China is a foreign exchange controlled country. Capital injections, cross-border trade and services
transactions settled in foreign exchange, overseas financing and profit repatriations, etc. of foreign
investment enterprises (FIEs) are subject to the exchange control regulations. The foreign
exchange authority is the State Administration of Foreign Exchange (SAFE) and its local branches.
An FIE must apply for registration of foreign exchange with the SAFE after the issuance of a
business license and obtain a foreign exchange registration certificate. The certificate should be
subject to an annual joint inspection by all authorities administering FIEs, including the SAFE.
In acceding to the WTO, China committed to implementing steps to liberalize the foreign exchange
market. While current account convertibility is a reality, the convertibility of capital accounts is
being introduced gradually. According to the 2008 Foreign Exchange Control Regulations, regular
international payments and transfers are not restricted by the state. The circulation of foreign
currency is prohibited and foreign currency may not be quoted for settlement within the PRC,
except as otherwise provided by the state.
Forex control on current and capital account
Current account. Transactions such as the sale of goods, the provision of services and other
ordinary expenditure (e.g. payments and receipts from international trade, payments of interest on
foreign loans (but not the repayment of principal) and the repatriation of dividends) generally are
classified as "current account" items. Payments and receipts of foreign exchange under current
account should be based on accurate and legitimate transactions. Financial institutions engaged in
the settlement and sale of foreign exchange should conduct a proper inspection of the accuracy of
dealing documents and conformity with the forex receipts and payments. The receipt of forex
China Taxation and Investment 2013
under current account may be retained or sold to financial institutions engaged in the settlement
and sale of forex in accordance with relevant state regulations. A forex payment under current
account should be supported by valid documents and settled with self-owned forex or forex
purchased from financial institutions engaged in the settlement and sale of forex in accordance
with the relevant rules on the administration of forex.
Capital account. If the purpose of a transaction is to create capital (i.e. equity or securities
investment, loans, derivative deals, guarantees benefiting a foreign entity, etc.), the forex will be
regarded as a "capital account" item with strict control over its movement. China previously
required very strict foreign exchange administration of capital account transactions. However, in
2012, the SAFE issued guidance that simplifies and relaxes the rules governing foreign exchange
administration of both inbound and outbound investment. Forex controls over the capital account
mainly include the following:
· All forex in the capital account and the fund for settlement must be used in accordance with
designated purposes approved by the relevant authorities and/or the SAFE.
· Overseas entities and individuals that invest in China or engage in the issuance and
transaction of securities or derivatives must register for forex purposes.
· Domestic entities and individuals that engage in outbound investments or the issuance and
transaction of securities or derivatives abroad must register for forex purposes.
· Foreign debts should be registered with the SAFE or its branches. SAFE will not approve
repayment of foreign debt unless it has been properly registered.
· The provision of outbound guarantees is subject to approval by the SAFE. Outbound
guarantees must be registered with the SAFE at the time the guarantee contract is signed.
Financial institutions in the banking industry can directly offer foreign commercial loans
within their approved business scope, but other domestic institutions that offer foreign
commercial loans must be approved by the forex control agencies.