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Foreign exchange control and the introduction of the euro

Effective as of the day of the introduction of the euro, the State Administration of Foreign Exchange of the PRC (SAFE) issued a notice permitting conversion of an account held in the PRC in any European currency into a euro account.

Prior to the introduction of the euro, the People's Bank of China and SAFE informed Chinese domestic institutions (both financial institutions and companies) as well as individuals, that they could accept and use euros in bilateral trade and financial operations. This obvious information was necessary to avoid Chinese contract partners opening up discussions with their foreign counterparts on the validity and content of existing contracts.

Although the introduction of the euro does not directly affect the foreign exchange regime of the PRC, the notice primarily addresses administrative matters, an essential part of foreign exchange control. Enterprises may either convert their existing account into a euro account or retain the original European currency account and open a euro account with the same bank. When several accounts in European currency exist, only one euro account can be opened, but existing European currency accounts can be maintained. The concurrent use of accounts in currencies of countries of the European Union and the euro will be permitted for a transition period of three years.

The opening of any foreign currency account requires special approval documents and use permits, a Foreign Exchange Account Opening Notice and a Foreign Exchange Registration Certificate to be issued by safe. For a conversion of an account to a euro account it is necessary - prior to approaching the bank- to register with SAFE such modification in the approval documents, the use permit, the Foreign Exchange Account Opening Notice and the Foreign Exchange Registration Certificate. Then, SAFE will issue a euro Account Opening Notice.

Except for the difference in currency, the basic particulars of the newly opened euro accounts and the original foreign currency accounts should remain consistent, such asthe nature of the account (capital account or current account). If the original European currency account is maintained in addition to the new euro account, then all restrictions, such as a determined maximum balance or maximum amount of aggregate receipts, will be accounted for in tandem.

Even if the European currency foreign exchange account opened outside China needs to be changed to a euro account, PRC foreign exchange administration procedures have to be complied with.

Obviously, the above principles also apply to foreign exchange debt accounts such as loan repayment accounts, where the change of currency has to be registered with SAFE. As to foreign debt registration, the monitoring system of the PRC requires the registration of all foreign loans denominated in a European currency. New rules are expected requiring debtors to deliver euro statements to the foreign exchange administration instead of the original European currency statements. With respect to loans denominated in euro after January 1 1999 they may immediately be entered into the statements in euro.

The new rules reiterate the strict distinction between current account and capital account items in the PRC. Whereas the renminbi is truly convertible with respect to current account transactions, capital account transactions are subject to much tighter SAFE control.

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