Basic features of foreign exchange control in China
Measures of foreign exchange administration
Guidelines of the Chinese Government for exercising foreign exchange control with regard to overseas-invested enterprises
Guidelines of the Chinese Government for exercising foreign exchange control with regard to free trade zones

Basic features of foreign exchange control in China

Since Dec.1, 1996, China has introduced a new system of foreign exchange control under which the Chinese yuan is convertible on current accounts, but strict administrative measures are still in place for capital account. Foreign exchange is not allowed to circulate or to be used in lieu in the settlement of accounts except in free trade zones. Any organization or individual with international balance of payment (including overseas-invested businesses, foreign financial institutions and the resident Chinese offices of foreign legal persons except for those of international organizations and foreign embassies or consulates) should declare for statistical purposes their international balances and go through the foreign exchange settlement and sales procedure when collecting foreign exchange in export and paying foreign exchange in import . The control over the confirmation of foreign exchange payment to banks in Chinese mainland and the control over export tax refund are closely linked.

Measures of foreign exchange administration

The foreign exchange administrative department in China achieves its targets mainly through a foreign exchange registration system and account categorization system.

  • Foreign Exchange Registration

An overseas-invested business should, within 30 days after obtaining the business license, apply for going through the procedure of foreign exchange registration, obtaining a Foreign Exchange Registration Certificate for Overseas-invested Businesses and a foreign exchange account IC.

 

  • Control over Foreign Exchange Accounts

An overseas-invested business may open accounts at a bank after going through the foreign exchange registration procedure. The major types of foreign exchange accounts are capital account, settlement account and special account.
  1. Foreign Exchange Capital Account

    2. The receipts on this account are registered capital funds injected by Chinese party and its foreign counterpart in the form of foreign exchange, while the expenditure is foreign exchange expenses of the enterprise concerned under current account and expenses under capital account approved by the Administration of Foreign Exchange Control.

  2. Foreign Exchange Settlement Account

    3. The receipts on this account are current-account earnings of an enterprise, while the expenditure on this account is the current-account expenses of an enterprise plus the capital-account expenses. The ceiling amount on this account is to be set by the Administration of Foreign Exchange Control by taking into consideration the actually invested capital of a business and its current-account capital fund needs. The amount of foreign exchange in excess of the ceiling should be sold to specifically appointed foreign exchange banks.

  3. Special Account for Loaning and Repaying

    4. The receipts on this account are foreign debts, loans converted from foreign debts and foreign exchange loans borrowed from Chinese financial institutions within the border of China, while the expenditure is expenses for purposes specified in the loan agreement and no permission by the Administration of Foreign Exchange Control is required.

  4. The expenditure on the special loan repayment account are foreign exchange bought with RMB with approval, foreign exchange bonuses transferred from approved special account for loans and foreign exchange earnings retained with approval. The expenditure on this account is repayments for the principal and interests of debts and relevant cost. Each item of expense is subject to approval by the Administration of Foreign Exchange Control.
  5. Special Provisional Accounts

    6. For special provisional accounts opened by a legal person or a natural person from outside the Chinese border, the receipts are funds in foreign exchange remitted by them into China to prepare for the establishment of overseas-invested businesses. The expenditure is the set-up cost and other relevant cost in making preparations for the establishment of overseas-invested businesses.
  6. When an overseas-invested enterprise collects or pays money through a foreign exchange account outside of China, it is obliged to comply with the relevant regulations of the country or region where they have opened the account.

Guidelines of the Chinese Government for exercising foreign exchange control with regard to overseas-invested enterprises

  • Control over foreign exchange receipts and expenditure under current account

The foreign exchange earnings of an overseas-invested business under current account must be deposited in the foreign exchange settlement account with a ceiling amount approved by the Administration of Foreign Exchange Control or settled and sold to specifically appointed banks. When an overseas-invested business makes current-account payment in foreign exchange, it only needs to show proofs of the authenticity of the deal to the financial institution paying the foreign exchange, who will verify the proofs.

  • Control over foreign exchange receipts and expenditure under capital account

The foreign exchange receipts of an overseas-invested enterprise under capital account must, according to relevant regulations, be remitted into China and deposited in special foreign exchange accounts and can not be deposited outside of China without the permission of the administrative departments in charge of foreign exchange control. Conversion of capital-account foreign exchange into RMB is subject to approval by the Administration of Foreign Exchange Control.

Foreign exchange earnings of overseas-invested enterprises under capital account has to be remitted into China, according to relevant regulations, and deposited in foreign exchange special accounts and can’t be deposited outside China without the permission of foreign exchange administrative authorities. Conversion of foreign exchanges under capital account into RMB yuan is subject to approval by the Administration of Foreign Exchange Control.

The foreign exchange expenses of an overseas-invested business under capital account must be approved by the Administration of Foreign Exchange Control. In making payments in foreign exchange, the business must first of all use its own money. Only when it is insufficient or when the business concerned does not own any foreign exchange under its name can it apply to the Administration of Foreign Exchange Control for purchase of foreign exchange by presenting approval documents given by the Administrations of Foreign Exchange Control.

