Qianhai takes another bold step in forex reform

The hits keep coming from Qianhai, the special economic zone in Shenzhen that appears to be the spearhead of the next stage of major reform for the country.

The Shenzhen Foreign Exchange Bureau has issued detailed implementation guidelines for pilot reforms of foreign exchange in the zone, located in the Shekou district. These put forward a batch of initial trial policies that include allowing the use of forex earnings in domestic equity investment, a type of cross-border financing for local enterprises.

The guidelines have their origins in a policy announced more than a year ago, February 2018, when Shenzhen became the first Chinese city approved to experiment with companies in its free trade zone receiving foreign funding. That resulted in a dramatic shortening of the approval time needed by banks – from hours to minutes – and allowed incoming funds to be paid to the enterprises before the banks had completed their due-diligence checks on the source. This, naturally, greatly improved cashflow management for companies in the zone. As of June this year, 71 companies in Qianhai were approved for this service, and they have received a total of US$1.49 billion. 

It’s small. But that is not the point. It’s a start.

The latest notice from the city government has opened the service to all companies registered in the zone, while also lowering the threshold for applications. Previously, applicants must either be a Hong Kong-funded enterprise or have paid a tax bill the previous year above RMB100,000. Now they need only have no related violation records.

The second major change is that foreign-funded enterprises in the zone that had not previously been designated as being in the “investment” business may now use funds from their foreign exchange transactions not only for working capital, but for domestic equity investment, i.e. they can expand their capital bases.

Previously, only foreign-funded enterprises engaged specifically in “investment” could carry out equity investment, and it was difficult for foreign enterprises to obtain this designation as part of their business scope. The criteria included companies must have total assets of at least US$400 million in the previous year of its application. In reality, many foreign-funded companies have needed to expand their domestic business through new investment, even though they were not designated as “investment” companies. Previously, it was difficult for them to enlarge their capital bases. 

After the introduction of the new policy, average foreign-funded enterprises can carry out equity investment as long as falls within certain guidelines. 

Banks based in the zone, meanwhile, have launched a number of services for cross-border financing to make it more convenient for enterprises in the zone to flexibly utilize both domestic and overseas markets to alleviate funding challenges. 

Enterprises can now borrow overseas funds of a value up to double their net asset limits. 

The local government is also to relax the requirement which previously stipulated that currency actually used for cross-border financing must be consistent with that stated in the contract, both for withdrawal and repayment. The new policy only requires the consistency of currency type for withdrawal and repayment. This initiative gives enterprises more options, allowing them to effectively solve the problem of withdrawing funds after receiving financing from countries where currencies are not freely convertible. For example, a Shenzhen company wants to raise funds from a Brazilian institution. The contracted currency is in Brazilian Real, but since it is not a freely convertible currency, no bank in China offers the exchange service. After the introduction of the new policy, companies can freely choose other withdrawal currencies even if they raise funds from countries (regions) whose currencies are not freely convertible, which greatly broadens the scope of financing options for enterprises.

Cancellation of foreign debt can be processed by any bank under the jurisdiction of the Shenzhen Foreign Exchange Bureau, and the time limit for the enterprise to handle the business has also been cancelled. Enterprises can choose banks nearby to cancel foreign debt, greatly increasing the efficiency.

(Editor’s note: We will follow up on this next week after talking to other experts in the finance industry. Feedback from readers is most welcome.)

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