CHINA LAW DIGEST NEWSLETTER
Vol. 2, No.1 - January 22, 2003
TOPICS THIS ISSUE:
- Provisional Measures on the Administration of Clearing and Selling of Foreign Exchange by Designated Foreign Exchange Banks
- Notice on Implementation Reform on the Administration of Foreign Exchange in Domestic Foreign Exchange Loans
- Provisions on the Administration of International Freight Forwarding Agency Enterprises with Foreign Investments -
- Judicial Interpretation Concerning Hearing of Civil Litigation Arising In Connection With False Statement in Securities Market
- Regulations on Anti-Money Laundry in Financial Institutions
- Circular on the Relevant Issues Concerning Strengthening of Administration of Approval, Registration, Foreign Exchange and Tax Collection of Foreign Invested Enterprises
Provisional Measures on the Administration of Clearing and Selling of Foreign Exchange by Designated Foreign Exchange Banks
Issue Date: November 16, 2002
Issuing Authority: People's Bank of China
Effective Date: December 1, 2002
Summary:
The Provisional Measures focus on the administration of the whole procedure of banks' operation in clearing, selling and paying of foreign exchange. Major contents of the Measures include:
- Regulation on the sanction procedure for the entrance and withdrawal of banks from foreign exchange clearing and selling market. The Measures made it clear that People's Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) and its branches are jointly responsible for the approval of banks operation in clearing and selling foreign exchange market;
- Differentiate the clearing and selling of foreign exchange transactions between banks and their clients and banks' own clearing and selling of foreign exchange transactions. It provides that foreign exchange net proceeds shall be sold through the foreign exchange market between banks and obtain prior approval from SAFE; banks shall entrust trading companies with foreign trade preferential rights to import self-trade items, and cannot make direct foreign exchange payment. The clearing and selling of foreign exchange transactions between banks and their clients shall subject to the current laws and regulations.
- Regulation on the revolving position and accounting of clearing and selling of foreign exchange. It provides that banks shall apply to SAFE for limit on the revolving position within 30 days from qualifying to conduct clearing and selling of foreign exchange transactions.
- Designated foreign exchange banks shall maintain separate accounting for the transaction between banks and clients or the transaction of their own for clearing and selling foreign exchange.
- The foreign currency exchange places (such as the foreign currency exchange services in hotels, airport and shopping centers) shall obtain authorization from the designated foreign exchange banks. The daily foreign currency exchange transaction shall be subject to the statistics of the authorization bank's clearing and selling of foreign exchange.
The Measures unified the previous policy on the distraction of domestic banks and foreign funded banks and cancelled the limitation on clearing and selling of foreign exchange transaction of foreign funded banks. It moves further to the commitments on banking that China has made in WTO accession.
Notice on Implementation Reform on the Administration of Foreign Exchange in Domestic Foreign Exchange Loans
Issue Date: December 6, 2002
Issuing Authority: State Administration of Foreign Exchange
Effective Date: January 1, 2003
Summary:
The reform shifts the previously "Debtor Registration System" to "Creditor Registration System". It means that debtors of domestic foreign exchange loans are not required to register the foreign exchange loan on a case-by-case basis with SAFE any more. Instead, creditors, which are Chinese financial institutions, shall register all foreign exchange loans with SAFE on a regular basis. Chinese financial institutions shall review at their own discretion on the ingenuity and legality of domestic foreign exchange loan. No SAFE approval is required.
The reform only applies to self-owned loans of foreign exchange between domestic financial institutions (Creditors) and non-financial institutions (Debtors). The reform simplified the management on the specific accounts for domestic foreign exchange accounts and the previously required approval from repayment of loans. It provides that Creditors shall be responsible for the application and cancellation of the specific accounts for domestic foreign exchange accounts. SAFE will only control through follow up inspections.
The reform is of great importance to domestic enterprises, banks and foreign exchange controls. After the reform, domestic enterprises do not have to register each foreign exchange loan with SAFE, which lower the cost of loan and increase efficiency of administration of foreign exchange.
Provisions on the Administration of International Freight Forwarding Agency Enterprises with Foreign Investments
Issue Date: December 11, 2002
Issuing Authority: State Administration of Foreign Exchange
Effective Date: January 11, 2003
Summary:
International freight forwarding agents established with foreign investments as used herein shall mean enterprises established in the forms of equity joint ventures, contractual joint ventures or wholly foreign invested enterprises, which are entrusted by the consignors or consignees of import and/or export goods to, in the names of their entrusting clients or in their own names, carry out freight forwarding and other relevant services and get paid for such service (hereinafter referred to as "Foreign-invested International Freight Forwarding Agents").
Foreign investors may establish Foreign-invested International Freight Forwarding Agencies in the form of equity joint ventures, contractual joint ventures and wholly foreign invested enterprises. The portions of shares held by foreign investors in the equity joint ventures and contractual joint ventures shall not be less than 25%; the specific date of accepting the applications for the establishment of wholly foreign invested international freight forwarding agents by the authorities will be announced by the MOFTEC at another time.
Foreign investors may acquire a portion of shares of exiting international freight forwarding agents to establish Foreign-invested International Freight Forwarding Agents, provided that portion of shares and the qualifications of the investors comply with these Provisions.
Subject to the approval by the authorities, the Foreign-invested International Freight Forwarding Agents may operate in the following business or part: space booking, consignment, warehousing and packaging, inspection of loading and unloading of goods, container stuffing and striping, distribution, transit, and other relevant short-distance transportation, services for customs clearance, freight inspection and freight insurance, etc.
