Bank Headquarters Publication [2014] No. 22

To the Shanghai branches of the China Development Bank, policy banks, state-owned commercial banks, joint-stock commercial banks, and China Postal Savings Bank; Bank of Communications, Shanghai Pudong Development Bank, Bank of Shanghai, and Shanghai Rural Commercial Bank; the Shanghai branches of other urban commercial banks; foreign banks in Shanghai; and non-banking financial institutions in Shanghai:

According to the Opinions of the People’s Bank of China on Financial Sector Support for the China (Shanghai) Pilot Free Trade Zone (referred to hereafter as the “Opinions”) and other relevant provisions, as approved by the headquarters of the People’s Bank of China (“PBC”), the Circular on Supporting Expanded Cross-border Use of RMB in the China (Shanghai) Pilot Free Trade Zone (“PFTZ”) is published as follows:

I. All policies and measures issued by the state government to encourage and support expanded cross-border use of RMB shall apply to the PFTZ.

II. Cross-border RMB Settlement under Current Accounts and Direct Investment in the PFTZ

Banking institutions in Shanghai may, based on the three principles of “knowing your clients, knowing your business, and due diligence, directly process cross-border RMB settlement under current accounts and under direct investment for entities (excluding those on a monitoring list for cross-border RMB settlement) or individuals in the PFTZ according to their receipt/payment instructions.

1. When conducting settlement under direct investment for the aforesaid parties, banks shall, according to the negative list management requirements for investment in the PFTZ, require them to produce approval documents issued by competent authorities if the settlement business is subject to negative list management.

2. The Shanghai Headquarters of the People’s Bank of China (“PBC Shanghai”) and the Administration Committee of the PFTZ shall establish a direct investment information sharing system through the comprehensive information management system of the PFTZ and provide relevant information services for commercial banks.

III. Bank Settlement Accounts of Individuals in the PFTZ

To facilitate individuals in conducing cross-border RMB settlement under current accounts, individuals working in the PFTZ as employees or business practitioners may, according to the Administrative Measures for RMB Bank Settlement Accounts (The People’s Bank of China Decree [2003] No. 5) and other relevant rules governing bank settlement accounts, open individual bank settlement accounts or institutional bank settlement accounts for individual business owners, and use them for cross-border RMB receipt and payment. In particular, an overseas individual who wishes to open a RMB bank settlement account shall also produce a residence permit valid for one year or more as issued by the exit-entry administrative division of the public security authorities.

IV. Overseas RMB Borrowing in the PFTZ

Financial institutions and enterprises in the PFTZ may borrow RMB funds from overseas (excluding trade credits and intercompany operational financing) to use in the fields that are consistent with national macro-control programs. It is not allowed for the time being to use such funds in investing in negotiable securities (including wealth management products and other asset management products) or derivative products, or in entrusted loans.

1. The upper limit of the size (balance) of overseas RMB funds that enterprises in the PFTZ may borrow must not exceed the paid-up capital * 100% * the macro-prudential policy parameters, where: the paid-up capital shall be that as indicated in the latest capital verification report, and the term of loan shall be longer than one year (not inclusive). Such borrowers in the PFTZ may, according to the Administrative Measures for RMB Bank Settlement Accounts, open special deposit accounts at banks in Shanghai to exclusively deposit RMB funds borrowed outside China. Such funds may only be used inside the PFTZ or outside China for the purposes including production and operation inside the PFTZ, and project construction inside the PFTZ or outside China.

Foreign enterprises established in the PFTZ before the launch of the PFTZ may use their own discretion to elect to follow the previous method to determine the quota (i.e., the ceiling amount is calculated as the difference between the total investment and the registered capital), or to observe the rules as set forth by this Circular when borrowing RMB funds outside China, and file their decisions with PBC Shanghai through banks with which their accounts are opened. Once an election has been made, no change shall be made.

2. The upper limit of the size (balance) of overseas RMB funds borrowed by non-banking institutions in the PFTZ must not exceed the paid-up capital * 150% * the macro-prudential policy parameters. The term of loan shall be longer than one year (not inclusive). The borrowed funds may be transferred back and deposited into their special deposit accounts opened with banks in Shanghai, and may only be used inside the PFTZ or outside China for the purposes including production and operation inside the PFTZ, and project construction inside SHFTZ or outside China.

3. The interest of the RMB funds borrowed from overseas and then retained in the dedicated deposit account opened by the enterprises and non-banking financial institutions in the PFTZ shall be calculated at the rate of current deposit.

4. The RMB funds borrowed outside China by banks in the PFTZ shall be subject to separate accounting in the PFTZ, and shall be used within the PFTZ, for real economy development purposes.

5. The macro-prudential policy parameters as mentioned in the above formulas shall be determined by PBC Shanghai, and may be adjusted in light of the need for nationwide credit control.

