Overseas Banks Reneging on China FDI Commitments

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Dec. 16 – Several international banks are reneging on previously agreed financing for multinational clients to secure investment capital for overseas expansion, said Chris Devonshire-Ellis, the senior partner of Dezan Shira & Associates. Citing several recent examples, he explained that some businesses, already committed to licensing and approvals processes in China, were now finding that their bankers were refusing to provide financing for the investment capital, despite this previously having been agreed with the business.

Businesses in China typically have a three month window upon issuance of the approvals certificates to inject capital into the operation. This can be extended on rare occasions, but if capital is not injected the China subsidiary will usually find itself out of compliance with its own articles of association and face having its operations certificate withdrawn. However, emergency loans can be made via the State Administration of Foreign Exchange (SAFE).

Businesses facing such difficulties should seek professional advice in China said Devonshire-Ellis. “There is a mechanism for dealing with financing the business via loans; however, the Chinese government must be informed. If businesses just place money into their trading account without informing SAFE then this will be classified as income and not investment and is subject to tax,” he said.

Devonshire-Ellis pointed out that companies facing problems with their bankers did seem able to arrange alternative short term financing, but was critical of banks withdrawing credit. “Interfering with previously agreed financing plans when the banks customer has already committed on the back of that credit line is yet more financial irresponsibility of behalf of the financial services industry and does not help during the current economic situation at all.”

Companies facing such problems were urged to talk to the China licensing authority who has been dealing with the application and to seek specific professional advice over injecting alternative loans into the business and not to just transfer money into their trading account.

“There are procedures to go through and we would urge businesses in China to take advice if faced with these sorts of problems.”