Doing Business with China

Framework of China's foreign exchange administration system

China's foreign exchange administration system includes the following major elements:

• management of current account convertibility;

• control over capital accounts,

• the system of a single, managed floating RMB rate;

• a nationwide inter-bank market; and

• macro-management of balance of payments, as well as the supervision and control of foreign exchange operations in the financial institutions.

Management of convertibility of current account

On 1 December 1994, China adopted Clause 8 of the International Monetary Fund (IMF) and provided for convertibility of RMB current accounts. Since then, all transactions relating to bona fide trades in foreign exchange on current accounts can be effected without administrative control. However, this does not necessarily mean that domestic enterprises and individuals can purchase foreign currencies without any supervision. The foreign exchange administration authority (SAFE) still verifies authenticity for the receipts and payments of foreign exchange in accordance with international practice.

Management of foreign exchange account under current account

At present, there are two types of foreign exchange current accounts which should be inspected and approved by SAFE before opening: the settlement account and the foreign exchange account for special purposes. Foreign- funded enterprises (FFEs) ^[1] and those qualified enterprises funded by domestic capital can apply to SAFE to open settlement accounts in the designated banks which are domestically funded and qualified to transact business in foreign exchange. Amounts of foreign exchange within limitations may be kept on account.

Accounts in foreign exchange for a special purpose include those foreign exchange accounts opened for businesses such as importing in proxy, special trade, labour contracts, donations and assistance, special proxies, international shipments, international remittances, international travel and tourism agencies, duty- free goods and accounts for temporary receipt among others.

In order to open a foreign exchange account, the FFE should present to SAFE an application report and the FFE Registration Certificate. With the 'Notice of Opening Account' granted by SAFE and its Registration Certificate, the FEE may then open a foreign exchange account at a bank or financial institution. The bank or financial institution opening the account should enter the account number, type of foreign exchange and opening date in the corresponding columns of the Registration Certificate and stamp its seal on the Registration Certificate.

When an FFE needs to open foreign exchange accounts in other cities or areas than the city where it is registered, it should apply to the local SAFE office in its city of registration for the 'Notice of Opening Account' issued by that office, and then apply to the SAFE offices in the cities where it wishes to open the new account in order to file and receive verification to open accounts in the designated banks.

Upon submitting approval documents for setting up or a business licence, the resident office of a foreign organisation in China should register and file with SAFE, and procure the 'Registration and Filing Form of Foreign Exchange Account for Foreign Organization'. The resident office may then open its foreign exchange account with the Registration and Filing Form in a designated bank.

Domestic organizations (excluding FFEs) can open accounts in foreign exchange with the approval of SAFE branches to keep their receipts in foreign exchange on current account.

When a foreign exchange account has been opened, it is not permitted to change the opening bank during the first six months. After that, it is possible to apply to transfer the account to other banks due to relocation of offices, or any dissatisfaction with the service provided by the original opening bank.

When the foreign exchange account is no longer needed, due to a normal change in business circumstances, the enterprise can file with SAFE an explanation for closing the account, the approval document for opening account and the 'Certificate of Using Foreign Exchange Account'. SAFE will withdraw the Using Certificate and issue a 'Notice to Rescind Account'. With these supporting documents the enterprise can close the bank account. The enterprise should send documents relevant to the account closing to SAFE within 10 working days.

SAFE carries out annual inspections on all foreign exchange accounts from January to April. All enterprises with foreign exchange accounting should participate in the annual inspection. Specific inspections are implemented by accounting firms appointed by enterprises. SAFE will examine the list of authoritative accounting firms annually and re-publish the list from which an enterprise can select the accounting firm itself.

Any breach of rules found during the annual inspection and/or daily supervision will be punished according to the relevant regulations. Breaches include: opening a foreign exchange account without proper approval, letting, lending or transferring the account to others, changing the usage limitation without approval, exceeding the ceiling of the amount authorised or the valid duration of the account or any other misdemeanour.