V. Cross-border Two-way RMB Capital Pooling in the PFTZ

1. Enterprises in the PFTZ may, in light of their operating and management needs, engage in cross-border two-way RMB capital pooling inside their own group. A group shall mean a multinational group of companies mainly linked by means of capital and composed of the parent company, subsidiaries, companies with capital participation and other members with investment relationships, including enterprises (and financial management companies) in the PFTZ. The cross-border two-way RMB capital pooling shall refer to the two-way capital pooling among the domestic- and overseas-based enterprises within the group. It shall be regarded as an operational financing activity within the group.

2. To engage in the cross-border two-way RMB capital pooling inside its own group, the headquarters of a group must designate a member enterprise (including a financial management company) registered, formed and actually engaged in business operation or investment in the PFTZ and select a bank in Shanghai to open a special RMB deposit account to be exclusively used for cross-border two-way RMB capital pooling inside the group. The said account may not be used for other funds. All parties inside and outside China that participate in the capital pool operations shall enter into agreements to specify their respective responsibilities and obligations for anti-money laundering, counter-terrorist financing and anti-tax evasion.

3. The flow of funds from parties whose cash is pooled to parties pooling the cash is considered as the “upstream flow”; while the flow of funds from parties pooling the cash to parties whose cash is pooled is considered as the “downstream flow”. The RMB funds in the upstream and downstream flows shall be the cash generated from production and operation, as well as industrial investment by enterprises. Cash flows generated by financing activities shall not be pooled for now.

VI. Centralized Payment and Receipt of Cross-border RMB under Current Account in the PFTZ

1. Based on operating and management needs, enterprises in the PFTZ may receive and make current account payments of cross-border RMB receipts and payments under current accounts,  on behalf of its domestic and foreign related parties on a centralized basis. Domestic and overseas related parties include member companies connected mainly by capital, and by investment-based relationships, as well as the non-group members that have supply-chain and close business relationships with the group.

2. The group headquarters shall designate an operating or investing member enterprise (including a financial management company) which is incorporated in the PFTZ, and choose a bank to open one RMB dedicated deposit account for centralized payment and receipt of cross-border RMB under current account on behalf of its domestic and overseas related parties.

3. The enterprise in the PFTZ shall enter into agreements of centralized payment and receipts under current account with each party that is making such arrangement with them, defining respective responsibilities in respect of the trade authenticity.

VII. Cross-border E-Business RMB Settlement

1. Banks in Shanghai are encouraged to directly provide cross-border RMB settlement services for actual e-Business transactions to the PFTZ-registered institutions that are engaged in cross-border e-Business.

2. Banks in Shanghai are supported to cooperate with the PFTZ-based payment service institutions (and their branches) holding an Internet Payment Business Permit, to provide cross-border RMB settlement services for actual e-Business transactions, including transactions by individuals and entities engaged in cross-border e-Business exports.

3. Banks shall enter into agreements with payment service institutions in respect of processing cross-border e-Business RMB settlement, and shall file the agreement with PBC Shanghai. The banks shall verify the authenticity and compliance status of the underlying transaction of the cross-border RMB settlement business processed through payment service institutions. The cross-border RMB settlement business forwarded to the banks by the payment service institutions shall have a cross-border e-Business transaction background, and shall be in accordance with the relevant state laws and regulations. The payment service institutions shall perform verification duties concerning anti-money laundering, counter-terrorist financing and keep corresponding transaction record, and shall coordinate with relevant state authorities to conduct inspections.

4. Payment service institutions shall conform to the Administrative Measures for the Payment Services Provided by Non-financial Institutions (The People’s Bank of China Decree [2010] No. 2), the Measures for the Custody of the Reserves of Payment Institutions' Clients (The People’s Bank of China Announcement [2013] No. 6) and other relevant regulations.

VIII. Cross-border RMB Settlement Service

1. The China Foreign Exchange Trade System (CFETS) (also being the National Interbank Funding Center) shall provide RMB- denominated financial services in the PFTZ for assets transactions between the PFTZ and offshore markets to expand the cross-border use of RMB.

2. The Shanghai Gold Exchange (SGE) shall provide RMB- denominated services in the PFTZ for precious metal trading, delivery and settlement between the PFTZ and offshore markets, promoting the use of RMB in international precious metal market.

IX. Information Reporting and Submission

All cross-border RMB business, as well as receipt and payment information, shall be reported and submitted to the RMB cross-border receipt and payment information management system in an accurate, complete and timely manner, and shall be processed for corresponding international payments statistics reporting.

X. Anti-money Laundering, Counter-terrorist Financing and Anti-tax Evasion

When providing relevant cross-border RMB services for financial institutions and enterprises in the PFTZ, banks shall specify in the service agreements that each party shall (i) fulfill the obligations and duties concerning anti-money laundering, counter-terrorist financing and anti-tax evasion as stipulated in relevant regulations; (ii) keep relevant transaction records and vouchers to ensure that the transaction can be retraced; and (iii) coordinate with the relevant authorities to conduct inspections.

The Shanghai Headquarters of the People’s Bank of China

February 20, 2014