China's Banking Authorities
There has been much confusion about the China's legal framework in finance and
banking. Foreign investors with operations in China will most often come across
the following two organizations:
People’s Bank of China (PBOC)
The People’s Bank of China, established in 1948, was then in charge of note issuance and credit allocation. It performed the function of being the government’s cashier as well as the largest domestic bank. In 1983, PBOC was reorganized into the central bank and gradually moved away for commercial activities. Much of its present day authority derives from the 1995 Central Bank Law. Its functions now are to formulate and implement monetary policies, issue and administer the circulation of the currency - RMB, issue
licenses and supervise financial institutions, regulate financial markets and manage the foreign exchange and gold reserves, acting as fiscal agent.
PBOC’s head office is in Beijing, divided into 13 administrative departments. Supervision of commercial banks is mainly the responsibility of the Bank Management Department, which overseas the domestic banks, the foreign banks and the non-bank financial institutions. Other departments, which are increasingly playing an important role in the supervisory activities, include the Internal auditing, IT, Education and Training. PBOC carries out its day-to-day supervision of China’s financial system through 9 regional branches, 326 sub-branches and 1,827 county-level sub- branches. It also has offices in London and Hong Kong mainly for managing China’s foreign exchange reserves. The current Head of PBOC is Governor Dai Xianglong.
Being a ministerial organization under the direct control of the State Council, PBOC normally does not deal with foreign investors or individuals. However, there is a specialized department called the State Administration of Foreign Exchange (SAFE) which is in contact with all foreign enterprises.
State Administration of Foreign Exchange (SAFE)
This government body deals with foreign exchange activities to:
- manage and monitor all payments and exchange of RMB under the capital and settlement accounts
- reconcile all inward and outward trade and non-trade payments
- formulate procedures to monitor the operation of foreign exchange markets
- direct international payment and collect statistics
- manage the foreign exchange reserves of the country on behalf of PBOC
Since 1996, China has introduced the system of ‘current account convertibility’ for RMB which means that payments of trade, fees and after-tax profit no longer require approval from SAFE if the foreign exchange purchaser has met all conditions for the transaction. SAFE still retains control over any non-current account items, which require conversion, such as capital repatriation and loan payments.
For this reason, advances from head offices in cash or kind which need to be repaid at some point in the future will have to be registered with SAFE, otherwise repayment may not be permitted.
Other important issues to recognize in dealing with SAFE include the time limit for drawing down a forex loan. SAFE has the right to cancel the registration certificate if the borrower fails to execute
draw down by certain dates.
There are also administrative measures since 1998 for SAFE to withhold approval for early redemption of foreign currency loans from RMB income.
It is therefore recommended that foreign investors arranging loans from overseas banks or domestic banks should consult their advisers
to avoid some of the pitfalls and controls from SAFE.
Financial Issues for Businesses in China
1. Capital Conversion
A North American client has decided to terminate their joint venture and sell
their portion of the shares to the Chinese partner. The partner advised that
they could only pay in RMB as it is difficult for them to obtain conversion approval from the
authorities.
Problem Analyzed
The Chinese partner was right in saying there are
restrictions as China does not allow automatic conversion of RMB funds into
foreign exchange for capital purposes.
Suggestion to Foreign Partner
Assuming that MOFTEC has recognized the share transfer agreement between both parties, approval from SAFE can be obtained within 24 hours
for the conversion of capital and remittance if the following conditions have
been satisfied:
- Agreement between both shares holders for the transfer for shares and MOFTEC
approval
- Joint venture’s authorization to deal in foreign exchange
- Proof of the registered capital being contributed and audited
- Proof of profit tax and other capital-gain tax payment
- Other supplementary documents on the current position of both partners
2. Pre-payment
China practices current account convertibility. This means that any companies
operating in China, whether foreign or Chinese enterprises, are able to purchase
foreign exchange to make payments abroad for trade settlement, commissions,
fees, royalties and dividends without the need for State Administration for
Foreign Exchange (SAFE)’s approval.
For companies selling to China that would like to receive advance payment as part
of the deal, this is possible as long as they are able to satisfy the remittance
bank that the importer has the license to import and is not on the black list
for contravening government rules, the proper documents to authenticate the
import transaction, whether the importer is acting as an agent, etc. Local
banking regulations also may require different procedures for the size of the
prepayment amount, performance guarantees and other related documents for port
of entry and nature of goods.
Fiducia is able to assist in procuring the requisite documentation.
3. Trust Loan
Many foreign investors with multiple investments in China have been experiencing
difficulties handling their overall cash position. Under PRC banking
regulations, foreign companies are not financial institutions, and they are
therefore not allowed to lend to group subsidiaries. Frequently, multinationals
with several investments in China would like to minimize their borrowings by
moving cash between different subsidiaries. This can take place under a `trust
loan’ scheme, which has become popular in China.
The group subsidiary with excess cash can engage a friendly bank (either
domestic or foreign) to place a deposit and the funds would be made available to
another group subsidiary anywhere in China ( subject to the bank’s operating
license) . This is an inexpensive way of financing since the trust bank does not
take risk on the borrower, i.e., the deposit would be returned only if the
borrower repays, a small one-off fee is charged for providing the service.
Profit Repatriation
Foreign companies, considering investments in China have always been
concerned about profit repatriation. The decision makers back home probably are
under the impression that RMB is not convertible and there would be
restrictions on taking profit out of China. What is more, where would one find a
bank willing to accept the RMB once it is remitted back to the home
country?
Since 1996, China has introduced a system of 'current account convertibility',
which has worked so well that the swap centres for foreign exchange were closed
down in 1998 for lack of business. Today any foreign investor can go to a bank
to arrange remittance of funds in a foreign currency of their choice even if
there is insufficient foreign currency in their accounts. No government
approval is required if the remittance is classified as a 'current account’
item under China’s regulations After-tax profit is one of them. All an
investor would have to do is to provide sufficient evidence to the remittance
bank that his company has made an after-tax profit and its registered capital
has been fully paid up. Simple, isn’t it? In fact, we are aware of a foreign
bank in China, which is able to ensure same day remittance if all evidence is
provided before 10 am in the morning.
A co-operative bank is important, but an investor needs to know the procedures
for arranging profit repatriation. Fiducia is able to assist you in submitting
the proper documentation to the remittance bank.
Account Management
Unlike most other countries, accounts in China are not classified according to
current account, savings or deposit accounts. This is because since 1996, the
government authorities need to separate accounts according to the nature of the
transaction, whether it is classified as a current account or capital account
item.
In general, there are 6 types of accounts with different modus operandi
| |
Account |
Convertibility |
|
Capital account: |
for foreign capital contribution and
only one would be approved. |
No |
|
Settlement account: |
for foreign currency non-capital inward remittances,
more than one would be allowed although approval
procedures vary from place to place.
There is a upper
ceiling for the amount retained |
Yes |
|
Loan account: |
for temporary deposit of forex bank borrowing and
receipt of borrowings from abroad |
No |
| Loan and Interest Repayment account |
for temporary deposit of funds before repayment,
Amount of which is subject to negotiation |
No |
|
Basic Account |
for RMB only, cash withdrawal allowed, only one
will be approved |
No |
|
General Account |
for RMB only, multiple accounts possible, but only for Remittances |
No |
As one can see, the above list illustrates the complexity of account management
in China. Investors should discuss with their financial advisers to ensure that
their receipts and payments are handled efficiently and securely.
If you require advice on financial issues related to China,
please contact Victor Sun
(email vsun@fiducia-china.com tel:
(+852) 22586634.) in confidence.
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