SAFE Issues New Regulations to Further Control Foreign Exchange Movement

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By Helen Liu

July 25 – Due to RMB appreciation as well as the large amounts of hot money illegally flowing into China, the State Administration of Foreign Exchange has released new regulations to further control the movement of foreign exchange. The regulations, released on July 2, 2008, will seriously affect businesses cash flow in China. To put it simply, companies must now make a profit in China or else the face the danger of not having enough funds to run their business.

The key points of the regulations are summarized below.

Receiving funds from overseas
1. Each company must open a “holding bank account” to receive all funds from overseas. Any transferring of funds out from this account must be approved by the bank.

2. If the funds are for goods which have previously been shipped overseas, the bank will cross check the internet to further confirm whether this amount agrees with export value shown on the export declaration form. For example, if a company exports finished goods worth US$50,000 overseas in January, but receives US$80,000 in March, only the US$50,000 can be converted into RMB, the remaining US$30,000 will be kept in a “holding bank account,” and can’t be used to make any payments. Only when a future shipment’s value can cover the US$30,000 will the money be able to be converted into RMB.

3. If a company receives prepayment from overseas for goods that will be delivered overseas in the following months, the company must go to SAFE to apply for this amount as prepayment in advance. SAFE will ratify the maximum quotas for each company, calculated as following:

The maximum prepayment collection quota = total foreign exchange collection of last year X 5 percent – prepayment which can’t be verified yet.

For example, if the maximum quota as prepayment is US$50,000, but a company receives US$80,000 in March, only US$50,000 can be converted into RMB, the remaining US$30,000 will be kept in a “holding bank account,” and can’t be used to make any payments.

Also the company should report to SAFE which day the goods will be shipped out to cover the prepayment amount. If the actual shipping date is over 90 days as from the estimating date, the company will be fined by SAFE.

Payment overseas
Starting from October 1, 2008, companies must report any overseas payment to SAFE with a payment term over 90 days as from the date shown on the import declaration form—no matter the amount—or they will not be allowed to arrange the overseas payment. The accumulated reported overpayment amount in one calendar year can’t exceed 10 percent of total importation amount of the last year.

Helen Liu is a senior manager in the corporate accounting services division of Dezan Shira & Associates. For more information regarding these new regulations, please contact info@dezshira.com. Please contact editor@china-briefing.com for copies of the new SAFE regulations (in Chinese).

11 thoughts on “SAFE Issues New Regulations to Further Control Foreign Exchange Movement

    All Roads says:

    Correct me if I am wrong, but the hot money they are targeting is not going to be found in the manufacturing sector… and this is going to crush a lot of exporters.

    I have put up a post going through some of the options/ implications, and hope that people will share their work arounds. there are bound to be some.

    r
    http://www.allroadsleadtochina.com

    Chris Devonshire-Ellis says:

    Thanks Rich. As always in China it’s a case of wait and see. Regulations can often seem draconian, and many states (Singapore is a good example) have laws in place that are on the statute, but are effectively (and deliberately) not enacted. The point being – they could be. Getting regulatory change through the legislature may not always be indicative of an immediate change in how regulations are implemented across the board. That is a different question. How the Chinese then use this change remains to be seen, and there is a lot of scope in the regulatory margins.

    China Primer says:

    It looks like this is already in effect in Shanghai. A friend of mine with a consulting WFOE received a decent-sized wire transfer to his BOC account last week; however, it did not reflect in his balance until he went to the branch in person to certify in writing that the funds were for “non trading” purposes.

    Chris Devonshire-Ellis says:

    We’ve had a number of questions from clients and readers on the new regulations, for interest we reproduce the most common of these below together with our answers. Should you require further assistance on the issue please email to info@dezshira.com.

    Q: I am running a representative office and every month I write an invoice for the coming expenses for the next month, for salaries, tax, energy, office expenses etc. Is this money also subject of this new regulation?
    A: The money for RO expenses are not subject to this new regulation.

    Q: I would like to enquire is the above release only applicable to export/import of goods? Does this release impact the services provided to overseas country?
    A: These new regulations are just applicable for export/import of goods, not for services provided to overseas companies. It is possible that in the future, SAFE will place further controls on service income, however in practice it remains difficult to verify the service income value compared with export/import goods.

    This is certainly in effect in Shanghai, but only for domestic companies. Companies registered and approved as a 100% Free Trade Zone company by SAFE are also exempt these regulations, or at least this is how it is currently practiced. To get the status of a FTZ company, certain documents must be submitted to SAFE. When SAFE has agreed or the bank has seen enough evidence that you are in fact a FTZ company, you will not have any issues with receiving USD.

    The workaround for many of our suppliers seems to be that they are now opening up HK bank accounts.

    Willy Lai says:

    Cornerstone is a WFOE and we import wines from our own wineries. We buy in USD or EURO and since these are our own wineries, we get credit terms ranging from 90 days to 180 days. Occasionally, we may delay payment for another 30 days to 60 days. We can import directly but we chose to import through and Import Agent. My question is:

    The current policy is targetted at domestic company exporting and getting payment in foreign currencies. How does it affect importing companies that pays in foreign currencies? Or does it affect us at all?

    Andy Scott says:

    Dear Willy,

    If your company pays in foreign currency outside of China to import goods, this new SAFE regulation will affect your company. Your company must report any overseas payment to SAFE with a payment term over 90 days as from the date shown on import declaration form starting from October 1, 2008. The accumulated reported delay payment amount in one calendar year cannot exceed 10 percent of the total importation amount for the last year.

    Regards,

    Sean says:

    Hi all,

    I like to enquire on (2) areas pertaining to the commercial contract between a foreign based company outside China and a Chinese supplier in China:

    1. Suppose there is an advance payment contract for goods where the foreign company pays to the Chinese supplier designated account outside China. Is SAFE registering necessary? Note that the money does not flow into China. Does it put the paying customer at risk of violating Chinese law (and thus the enforceability of the commercial contract) if the Chinese supplier does not register the commercial contract where payment is recieved by the supplier outside China?

    2. Is such a commercial contract structure sound and legally enforeceable in Hong Kong? Whereby I pay as instructed by the Chinese supplier into a HK based bank account (could be under the name of the Chinese Co. Or maybe not – does it matter?). If there is a commercial dispute or non-performance by the Chinese supplier to deliver goods, can I use the commercial contract and evidencing payment, to the HK court and get back the money I pay or even compensations from the Chinese supplier?

    Best regards,

    Sean

    Antonio says:

    Can anybody tell me the document required by safe to get a commission payment to an foreing (USA company) representing a Chinese company. Are they the same document required on the letter of credit or should you provide more documents. It is there any regulation on commission payments to a foreign company

    Shelley says:

    Our company is a law firm. Parent office is located in USA and one of our subsidiary is in Beijing China. We’re a service provider. A few client we have in Beijing told us that there is
    a new regulation enforced recently the China Foreign Currency Administration Bureau which requests additional approvals on any payments to outside of China. So, it took the client another two weeks to get those approvals. Is it true?

    Best regards,

    Shelley

    Beno Samuel says:

    We have a parent company in HongKong and a WOFE in China.
    We have imported some goods from USA for our WOFE and the vendor wants the payment in US Dollars.
    The payment of US Dollars can be done from our holding company’s bank account in Hong Kong and we want the goods to be cleared in China.

    Does SAFE have an issue with this? Will this transaction be considered as non payment from the Chinese Entity. or what is an alternative to this.

    Please advise.
    Thanks
    Beno
    Thanks

    How we can solve this issue

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