Foreign-invested entities (“FIE”) in China often encounter several issues in cross-border foreign currency exchange (“foreign exchange”).
Entities and individuals in China are strictly provisioned to adhere to the relevant laws, rules, and regulations. Otherwise, the corresponding government body or financial institution (“FI”) can refuse to administrate 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. Below, we highlight the main points to conduct FIE transactions efficiently.
The Foreign Exchange Administration Regulations of the People’s Republic of China (“Regulations”) refers to foreign exchange as the payment instruments and assets used for international settlement and expressed in foreign currency, such as:
- 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 exchanges can face further regulations and may require prior approval from SAFE. Therefore, FIE should monitor the latest foreign exchange regulations to ensure that foreign exchange can be legally conducted. Equally, foreign exchange administrations often require supporting documents to verify transactions, and a lack of substantial supporting documents will hinder the foreign exchange transaction.
Types of Accounts
The FI is permitted to open two types of foreign exchange accounts for entities; current account and capital 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. They 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 such as corresponding duly signed contracts, purchase orders, receipts and so forth as verification for the foreign exchange. If the FIE deem that the documents are not substantial, they may request further documents.
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 include 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 have questions or concerns related to the Foreign Currency Exchange, please contact us at email@example.com. Horizons can provide insight, expertise and the right solutions for you.