How to Navigate Cross-Border Foreign Exchange in China – Financial Services

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Foreign Invested Entities (“FIEs”) in China often encounter several problems when trading foreign currencies (“Currencies”) across borders. Unlike other jurisdictions where the number and amount of foreign currency exchange transactions are unlimited, entities and individuals in China are strictly provisioned to comply with applicable laws, rules and regulations. Otherwise, the corresponding government agency or financial institution (“FI”) may decline to administer the exchange.

The State Administration of Foreign Exchange (“SAFE”) is the government body governing the administration of foreign exchange. For FIE, foreign exchange can be a minefield without the right expertise. In the following, we highlight the main points for navigating FIE in conducting transactions efficiently.

Definition of foreign exchange

Foreign currencies are defined in the regulations of the People’s Republic of China Foreign Exchange Administration (“regulations”) as payment instruments and assets used for international settlement and expressed in foreign currencies include the following:

  • Cash in any foreign currency, including notes and coins;

  • Payment orders and payment instruments in foreign currencies, such as invoices, bank deposits, bank cards, etc. ;

  • Foreign currency tradable securities such as bonds, stocks, etc. ;

  • Special Drawing Rights; and

  • Other currency assets

Various foreign exchange transactions are subject to other regulations and may require the prior approval of SAFE. Therefore, the FIE must keep abreast of the latest exchange regulations to ensure that the exchange can be made. Similarly, the exchange administration often requires supporting documents to verify the transaction, the lack of substantial supporting documents will hinder the exchange.

Types of accounts

FI is authorized to open foreign currency accounts in two categories for entities: current account and capital account.

Current account

Current account refers to the ordinary foreign exchange that occurs in the day-to-day operations of an entity. For example, foreign currencies in current accounts include international receipts and payments related to trade, labor services, unilateral transfers, etc.

The FIE may carry out foreign exchange transactions within the framework of a current account without the prior approval of SAFE. The FIE may instruct its Financial Institution (“FI”), the Nominated Bank, to arrange payment from the Foreign Currency Account. The FIE should note that IFs are required under the Regulations to examine the authenticity and consistency of the documents involved in the change.. In practice, the FIE should provide documents including the corresponding duly signed contracts, purchase orders, receipts, etc. to check the change. If the FIE considers that the documents are not substantial, it may request additional documents.

Capital account

Capital account refers to the increase and decrease in debt or equity due to capital inflows or outflows. For example, foreign currency under capital accounts includes international receipts and payments related to direct investment, loans, investment in securities, etc.

For the FIE, the capital accounts are mainly used to inject foreign capital into the FIE. Under the Regulations, the FIE can open a capital account with a designated FI and inject capital, once the FIE has been established in accordance with the relevant procedures and the registration has been 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 will take care of check-in procedures.

In recent years, SAFE has relaxed foreign exchange regulations to optimize the business environment and allow for greater ease. However, the FIE should note that FIs are subject to stricter supervision by SAFE and that exchanges must strictly comply with applicable laws, rules and regulations. Violations are subject not only to pecuniary liability, but also where the circumstances constitute a crime, criminal liabilities may be pursued against the individual or entity.

Originally published on April 2, 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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