Foreign exchange restrictions continue to be a challenge for
international businesses that invest in a subsidiary in China.
Approvals are necessary for just about every kind of transaction,
from confirming the investment amount (registered capital) to
contributions, to converting the foreign exchange to local currency
for use in China and repatriating dividends. Foreign exchange
restrictions add a level of complexity to foreign direct investment
(FDI), and occasionally create serious challenges to a chosen
business model or implementation strategy.
To encourage and facilitate FDI, the department in charge of
foreign exchange - the State Administration for Foreign Exchange
(SAFE) - as introduced new rules in the form of the
"Circular on Issues Concerning Further Improvements and
Adjustments of Administration Policies of Directly Invested Foreign
Exchange", which will take effect on 17 December 2012.
After summarizing the general contents of the Circular, we
highlight two changes that will have a direct impact on foreign
Various activities that currently require administrative
reviews and approval, will only require registration - thus cutting
the time and administrative burden, and limiting the discretion of
the local SAFE officers in rejecting an application. Examples are
the opening of a foreign currency bank account; foreign exchange
purchases, sales and settlement; and foreign exchange transfers
between onshore bank accounts (e.g. to contribute dividends,
proceeds or liquidated assets to a new investment).
Certain activities will continue to require approval, but
application materials and approval processes will be simplified.
For example, the verification of a capital contribution can be
verified through a computer system - CPA's no longer need to
obtain a physical approval document from the SAFE.
Restrictions will be relaxed or lifted entirely. For example,
foreign-invested companies will be permitted to lend foreign
currency to foreign companies, though restrictions remain on the
We highlight two specific changes that will impact foreign
investors as well as some foreign individuals with assets in
Pre-investment Bank Accounts to Pay Initial Expenses
A foreign investor can only pay in his registered capital after
the company is established. This creates a gap - how can a foreign
investor pay for initially pre-investment expenses such rents and
rental deposits, and government administration fees, and even
agency or legal fees? Chinese legal procedures have traditionally
allowed investors to open a temporary bank account, but the SAFE
approval procedures were so strict and impractical that very few
foreign investors followed this approach. The preferred solution is
usually for the foreign investor to pay expenses directly, but then
they cannot be included in the accounts of the invested entity.
The Circular tries to solve this problem, by simplifying the
procedures for a foreign investor to open a bank account
pre-investment, and keeping the required information and documents
to a minimum. After the WFOE or JV has been formally established,
the amounts already contributed through this temporary bank account
can then be included in the capital contribution. To avoid abuse of
this channel to get funds into the China, some restrictions will
continue to exist on the amount that can be pre-invested. Some
limitations on how these funds can be used, should also be
Conversion of Local Currency Proceeds for International
Foreign-invested companies, representative offices and foreign
individuals that earn local currency from the sale of Chinese real
estate or equity, or from liquidating a company, will be able to
use the proceeds to purchase foreign currency from the bank
directly and can then remit this foreign currency abroad.
The erstwhile approval by the SAFE for such a conversion will be
cancelled. Moreover, funds no longer need to leave the country from
the location where the proceeds were earned. For example if one
sells a house in Beijing, the proceeds can be converted and
remitted abroad from a Shanghai bank account.
The Circular does not liberalize all transactions on the capital
account, but does go some way in easing restrictions on the
handling of foreign exchange for investment purposes. Foreign
companies that plan to invest in China, as well as foreign-invested
companies (and even foreign individuals) that frequently encounter
foreign exchange issues, should take note.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The NPP states that India is located on a strategically important location and is well connected to several international trade and commerce routes.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).