When a serious breach of rules by an enterprise in the use of a foreign exchange account is found by SAFE during an annual or spot inspection, it may cause closure of the account. The opening bank will close the account upon the Notice to Rescind Account or other relevant documents issued by SAFE. The enterprise should nullify the account by submitting to SAFE the notice documents from the bank, the approval document to open the account and the Using Certificate within 10 working days after receipt of certification from the bank of the account closure.

Payment in foreign currencies under current account

Under current accounts, RMB payments for imports may be converted into foreign currencies, as well as capital gains within China, for transfer abroad.

Only those importers which have been placed in the 'list of importers paying in foreign exchange' by SAFE and its local offices can make payments in foreign exchange directly through the designated banks. To be listed, the importers should submit to the local SAFE:

1. approval to carry out imports and exports by the local Foreign Trade and Economic Cooperation department;

2. business licence issued by the Industrial and Commercial Administration; and

3. Organization Coding Certificate issued by the Technology Supervision Bureau .

Payments for normal trade in goods may be effected directly from the foreign exchange accounts of importers and exporters without any approval from SAF. Alternatively, domestic entities can purchase foreign currencies as needed at the official rate under current account from the designated banks with the necessary supporting documents to pay foreign trade contracts.

• In cases where a purchase of foreign exchange is needed to open an L/C for goods imported under a documentary credit/payment guarantee, the import contract, Verification Certificate for Foreign Exchange Payment for Imports and the application to open an L/C shall be presented to the designated bank. When payment for a purchase is needed, valid commercial documents shall be presented if payment is made by L/C. For verification of imports, the original customs declaration form for import shall be presented.

• For goods imported under documentary collection, the import contract, 'Verification Certificate for Foreign Exchange Payment for Imports', payment notice and valid commercial documents under collection shall be presented. The original customs declaration form is also required for verification.

• For import by remittance payment, the import contract, Verification Certificate, invoices, original customs declaration form and original transport document shall be presented. In cases of a difference between the consignee of the bill of lading and the business unit on the customs declaration form, and the name of buyer on the import contract, a proxy agreement between the parties concerned is needed;

• For those goods in the above-mentioned categories subject to import quota or under import control, an import licence granted by the relevant government agency or import certificate shall be presented; for those under the registration system, a completed form of registration shall also be presented.

• Advance payment for imports below 15 per cent of contract value or exceeding 15 per cent but less than the equivalent of US$100,000 or a payment for commission that exceeds a certain amount or proportion can be effected through the designated banks against a certificate of authenticity by SAFE. Individual payments for private purposes can be made directly through the banks if the amount is within the authorized limit. For the payments that exceed the authorized amount, the relevant valid documents should be re-checked by SAFE before payment.

Payment for service trades in foreign exchanges is managed as follows . Transactions in foreign exchanges for payment and income generated from service trade are made through the designated banks upon submitting the necessary supporting documents as required.

Transportation

• Income in RMB from passenger services and goods transportation by offices of foreign airlines in China may be converted into foreign currencies upon presenting the Notice of Sales of Foreign Exchange issued by SAFE, a list of tickets sold and other relevant documents;

• Payment in foreign currencies for freight under import and export contracts may be effected from the importer/exporter's foreign exchange account or paid with foreign currencies purchased at banks against relevant documents;

• Payment for transportation expenses, equipment maintenance and port usage fees may be processed as stipulated above and be subject to verification afterwards.

Patent, trademark use/transfer and royalties

To effect payments in foreign exchange for the licence of or transfer of patent or knowhow, trademarks (with or without patents and knowhow), software, technical consultancy, technical services, co- operative design, cooperative research and development, and hardware maintenance, ^[2] domestic units should present to the designated bank the following documents:

• written application;

• contract or agreement;

• invoice or payment notice;

• registration and effect certificate for technology and equipment import contract granted by foreign trade department (or permission of technology import, or registration of technology import contract, or data- sheet of technology import contracts);

• tax voucher .