Judicial Interpretation Concerning Hearing of Civil Litigation Arising In Connection With False Statement in Securities Market
Issue Date: January 9, 2003
Issuing Authority: Supreme People's Court
Effective Date: February 1, 2003
Summary:
The long-awaited Interpretation was finally issued by the Supreme Court in January, which serves as the basis for the Chinese court to accept and hear cases arising in connection with false statement in the securities market.
Acceptance of such cases. The Interpretation provides that victim investors shall file such civil litigation against the false statement makers after an administrative decision or a court criminal judgment has been made regarding the false statement.
Defendant. The Interpretation provides that defendants in false statement cases can be sponsors, issuers, controlling shareholders, underwriters, professionals such as accountings firms, law firms and assets assessment companies, and directors, supervisors and general managers (senior management staff). Although the controlling parties on the issuers cannot be defendants, the Interpretation provides that issuers can recourse to the controlling parties after they undertake civil liabilities if investor's losses are caused by the controlling parties.
Form of Litigation. The form of litigation that can be brought up by more than one victim investors can only be co litigation. No class action can be filed in false statement cases. It means the number of plaintiff by the time of litigation shall be certain. Those who did not participate in the co litigation will not be applicable to the court judgment, and they have to file new civil litigation to get damages for the same false statement.
Definition of False Statement. The Interpretation provides that false statement includes false registration statement, misleading statement made in registration or through media, majority omission and undue information disclosure.
Causation. Investors in false statement cases need to proof 1) they purchased the securities that directly related to the false statement; 2) they purchased the securities after the false statement was made and before the discovery date/amendment date of such false statement; and 3) loss occurs after they sold/kept such securities after the discovery date/amendment date of the false statement.
Damages. Damages are limited to actual losses including investment losses, commission losses and stamp tax. For those who sell the securities before the reference date, investment loss is the difference between the purchase price of the securities, which is the average price of the securities purchased, and the selling price, which is the average price of the securities sold. For those who sell the securities after the reference date, investment loss is the difference between the average purchase price of the securities and the average of the daily closing price from the discovery date/amendment date to the reference date.
Regulations on Anti-Money Laundry in Financial Institutions
Issue Date: January 3, 2003
Issuing Authority: People's Bank of China
Effective Date: March 1, 2003
Summary:
For the first time, Chinese government issued national laws on the money laundering activities which seems to be getting worse and worse in China. The Regulations are applicable to all financial institutions including policy-oriented banks, commercial banks, mutual credit societies, postal savings and remittance institutions, finance companies, trust and investment companies, financial leasing companies and foreign-invested financial institutions.
The People's Bank of China (PBOC) shall be responsible for the supervision and administration of anti money laundering work. An anti money laundering team under PBOC shall be established and be entrusted with responsibilities such as research and formulate anti money laundering strategies, plans and policies; constitute rules and systems of anti money laundering work; constitute the reporting system of large-amount and/or suspicious RMB transactions. The State Administration of Foreign Exchanges shall be responsible for the supervision and administration of the reporting system of large-amount and suspicious transactions in foreign currencies and shall constitute relevant rules and system for such purpose.
The financial institutions shall establish clients identity registration system and examine the identities of those clients whom they deal with in depositing and settlement business. The financial institutions shall examine and analyze the suspicious funds transactions and shall report to local Public Security authorities if any criminal activity is found to be involved. The financial institutions violating the Regulations may result in warning, fines and cancellation of responsible management staff's title, to the worst situation.
Circular on the Relevant Issues Concerning Strengthening of Administration of Approval, Registration, Foreign Exchange and Tax Collection of Foreign Invested Enterprises
Issue Date: December 30, 2002
Issuing Authority: Ministry of Foreign Trade and Economics Cooperation
Effective Date: January 1, 2003
Summary:
The Circular regulates mainly the foreign invested enterprises in which foreign investor's capitalization is lower than 25% and foreign investors purchasing shares directly from domestic companies.
In the case that the registered capital contributed by foreign investor(s) is less than twenty-five percent (25%), unless otherwise stipulated in laws and administrative regulations, the establishment of such a FIE shall be subject to examination and approval in accordance with the currently valid examination and approval procedures concerning the establishment of FIEs. If the establishment of such a FIE is approved, the Approval Certificate of FIE marked with the sentence of "foreign investment being less than 25%" shall be issued; if such a FIE is registered, the Business License of FIE marked with the sentence of "foreign investment being less than 25%" in the column of "Enterprise Category" shall be issued.
Those FIEs with less than 25% of registered capital contributed by foreign investors shall not enjoy tax exemption and deduction on the equipment and goods imported for self-use under the total investment. Neither shall those FIEs enjoy other tax treatments enjoyed by FIEs. Joint stock companies with foreign investment which have already enjoyed FIE treatments may continue enjoying FIE treatments in accordance with relevant regulations after their capital is increased or shares are transferred to foreign investors.
If foreign investors purchase shares of a domestic enterprise of any nature or category, such domestic enterprise shall be modified into a FIE subject to the approval of examination and approval authority following the currently valid examination and approval procedures for FIEs in accordance with the relevant state laws and regulations and the foreign investment industry policies shall be complied with.
If a Chinese individual shareholder of the original domestic company has been shareholder for more than one year, he or she can continue being the Chinese investor of the FIE which the original domestic company is modified into upon approval. For the time being Chinese individuals are not allowed to set up FIEs with foreign companies by way of new establishment or acquisition.
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