China Notice on Foreign Exchange Management for Banks' Trade Financing

To provincial administrations of foreign exchange; the administrations of foreign exchange at Shenzhen, Dalian, Qingdao, Xiamen, and Ningbo; the foreign-exchange banks designated for Chinese-funded enterprises:

Hereby announced are relevant matters on optimization of foreign exchange management for banks' trade-financing practices:

Ⅰ Enterprises' trade receipts/payments shall be truthful and legitimate.

Enterprises' receipts and payments regarding trade (including transit trade) shall be based on real and legal imports, exports or other business dealings. The enterprises shall not declare fictitious trade events for cross-border receipts and payments on bank credits.

Ⅱ Banks shall strengthen their censorship over authenticity and compliance of any trade financing business.

(Ⅰ) Where enterprises apply for financing their cross-border trade business by means of letters of credit, collection, etc., banks shall verify the authenticity and compliance of relevant trade backgrounds, the trade financing amount and time limit, in accordance with the enterprises' business status and financial positions.

(Ⅱ) As regards forward financing business (not less than 90 days, including spot trading extension or continued aggregate period of more than 90 days), irrespective of the collection of full or higher security deposit, the banks shall enhance their inspection in any of the following cases; where having suspicion of the business authenticity and compliance, the banks shall require the enterprises to submit trade-related contracts and original documents of title to goods so as to take relevant identification.

1. The financing business is characterized by high frequency, large scale, relative concentration of counterparties or trading with affiliates, remarkable exchange mismatch between RMB and foreign currencies;

2. The financing merchandise has (but not limited to) high own value or high added value, or small size that is easy to carry, or regular package that is easy to standardize;

3. Foreign trade practices by way of transit and resale (goods importing via customs supervision zones and then re-exporting).

(Ⅲ) Banks should strengthen trade-financing due diligence to be more initiative and sensitive to any suspicious transactions with an internal risk-control system, including tougher supervision over banking branches and prohibition of grassroots' relaxation in the censoring and even assistance in evading exchange regulations.

(Ⅳ) Where enterprises are suspicious as described in the (Ⅱ) above, the banks shall timely report to the State Administration of Foreign Exchange or its branches and actively take measures to prevent abnormal cross-border capital flows.

Ⅲ Improvement in Classified Management of Enterprises' Foreign Exchange Receipts/Payments Relating to Trade Where Class A enterprises have remarkable mismatch between fund flows and merchandize flows, or big fast receipts/payments relating to transit trade, large scale of forward financing, and the typical characteristics of cross-border financing arbitrage, the foreign exchange administrations may send them "risk reminders", requiring them to give explanations within 10 workdays.

If the enterprises fail to give timely reasonable explanations, the foreign exchange administrations may, as per HuiFa [2012] No.38 Notice, include them into Class B, or even into Class C under severe circumstances for stricter supervision.

After being degraded to Class B, the enterprises may be restored to Class A on the condition of keeping 3 months of compliance with relevant indicators; where being ineligible for the restoration, the Class B supervision shall be prolonged by 3 months; where remaining ineligible through 6 months of supervision, the Class B supervision shall be prolonged by one year or be degraded into Class C with one-year supervision.

Ⅳ Tougher monitoring of banks' trade-financing authenticity and compliance
The foreign exchange administrations shall strengthen their monitoring of banks' trade financing business. Concerning any suspicious banks, the administrations may assess the banks' due diligence by way of spot-checking certain banking data or taking on-site inspection when necessary.

Where any banks obstruct or refuse the administrations' on-site inspection, or fail to implement their due diligence in censoring, the administrations may send the banks "risk reminders" or impose penalty on them as per relevant regulations.

Ⅴ Imposition of Bigger Penalty
The foreign exchange administrations may impose penalty on the violating banks and enterprises. As regards fictitious trade made through counterfeit or reused documents and commercial bills, the penalty may be imposed for illegal inflow of exchanges, illegal settlement of exchanges, illegal arbitrage of exchanges, evasion of exchange control, or for even criminal liability.
This Notice shall enter into force upon its issuance.

Local foreign exchange administrations should immediately forward this Notice to their branches, city commercial banks, rural commercial banks, foreign-owned banks, joint Chinese-foreign banks, branches of foreign banks, and rural cooperative financial institutions. In case of any implementing problems, please timely feedback to the State Administration of Foreign Exchange.

Contact phone no.: 010-68402450



The State Administration of Foreign Exchange of China (SAFE)
December 6, 2013