United States: China Capital Controls: Best Practices For Accelerating International Payments

Following the depreciation of Chinese currency RMB and the reduction in China's foreign exchange reserves[1], foreign companies and individuals in China have met hurdles in moving their money out of China, and overseas companies have experienced delays of payments by their Chinese business partners. This article will discuss the recent tightened controls over capital outflows from China to overseas and offer the best practical solutions to accelerate the funds transfer progress.

Mandatory Submission of Application for Individual Purchase of Foreign Exchange

Starting from January 1, 2017, individuals are required to submit the Application for Individual Purchase of Foreign Exchange for whatever amount of foreign exchange that they seek to buy at a bank counter or an online bank. This new requirement comes from the Notice re Improving Individual Foreign Exchange Business Information System-Hui Fa [2016] No. 34 promulgated by the foreign exchange regulatory authority-State Administration of Foreign Exchange ("SAFE") on December 30, 2016.

As background, transactions processed by any amount of foreign exchange in China must be declared[2], and each individual is free to settle foreign exchange with the equivalent of USD 50,000 as well as purchase foreign exchange with the equivalent of USD 50,000 within one year without submitting supporting documents of the transaction.[3] However, under the new requirement, an individual could no longer easily purchase foreign exchange only with an ID card but would need to submit this additional Application for Individual Purchase of Foreign Exchange which identifies the purpose of the funds.

In addition, an individual is subject to more obligations under the Application for Individual Purchase of Foreign Exchange. Buying overseas real estate with individual foreign exchange is prohibited[4] and borrowing other people's annual quota to split the purchase of foreign exchange is not allowed[5]. A violation of this rule will subject the individual to being listed on the SAFE's "watch list" which restricts this person from using his annual quota to purchase foreign exchange in the year when he is included in the "watch list" and the two consecutive years thereafter; in the interim, an anti-money laundering investigation will be initiated against this person.

Ways to Expedite Processing of Cross-border Payment Approvals

For cross-border payment exceeding the annual quota of USD 50,000 by an individual and any amount of cross-border payment by an entity, supporting documents of the current account transactions or the capital account transactions are required to submit to the banks. For example, the bank would need to review the tuition sums issued by a foreign school for approving the payment in foreign exchange; a license agreement executed between the Chinese licensee and the foreign licensor should be submitted to the bank for approving the outbound payment of the license fees.

However, following the SAFE's recent imposed capital controls over outbound payments in foreign exchange, payment delays are becoming more common. That said, before a foreign creditor jumps to file an arbitration or litigation action against the Chinese debtor for collection of bills, the following steps can be helpful due to the costs and the time to pursue a claim:

First, check the supporting documents and make sure each agreement, receipt, certificate, etc. has a Chinese version. As a practice, Chinese translations are always required for the banks, the SAFE, and the tax authorities in China to review and issue their approvals of the payment.

Second, send a bilingual demand letter in both Chinese and English which includes an offer to support the governmental approval processes.

Third, engage lawyers with cross-border transaction experience to make connection with both the bank and the SAFE representatives handling the approval application.

Fourth, in appropriate situations, recruit support of the foreign government representatives in China, for example, the US Treasury representative at the Beijing Embassy, for purpose of communicating with the SAFE officers and breaking the logjam.

We have been successful in working with both the banks and the SAFE to expedite processing of cross-border payment approvals. We understand that the SAFE's main task is to ensure that Chinese companies and individuals are not engaged in illegal offshore investments and thus capital flight. That said, as long as the supporting documents can justify the transaction, potential hold-ups from the banks or the SAFE should not happen. However, in the event of the tightened capital control policies issued by the SAFE from time to time, we suggest using lobbying efforts in appropriate situation[6] to move things along as a cost-effective strategy to encourage the debtors to make prompt payment.


[1] The year of 2016 has seen the Chinese currency RMB depreciate by 6.5% against the US dollar. Following China's move to sell its US dollars to prop up the RMB's value, the foreign exchange reserves of China have dropped to USD 2.998 trillion at the end of January, 2017, which is the first time the figure has fallen below USD 3 trillion in nearly six years. See here for details: http://www.caixinglobal.com/2017-02-13/101054647.html Caixin News Article "Head of Foreign Exchange Watchdog Vows to Strengthen Fight Against Capital Flight", by Fran Wang, Feb. 13, 2017.

[2] Article 6 of the Regulations of the People's Republic of China on Foreign Exchange Control provides that:

"The State shall practice a system for declaring statistics on international receipts and payments."

[3] Article 2 of the Implementing Rules of the Administrative Measures for Personal Foreign Exchange provides that:

"Administration of annual total amount shall apply to settlement of personal foreign exchange and domestic purchase of personal foreign exchange. The annual total amount is the equivalent of USD50,000 per capita per year. ... Settlement and purchase of personal foreign exchange within the annual total amount shall be transacted at banks on the strength of valid identity certificates of the persons concerned; with regard to settlement and purchase of personal foreign exchange beyond the annual total amount, current items shall be transacted in accordance with Articles 10, 11 and 12 hereof, and capital items shall be transacted in accordance with "Administration on Capital Items of Personal Foreign Exchange" hereunder."

[4] Buying overseas real estate belongs to a capital account transaction, thus is not allowed to use the foreign exchange from a current account transaction. By definition, Article 52 of the Regulations of the People's Republic of China on Foreign Exchange Control provides that:

"Capital account transactions" means the transactions causing the change of external assets and liabilities level in the international receipts and payments, including capital transfer, direct investment, securities investment, derivative products and loans, etc.

"Current account transactions" means the transactions relating to goods, services, profits, and frequent transfer in the international balances of payments.

[5] One example of splitting the purchase of foreign exchange can be seen under Article 1(3) of the Notice of the State Administration of Foreign Exchange on Further Improving the Administration over Individual Settlement and Sales of Foreign Exchange: "where more than five (5) different individuals remit the foreign exchange to the same person or agency outside the territory of China after purchase of foreign exchange separately on the same day, every other day or for many consecutive days."

[6] For outbound investments in favored sectors, for example, biotech, it is important to bring the policy argument to SAFE's attention for approving of the capital flows.

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.

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