of the People's Bank of China and the State Administration of Foreign Exchange on the Prohibition of Purchase of Foreign Exchange for Advance Redemption of Loan

YinChuan [1998] No.53

August 31,1998

Branches the People's Bank of China in all provinces, autonomous regions, and municipalities directly under the Central Government, and in Shenzhen Economic Zone; Branches of the State Administration of Foreign Exchange in all provinces, autonomous regions, and municipalities directly under the Central Government, and in Shenzhen Economic Zone; Industrial and Commercial Bank of China,Agricultural Bank of China,China Construction Bank,China investment Bank, Bank of Communication,CITIC Industrial Bank,China Everbright Bank,China Huaxia Bank,China Minsheng Banking Corp., Guangdong Development Bank, Shenzhen Development Bank,China Merchants Bank, Fujian Xinye Bank, Shanghai Pudong Development Bank:

Since this year, some enterprises are found to have illegally applied for extension of Renminbi loan through various means to purchase foreign exchange for advance redemption of debts in foreign currencies. Such actions violated the provisions governing the control over the credit and capital account, intensified the pressure on balance of the payments, endangered the national financial security, so they must be prohibited strictly. For this purpose, on August 20, People's The bank of China and State Administration of Foreign exchange have jointly issued the Circular on Relevant Issues Governing the Prohibition of Purchase of Foreign Exchange for Advance Redemption of Loan. It is hoped that every commercial the banks, enterprises and concerned parties shall implement it earnestly.

In order to carry out this work satisfactorily, we make the following notice again:

I.

Commercial the bank shall strengthen their control over the credit.

Each commercial the bank shall improve its financial services and extend timely loan in Renminbi based on the principle of credit to actively and positively support enterprises' production, marketing and construction, and the export and import trade; at the same time it shall strengthen its credit management. First, they shall recall the due principal and interest of loan in Renminbi according to the laws and strictly prohibit the borrowing enterprises to purchase foreign exchange with Renminbi to make advance redemption of debts in foreign currencies while defaulting the principal and interest of due loan. Secondly, the newly extended loan shall be strictly sticked to the terms of loan and be confined to the production and construction. Thirdly, the bank of deposit have the right to check, investigate and stop enterprises defaulting the principal and interest of due loan in Renminbi and peculating the fund for production and construction to purchase foreign exchange for advance redemption of debts in foreign currencies.

II.

SAFE shall strengthen their control over the payments of foreign exchange under the capital account.

All foreign exchange payments under capital account shall be approved by SAFE. In case of foreign exchange payments under capital account, own foreign exchange shall be firstly used and foreign exchange can be purchased for the insufficient part.

SAFE should control restrictly the redemption of foreign loans, the change of foreign loans into loans and the own-operated loan of foreign exchange in advance. In the event that there is no clause of advance redemption of foreign debts in the borrowing contract, the advance the payments is not allowed; if there is the clause of advance repayment, it shall first be repaid with their own foreign exchange after the examination and approval by SAFE and the debtor can't purchase foreign exchange to pay the debts.

SAFE shall not grant permission for intercity purchase of foreign exchange for repayment of debts, the permission for the purchase of foreign exchange for abroad investment in equity or in credit and that for the purchase of foreign exchange for the repurchase of shares and bonds in foreign currencies. Before December 31 1998, SAFE shall not allow the purchase of foreign exchange with Renminbi to pay the domestic foreign exchange loan. The repurchase with other foreign exchange must be approved by SAFE.

III.

Designated foreign exchange the banks shall strengthen their business control over the capital account transaction.

Every designated foreign exchange the bank must handle such transactions as the purchase, the sale and the payments of foreign exchange under capital account, the domestic appropriation and transfer of account and the opening of the special account with the presence of the approval or authorized documents by SAFE.

Every designated foreign exchange the bank can not handle the sale of foreign exchange for the advance redemption of foreign debts, that of entrusting loan(s) in foreign exchange and that of proprietary loan(s) in foreign exchange without authorization; or handle the intercity sale of foreign exchange for repayment of loan unauthorizedly.

IV.

Risk control over the foreign exchange business under capital account shall be strengthened by financial institutions.

Sub-branches or more subordinate branches of every designated foreign exchange the bank shall not handle the purchase, the sale and the payments of foreign exchange, the domestic appropriation and transfer of account and the opening, the purchase and the payments of special account under capital account any more. If the above-mentioned businesses have been operated, they shall be passed over to next higher institutions in charge before September 30 1998.

Non-the bank financial institutions shall not engage in settlement of foreign trade without exception.

The registration of foreign debts for non-the bank financial institutions and leasing company with foreign investment is changed. Periodic registration is changed to transaction by transaction register and the repayment of principal and interest of loan shall be examined and approved by SAFE transaction by transaction.

In extending loan in foreign exchange, each financial institution shall include the clause of "Registration of foreign exchange loan in foreign exchange must be finished within 15 days since the signing of the contract" in the loan contract. And the repayment of principal and interest shall be approved by SAFE.

V.

Make a comprehensive check over the advance redemption with purchased foreign exchange and handle severely the violating personnel.

Every head office of commercial the banks shall strengthen its control over credit, prohibit to extend loan in Renminbi for enterprises to purchase foreign exchange for advance redemption of debts. It shall raise detailed requirements and organize concerned personnel to carry out the check over the implementation by every branch.

The branches of State Administration of Foreign exchange shall recheck the approvals and all the foreign the payments under capital account transaction by transaction.

The provincial (autonomous regional, municipal) branches and city branches of the People's bank of China shall select some enterprises with relatively big amount of foreign exchange payments under capital account to check their source of Renminbi for purchase of foreign exchange, the approval of foreign exchange payments and the sale of foreign exchange under capital account. After August 20, if any cases of extending loans for enterprises to purchase foreign exchange for advance redemption, any cases of giving approval to enterprises to make advance redemption or any cases of and selling foreign exchange to enterprises in violation of relevant regulations occur, they must be quickly checked and verified and the leader in direct charge of the affair shall be dismissed from post and the acting personnel shall be penalized seriously; if violating criminal law, they shall be punished according to the laws.

Branches the People's Bank of China in all provinces, branches of the State Administration of Foreign Exchange and the General Banks of various commercial banks shuold delieved the circular to the leader of every level and the related persons right now, the issue on carring out should be replied to the People's Bank of China and the State Administration of Foreign Exchange before the date of September 15.