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Foreign Exchange Controls in China

Updated:2018-4-24 11:12:10    Source:www.tannet-group.comViews:245

Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents. In China, companies, banks, and individuals must comply with a “closed” capital account policy. This means that money cannot be freely moved into or out of the country unless it abides by strict foreign exchange rules.

Foreign exchange system in China
The main bodies responsible for overseeing the flow of foreign exchange is the State Administration of Foreign Exchange (SAFE) and the People’s Bank of China (PBOC), the central bank. SAFE is the administrative agency responsible for managing foreign exchange activities in China, setting relevant regulations, and administering China’s foreign exchange reserves. SAFE’s approval or record-filing is required for a range of transactions involving inbound and outbound  foreign payments.

In the Chinese foreign exchange system, there are two main accounts: the current account and the capital account. The current account applies to ordinary recurring business transactions, including trading receipts and payments, payment of interest on foreign debt, and repatriation of after-tax profits and dividends, amongst other transactions.

The capital account, on the other hand, deals with capital import and export, direct investments, and loan and securities, including principal repayment on foreign debts, overseas investments, investment in foreign invested enterprises (FIEs), and more.

Compliance requirements
According to SAFE rules, incorporated foreign invested enterprises are subject to a general debt to equity ratio requirement.This means that out of the total investment of an FIE, a certain percentage must be comprised of capital contributed by the investors.

If the FIE fails to comply with SAFE requirements, the foreign exchange bureaus can take over the capital account information, and banks will refuse to process any foreign exchange business under the FIE’s capital account. Furthermore, if the FIE does not meet SAFE’s conditions, then banks will not allow the FIE to distribute profits to foreign shareholders.

Given China’s restrictions on foreign currency exchange, companies have to be strategic about their funding plans early in the pre-investment stage.

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