Understanding the foreign exchange regime
November 09, 2010 | BY
clpstaff &clp articles &Figuring out how to set up your accounts in China can be tricky if you're not sure about foreign exchange controls. Here, a few experts from Baker & McKenzie and Duan & Duan share their insights on what to note when doing commercial banking in the Mainland
My US-based company is just about ready to finalise the set-up of a wholly foreign-owned enterprise (WFOE) in a second-tier city in China, but I am unsure of the issues regarding PRC foreign exchange control. Should I open a Renminbi account, a foreign currency account, or both? What does Chinese law say about the conversion of items in current and capital accounts? How can I reduce the amount of trapped cash? Generally I guess I'm asking:
As a new WFOE entrant, what should I be aware of in terms of the foreign exchange regime in China and how can I best set up my account(s) to avoid capital-draining pitfalls?
The domestic perspective
Chinese Law requires that an overseas institution or individual that makes direct investments in the territory of the People's Republic of China shall handle the registration formalities at a foreign exchange administrative branch upon the approval of the competent department. Specifically, the registration must be initiated within 30 days of acquiring the business licence (the equivalent of the “Certificate of Incorporation”). If the registration is granted, the foreign exchange administrative branch will issue to the enterprise a “Foreign Exchange Registration IC Card”.
To direct overseas capital into China, the overseas institution or individual must also file an application to the same foreign exchange administrative branch to establish a foreign exchange capital account. Upon its approval, the bank may then establish the said account, in which overseas capital could be deposited. Subsequently, a Chinese Certified Public Accountant must be hired to conduct an Asset Evaluation to make certain that the foreign currency, real property and other overseas interests contributed by the foreign investor(s) are in line with State Foreign Exchange Laws and Regulations.
Before the enterprise can start active domestic trading, the foreign currency in the capital account is required to be converted into Renminbi (Rmb), which shall be deposited in a Rmb account of the enterprise. The Rmb funds originating from this foreign exchange settlement should be employed in businesses stated in its business scope (the equivalent of an “Objective Clause”), which is separately approved by respective government agencies. Ultra-vires use of the converted funds will attract heavy administrative penalties, and will sometimes lead to the revocation of the foreign exchange registration.
Looking at the details in relation to the “trapped cash” possibility, current Chinese Law states that: if the Capital and the Rmb accounts are all established in the same bank, the Rmb funds coming out of the foreign exchange settlement must be transferred out to the payee within the same day; if the two accounts are maintained in separate banks, the foreign exchange settlement bank, before it makes any transfer of Rmb funds, it must annotate “foreign exchange capital settlement” on the transfer certificate, and the transferee bank should, upon receipt of the Rmb funds, forward it to the intended payee within two working days. Therefore, one simple way to avoid time delays or unsuccessful transfers is to have both the capital and Rmb accounts of the enterprise established and managed in one bank.
The Foreign Exchange Registration IC Card is currently required to be reviewed by the Foreign Exchange Administrative branch annually. Failure to participate in the annual review or other substantive contraventions will lead to the revocation of the foreign exchange registration for the enterprise. One of the severe consequences being that no foreign exchange settlement might be conducted by the enterprise, thus effectively grinding its domestic trading to a halt.
Gary J Gao
Partner
Duan & Duan Law Firm
The international perspective
Foreign exchange regime
For many years, China has implemented an exchange control system with the State Administration of Foreign Exchange (Safe) acting as China's exchange control authority. Through its branches and sub-branches across the country, Safe regulates and supervises the conversion between Renminbi (Rmb) and foreign currencies as well as cross-border fund transfers. Under the current exchange control regime in China, cross-border fund transfers are subject to different administration and supervision treatments, depending on whether such transfers relate to current account or capital account items.
Current account items usually have a recurrent nature, such as payments in respect of foreign trade, cross-border supply of services, and remittance of profits and dividends to outside of China. Current account payments and currency conversion in relation to these payments may be made at any licenced foreign exchange bank upon presentation of the relevant supporting materials of the underlying transactions for which the payments are to be made.
Capital account items, on the other hand, are related to investments or loans, including direct investments, all types of foreign loans and securities investments. Unlike current account items, capital account items usually require the prior approval or verification by Safe before payments in relation to them may be made.
Accounts set-up
Upon its initial establishment in China, a wholly foreign-owned enterprise (WFOE) will need to open at least two bank accounts: one registered capital account and one Rmb basic account, which are generally considered as part of the “post-establishment procedures” that must be complied with before the WFOE may formally commence its operation.
The WFOE will first need to obtain the Foreign Exchange Registration Certificate from Safe, which will contain some basic information of the WFOE and information of its foreign currency accounts. Note that in most cities, such certificate may now be issued in the form of an IC card with which one may gain access to the accounts monitoring system operated by Safe.
The registered capital account can be opened with any licenced foreign exchange bank, including any foreign bank's subsidiary bank or branch in China (and in most cases, with the bank in the same city where the WFOE is located), and will have to be denominated in foreign currency, which is usually USD. Such account may only be used by the WFOE to receive capital funds contributed by its overseas shareholders. Funds in the registered capital account can be converted into Rmb at the account opening bank without Safe approval or verification. The WFOE may also open other foreign currency denominated accounts for trade settlement purposes (which are classified as “Settlement Accounts” under current account items) and, subject to Safe approval or verification, such other accounts under capital account items, such as a foreign debt account which is required when the WFOE borrows a loan from overseas.
The WFOE will also need to obtain the Account Opening Permit from the local branch or sub-branch of the People's Bank of China (PBOC), the central bank of China. Similar to the Foreign Exchange Registration Certificate, the Account Opening Permit will contain basic information of the WFOE and information of its Rmb accounts (and in most cities such permit may now be issued in the form of an IC card with which one may gain access to the accounts monitoring system operated by PBOC). The Rmb basic account can be opened with any licenced bank, including a foreign bank's subsidiary bank or branch in China that is allowed to engage in Rmb business in China. In most cases, the account opening bank is in the same city where the WFOE is located. The WFOE may subsequently open other Rmb accounts according to its operational needs.
Harvey Lau, Partner
Charles Chen, Consultant
Baker & McKenzie
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