In addition, other documents are required according to the nature of the business such as:

1. Filing certificate issued by the State Bureau of Intellectual Property for implementation of a patent licence;

2. Copy of patent registration or verification of advertisement on patent issued by the administration agency of patents for transfer of the patent;

3. Copy of patent registration or verification of advertisement on Patent issued by administration agency of patents, and verification of transfer of a trademark issued by trademark administration agency;

4. For consent to software usage, the contract should be stamped additionally with the ' Seal of Registration of Copyright Contract' or approval of the contract granted by the copyright administration agency.

Advertisement and exhibition

Payment in foreign exchange for overseas advertising and exhibitions may be paid through the user 's foreign exchange account or with foreign currency purchased at banks against the necessary documents such as contract, approval from relevant administration agencies, and invoices or notices of payment etc.

Remuneration, bonus and allowance for employees of foreign nationality

Individuals of foreign nationality may purchase foreign currencies at banks with the documents including: written application, valid passport or identification document, employment document, ^[3] and breakdown of income in RMB and tax payment receipt.

Outward remittance of profits, stock dividends and interest

According to international balance of payment statistics principles, the outward remittance of profits, receipts and payments of interest, dividends and rentals, as well as payments of interest on external debt, all fall under current account. The relevant rules for their management are as follows:

• Payments in this category may be paid through the concerned enterprise's foreign exchange account or with foreign exchange purchased at banks.

• To remit abroad the current year gains mentioned above, FFEs shall present documentary proof to the designated foreign exchange banks including: tax payments; any receipt and taxation declaration forms; ^[4] current year audit report issued by a CPA; the board of directors' resolution on the distribution of profits, stock dividends or stock bonuses; FEE's Foreign Exchange Registration Certificate; Capital Assessment Report issued by a CPA; and other documents required by SAFE.

• To remit previous year gains abroad, the foreign investors in FFEs and enterprises issuing stock abroad shall present the audit report issued by a CPA in addition to the documents prescribed above. The audit report must be for the relevant years when the profits, stock dividends or stock bonuses arose.

• Neither an FFE whose registered capital has not been fully paid up as provided by the articles of association nor an enterprise issuing stock abroad, whose foreign exchange funds raised by the issuance of stock have not been fully repatriated, is allowed to remit profits, stock dividends or stock bonuses abroad.

• Interest on external debts payable by domestic units should be paid or the foreign exchange required may be purchased at banks against certificates of authenticity issued by SAFE.

Foreign exchange for resident individuals

Foreign exchange needed by resident individuals to go abroad on personal business may be purchased from banks against valid documents required to illustrate authenticity and validate the need for foreign exchange. Banks should sell foreign currencies to individuals at the current day quoted rates and according to SAFE regulations. Standards for amounts which may be purchased by individuals are set for various situations and purposes.

Foreign exchange remitted legally to resident individuals, or drafts in foreign exchange brought back personally by residents, can be kept in foreign exchange bill account. Convertible foreign currencies owned by resident individuals or brought back by them can be kept in a bank note account in foreign exchange.

Other payments

Other foreign exchange payments, such as those for education and the entertainment industry, will be reviewed and may be effected according to the corresponding regulations of the regulations on sale and purchase of and payment in foreign exchange.

^[1] Foreign-funded enterprises (FFEs) refer to joint-invested ventures, foreign cooperative joint ventures , and wholly foreign-owned enterprises registered within Chinese territory.

^[2] Including consultancy on hardware, maintenance of computer hardware and relevant external equipment etc.

^[3] Such as: certificate of employment issued by the social security agency, certificate of expert issued by bureau of administration of foreign expert and employment contract etc.

^[4] For enterprises enjoying tax reduction or exemption, certificate of tax reduction or exemption issued by domiciled taxation administration agency shall be provided.