Guidelines of the Chinese Government for exercising foreign exchange control with regard to free trade zones

The following administrative measures have been implemented since September 10, 1998.

  • Control over denomination and settlement in foreign exchange within free trade zones

Only foreign exchange is allowed to be used in businesses between those in a free trade zone and those outside of China and in shipping duty-free goods in or out between those in a free trade zone and those outside of it. In such cases, denomination and settlement in RMB is not allowed. For businesses between those in a free trade zone and those outside of it and for businesses do not involve duty-free goods and businesses inside a free trade zone, denomination and settlement may be done either in foreign exchange or in RMB.

  • Control over opening foreign exchange accounts by businesses within a free trade zone

It is stipulated that after receiving a Foreign Exchange Registration Certificate for Free Trade Zones and a foreign exchange account IC, if a business wants to get a loan from financial institutions in the free trade zone or from foreign financial institutions in Shanghai, it may open a special account for loan with financial institutions in the free trade zone, subject to approval by the Administration of Foreign Exchange Control.

  • Control over settlement in foreign exchange for businesses within free trade zones

Businesses within free trade zones may fully retain their foreign exchange earnings and deposit them into their foreign exchange accounts. But approval by the Administration of Foreign Exchange Control needs to be obtained before it can convert its foreign exchange deposits in a foreign exchange capital account or in a foreign exchange settlement account into RMB.

The loans borrowed from overseas by a business in a free trade zone may not be settled in foreign exchange unless they are approved by the Administration of Foreign Exchange Control. Neither can the loans in foreign exchange obtained by a business within a free trade zone from Chinese financial institutions inside China (export documentary bill excluded) and the international commercial loans obtained by Chinese business within a free trade zone be settled in foreign exchange.

  • Control over foreign exchange payments by businesses within free trade zones

Any payment in foreign exchange made by a business within a free trade zone, whether it is made to some party outside of China or made between the business and another within the zone, can be transacted only through financial institutions in the zone or foreign financial institutions in Shanghai. In principle, such payments must be made from its own foreign exchange account and must not be made by purchasing foreign exchange.

When a business within a free trade zone makes a payment to some party outside of China, it should make the payment from its own foreign exchange account by presenting requisite valid business documents and vouchers.

When a business is paying to parties outside the free trade zone, it may make the payment through its foreign exchange account by presenting relevant and valid documents and vouchers.

Payments in foreign exchange between businesses within a free trade zone can be made through their own foreign exchange accounts on the strength of payment agreements or contracts and invoices.

  • Control over foreign exchange payments made by businesses engaging in transit trade within free trade zones

Foreign exchange payments in transit trade, be it collection before payment or payment before collection, should be made, in principle, from its own foreign exchange accounts instead of by purchasing foreign exchange. The businesses concerned should first present valid documents and have them verified by the Administration of Foreign Exchange Control and then go and make the payment at financial institutions within the free trade zone or foreign financial institutions in Shanghai by presenting the Approval Documents for Foreign Exchange Payment in Transit Trade in Free Trade Zone obtained from the Administration of Foreign Exchange Control.

  • Control over purchase of foreign exchange in free trade zones

Except for businesses engaging in distribution and export processing and the foreign investors of an overseas-invested business, who want to remit the RMB profit earnings out of China, no other types of businesses may, under no circumstances, purchase foreign exchange.

  1. Control over foreign exchange by goods distribution and export processing businesses

    2. In principle, payment for import should be made by a distribution business to some party outside of China with the foreign exchange balance in the business’s own accounts. Only when there is not sufficient foreign exchange in its own account can it apply to the Administration of Foreign Exchange Control for purchase of foreign exchange. The Administration of Foreign Exchange Control will examine the factuality of the case before issuing an approval document, which must be presented to a financial institution within the free trade zone or a foreign financial institution in Shanghai by the business concerned when purchasing the foreign exchange. The foreign exchange should be purchased with RMB earnings obtained from selling imported goods inside and outside of the free trade zone.

    The same control set forth in the above paragraph is applicable to export processing businesses too. The money they use to purchase foreign exchange should be their RMB earnings obtained from selling processed good inside or outside the free trade zone concerned.

    The total amount of foreign exchange purchase by a distribution business should not exceed the total value of its import goods in the previous year.

  2. Control over the purchase of foreign exchange with RMB profit earnings for remittance abroad by a foreign party

The Administration of Foreign Exchange Control will first verify the factuality of the circumstances before it issues the approval document. The foreign party concerned may then purchase the needed foreign exchange on the strength of the document at a financial institution in the free trade zone or at a foreign financial institution in Shanghai.

  • Control over foreign exchange of a free trade zone business.

In import and export, businesses in free trade zones are not subject to the system of confirming foreign exchange payment to banks in Chinese mainland. When goods are shipped into free trade zones from non-free-trade-zone areas or out from free trade zones to non-free-trade-zone areas, the business concerned should go through the foreign exchange payment confirmation procedure for collecting foreign exchange for export and paying foreign exchange for import. If the goods are shipped out of China from a free trade zone or into a free trade zone from overseas, businesses within the free trade zone are not required to register the goods with the Customs in import and write them off in export.

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