China (Shanghai) Pilot Free Trade Zone: Implementation Details issued for Cross-border use of RMB
Business Regulation and Tax Newsflash
Issue 13 - 28 February 2014
The Shanghai head office of the People's Bank of China ("PBOC") issued a notice on February 20 providing more implementation details in promoting cross-border use of RMB in the China (Shanghai) Pilot Free Trade Zone ("Pilot FTZ"). The key points of the notice are set out below:
RMB cash pooling
- A two-way cross-border RMB cash pooling is allowed for a multinational group which has established an operating entity in the Pilot FTZ.
- To apply for the cash pooling business, the group must designate an operating entity in the Pilot FTZ to open a dedicated RMB account, the funds in which must be separately accounted for.
- The RMB funds being pooled are limited to cash flows generated from participants' operating and industrial investment activities; cash flows generated from financing activities cannot be pooled.
Centralized RMB receipt/payment
- An operating entity in the Pilot FTZ may receive and make current account payments of cross-border RMB on behalf of its domestic and foreign related parties on a centralized basis.
- Related parties allowed in the scheme may include the entity's group members and non-group members which have supply-chain and close business relationship with the group.
- To apply for the centralized RMB receipt/payment scheme, the group must designate an operating entity in the Pilot FTZ to open a dedicated RMB account.
RMB borrowing from overseas
- The balance of RMB borrowing from overseas by an entity in the Pilot FTZ cannot exceed the ceiling amount which is calculated as -
- general entities: paid-in capital of the entity * 1 * policy parameter
- non-banking financial entities: paid-in capital of the entity * 1.5 * policy parameter
The aforementioned RMB borrowing refer to those due more than one year. Cross-border trade credits and cash pooling will not be accounted for this purpose.
- RMB borrowing from overseas by an entity in the Pilot FTZ can only be used in FTZ or overseas projects, but cannot be used to invest in securities (including asset management products), derivatives or entrusted loans.
Cross-border RMB settlement
- Banks in Shanghai may generally process cross-border RMB settlement under current account or direct investment items for entities or individuals in the Pilot FTZ simply according to the receipt/payment instructions; however, it is left to the bank's discretion to design and implement control procedures based on the KKD principles (i.e. "Know your customer", "Know your business" and "Due diligence") to ensure the settlement request comes from valid transaction or business needs.
- For inbound investment projects on the "Negative List", relevant government approvals must be submitted to the bank to process the RMB settlement for direct investment purpose.
- An individual working in the Pilot FTZ may open a RMB bank account for cross-border RMB settlement purpose; for a foreign individual, a resident permit with at least one year valid period must be submitted to open such account.
Cross-border use of RMB in trading services
The China Foreign Exchange Trade System (CFETS) and Shanghai Gold Exchange (SGE) will provide RMB-quoted/denominated financial assets and precious metal trading/settlement services in the Pilot FTZ for traders in the FTZ and overseas.
Please follow the link for a copy of Q&A (in Chinese) by PBOC officials on the notice. You may also access the relevant information and regulations about the Pilot FTZ via Deloitte's dedicated portal page.