Laws of the People's Republic of China

Circular of the State Administration of Foreign Exchange on Relevant Foreign Exchange Administration Issues concerning Designated Foreign Exchange Banks' Forward Purchase and Sale of Foreign Exchange Business and Renminbi and Foreign Currency Swap Transaction to Clients

Hui Fa [2006] No. 52 October 20,2006

The branches and foreign exchange administration departments under the State Administration of Foreign Exchange in all provinces, autonomous regions, and municipalities directly under the Central Government, the branches in the cities of Shenzhen, Dalian, Qingdao, Xiamen and Ningbo; all policy banks, state-owned commercial banks and joint stock commercial banks:

For the purpose of conforming to the needs of evasion of exchange rate risks by domestic economic subjects, facilitating the provisions of products and services for the evasion of exchange rate risks by designated foreign exchange banks (hereinafter referred to as these banks) to clients, we hereby clarify relevant foreign exchange administration issues involved in these banks' forward purchase and sale of foreign exchange business and Renminbi and foreign currency swap transaction(hereinafter referred to as "swap") to clients as follows subject to the Circular of the People's Bank of China concerning Relevant Issues for Enlarging Designated Foreign Exchange Banks' Forward Purchase and Sale of Foreign Exchange Business and Renminbi and Foreign Currency Swap Transaction to Clients" (Yin Fa [2005] No. 201):

1.

The Forward Purchase and Sale of Foreign Exchange Business

(1)

The foreign exchange income and expenditure which may be under spot purchase and sale of foreign exchange in accordance with foreign exchange administration provisions may also be under forward purchase and sale of foreign exchange business.

(2)

The forward purchase and sale of foreign exchange business shall be under performance examination. A bank may, according to its own business operation and needs of risk administration, decide to sign a forward contract with a client. When the forward contract expires, the bank shall, pursuant to corresponding effective vouchers provided by the client, purchase or sell foreign exchange.

(3)

As regards the performance of a contract on forward purchase and sale of foreign exchange, the amount of the contractual principal shall be delivered in full at the agreed forward transaction price, and no non-delivery forward is permitted.

(4)

When a forward contract expires, if the client has breach of contract, the matter shall be disposed in accordance with commercial principles.

(5)

A client may adjust the term for performance of the forward contract (advance or renew the performance) by swap transaction. The contractual amount, the renewal times and the term shall be determined through negotiations between the client and the bank.

2.

Swap Transaction

(1)

The foreign exchange funds exchanged out by clients at the near end of the swap (which means the last exchange of funds in the swap, similarly hereinafter) shall be limited to the foreign exchange funds which may be under spot settlement of foreign exchange in accordance with foreign exchange administration provisions; the foreign exchange funds exchanged out at the far end of the swap (which means the next exchange of funds in the swap, similarly hereinafter) shall be limited to the foreign exchange funds exchanged at the near end.

When a client exchanges out the foreign exchange funds in the swap performance, a bank shall, with reference to the performance examination administration of forward purchase and sale of foreign exchange business, examine the funds and vouchers delivered by the client pursuant to the provisions on the administration of spot settlement of foreign exchange.

(2)

A client may directly use Renminbi to exchange for foreign exchange by swap transaction, the payment and use of which shall be compliance with foreign exchange administration provisions.

(3)

The foreign exchange got by a client through exchange at the far end of the swap shall be generally transferred to the account through which the foreign exchange funds were exchanged out; the foreign exchange at the near end which came from a capital account, special account of foreign debts, or special account of loans converted from foreign debts of a foreign-funded enterprise may, when got by a client through exchange at the far end, be transferred to the current foreign exchange account, and shall not be transferred to any of the said three kinds of capital foreign exchange accounts.

(4)

As regards the foreign exchange or Renminbi exposure formed in a bank due to breach of contract of a client in the swap transaction, the bank may include such exposure into its own overall position in the purchase and sale of foreign exchange for squaring, the income or loss of which shall be disposed by the bank and the client.

(5)

A client may adjust the term for performance of the total or partial amount under the swap contract (advance or renew the performance), the renewal times and the term shall be determined through negotiation by the client and the bank.

3.

Statistical Administration

(1)

When a client adjusts the term for a forward or swap contract by signing a new swap contract, the bank shall not render the said new swap transaction as a sum of new transaction for separate statistics, and may only need to make statistics on the performance of the adjusted forward or swap contract.

(2)

After a client has breach of contract in swap transaction, the bank shall deem the performance amount at the near end or the balance between the performance at the near end and the partial performance at the far end at the time of performance as spot purchase and sale of foreign exchange for statistics.

(3)

The aforesaid statistics shall be reflected in the Monthly (Ten-day) Statistical Report of the Bank's Purchase and Sale of Foreign Exchange and the Daily Report about the Overall Position of the Bank's Purchase and Sale of Foreign Exchange.

4.

The scope of clients for whom a bank handles the forward purchase and sale of foreign exchange business or the swap transaction shall be limited to the institutions within the territory of China and other clients approved by the State Administration of Foreign Exchange.

A bank may handle the purchase of foreign exchange with Renminbi for overseas investment under relevant provisions or the swap transaction of inward foreign exchange at the near end and outward foreign exchange at the far end under the financial administration for individual residents.

5.

Without approval of the State Administration of Foreign Exchange, no institution or individual within the territory of China may participate in derivative transactions of Renminbi to foreign exchange outside the territory of China in any form. These banks shall provide products and services to the clients for the evasion of Renminbi exchange rate risks within the prescribed scope of business.

All branches of the State Administration of Foreign Exchange shall, after receipt of the present Circular, immediately transmitted it to the sub-branches, urban and rural commercial banks, rural cooperative financial institutions, and foreign-funded banks under their respective jurisdiction.

If there is any question in the implementation, please contact Balance of Payments Department of the State Administration of Foreign Exchange.

Tel: 010-68402385, 68402313; Fax: 010-68402315