This article examines the foreign exchange restrictions on foreign investment enterprises ("FIEs") in the PRC.

Generally, FIEs in the PRC are encouraged to export their products, and sales within the domestic market are strictly controlled. While there is no outright prohibition or quota set for domestic sales by FIEs, the de facto restraint lies in the need for the enterprise to balance its foreign exchange flows.

Under existing PRC regulations regarding foreign exchange control, all foreign exchange deposits and disbursements of a joint venture must flow through the FIE's bank account in the PRC, so the PRC authorities can easily check the income and expenditures which are being incurred.

Because the Renminbi is not convertible into foreign exchange, FIEs have to generate sufficient income in a hard currency in order to have enough foreign exchange for the remittance of foreign exchange dividends and other foreign exchange distributions and expenditures. This can become a significant problem for foreign investors who view FIEs as a means of penetrating the PRC domestic market, since, generally speaking, domestic sales are paid for in Renminbi. Moreover, a PRC joint venture party will generally view the joint venture primarily as an exporting enterprise capable of generating sufficient foreign exchange. Even many FIEs which do export a significant portion of their output have encountered difficulties in balancing their foreign exchange receipts and expenditure.

There are a number of ways in which assistance is given to balance foreign exchange receipts and expenditure. In particular, over the past few years forex swap centres have developed at a local and national level, to which FIEs that can demonstrate a genuine need for foreign exchange may have access.

As part of the reform of the domestic banking industry in the PRC, the People's Bank of China has indicated that the role of forex swap centres may be taken over by domestic banking institutions in the future.

This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.