How to navigate cross-border foreign currency exchange in China

Foreign-invested entities (“FIE”) in China often encounter several issues in cross-border foreign currency exchange (“foreign exchange”) in China. Contrasting to other jurisdictions in which the amount of foreign currency exchange is often unlimited, entities and individuals shall strictly adhere to the relevant laws, rules, and regulations. Otherwise, the corresponding government body or financial institution (“FI”) can refuse to administrate the foreign exchange. The State Administration of Foreign Exchange (“SAFE”) is the governing government body administrating foreign exchange. For FIE, foreign exchange can be a minefield without the right expertise and understanding of the regulations. In the below, we highlight main points to navigate FIE in conducting transactions efficiently.

Definition of foreign exchange
Foreign exchange is defined under the Foreign Exchange Administration Regulations of the People’s Republic of China (“Regulations”) as the payment instruments and assets used for international settlement and expressed in foreign currency include the following items:

  • Cash in any foreign currency, including notes and coins;
  • Foreign currency payment orders and payment instruments, such as bills, bank deposits, bank cards, and so forth;
  • Foreign currency negotiable securities such as bonds, stocks, and so forth;
  • Special drawing rights; and
  • Other foreign currency assets

Various foreign exchange is subject to further regulations and may require prior approval from SAFE. Therefore, FIE should keep abreast of the latest foreign exchange regulations to ensure the foreign exchange can be performed. Equally, the administration of foreign exchange often require supporting documents to verify the transaction, lack of substantial supporting documents will hinder the foreign exchange.

Types of accounts
FI is permitted to open foreign exchange accounts in two categories for entities: current account and capital account.

Current account
Current account refers to ordinary foreign exchange which occurs within the daily operations of an entity. For example, foreign exchange under current accounts includes international receipts and payments related to trade, labour services, unilateral transfers and so forth.

FIE can conduct foreign exchange under a current account without prior approval from SAFE. FIE can instruct their financial institution (“FI”), the designated bank, to arrange payment from the foreign exchange account. FIE should note FI are required under the Regulations to examine the authenticity and consistency of the documents involved in the foreign exchange. In practice, FIE should provide documents including corresponding duly signed contracts, purchase orders, receipts and so forth to verify the foreign exchange. If the FIE deem the documents are not substantial, they may request further documents.

Capital account
Capital account refers to the increase and decrease in debt or equity due to capital inflow or outflow. For example, foreign exchange under capital accounts includes international receipts and payments related to direct investment, loans, investment in securities and so forth.

For FIE, capital accounts are mainly utilised to inject foreign capital into the FIE. Under the Regulations, FIE may open a capital account with a designated FI and inject capital, after the FIE is established in accordance with relevant procedures and registration is approved by the relevant local SAFE. Foreign currency in the capital account can be converted 100% into Renminbi without prior approval from SAFE. Instead, FI shall handle the registration procedures.

In the last years, SAFE has relaxed foreign exchange regulations to optimise the business environment and enable greater ease. However, FIE should note the FI are subject to stricter supervision from SAFE and foreign exchange shall strictly adhere to the relevant laws, rules, and regulations. Violations are subject not only to monetary liability but also where the circumstances constitute a crime, criminal liabilities can be pursued against the individual or entity.

If you would like more information about banking procedures or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.

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