This article focuses on basic foreign exchange goods trade regulations to provide companies that conduct cross-border goods trade with a general understanding of the regulations.

Navigating regulations is one of the biggest challenges for foreign companies doing business in China. When it comes to foreign exchange transactions, regulations can vary based on business type, payment term or method, and are subject to change by the regulator. Therefore, it is prudent for companies to understand the landscape and have local resources they can call on for assistance.

Background

In China, foreign exchange business is still under government supervision. However, the Chinese government does not impose restrictions for cross-border payments under goods and services trade. SAFE (State Administration of Foreign Exchange) is the main regulatory body that issues regulations and supervises the foreign exchange transactions.

Banks in China are required to continuously enhance their internal management policies and their operational procedures for conducting their foreign exchange business in accordance with the regulations and the banks’ internal policies (know your customer, know your business, due diligence, anti–money laundering, anti–terrorist financing, anti–tax evasion, etc.).

Prerequisites

In order to conduct foreign exchange goods trade, companies need to:

• Include import/export business in the business scope of their business license
• Complete the registration for import/export operation at the following government bureaus:
  • Ministry of Commerce (MOC)
  • Customs
  • Inspection & Quarantine Bureau
  • Public Security Bureau
  • China Port (www.chinaport.gov.cn)
  • SAFE
    • Companies must be registered in the “List of Enterprises Handling Foreign Exchange Receipts and Payment for Trade 贸易外汇收支企业名录” (List) issued by SAFE.
    • Banks cannot conduct any foreign exchange business for companies not on this List.
    • Companies can apply to be put on the SAFE List with the following documents:
      • Application form
      • Confirmation for foreign exchange receipts and payments for trade in goods (hereinafter referred to as foreign exchange receipts and payments as FX payments) signed by the legal representative with the enterprise’s company seal
      • Business license
      • Registration form for import/export operation; those not required to complete filing registration may submit the approval certificate for foreign investment
      • Any other documents required by SAFE
    • Safe may remove companies from the listen when:
      • Company terminates business or ceases doing foreign trade business
      • The regulator cancels or revokes the company's business license or the import/export license
      • The company has not handled FX payments for two consecutive years
      • SAFE is unable to contact the company via application contact details when it attemps to implement onsite inspection
      • Any other circumstances identified by SAFE
    • Tax Bureau

Offsite and onsite inspections

SAFE launched a nationwide online monitoring system for foreign exchange (FX) transactions related to goods trade in 2012. All banks and enterprises that conduct foreign exchange goods trade are connected to this system, which links to China Customs. Thus, SAFE monitors the company’s logistic flow (goods import/export information on the China Customs) as well as the funds flows of FX payments.

• Offsite inspection
  • SAFE maintains a verification mechanism to match the logistic flows to the funds flows within a certain period on a regular or ad hoc basis. Special monitoring will be implemented on the company when the company’s:
    • Variance in matching the logistic flow and funds flow exceeds a certain scope
    • Trade credit outstanding balance or long-term/medium-term trade credit amount incurred exceeds a certain percentage
    • Other unusual or suspicious activities are discovered
• Onsite inspection
  • SAFE will conduct an onsite inspection on a company with unusual or suspicious signs, or when its data triggers indicators set by SAFE.

Categorized Administration

SAFE implements categorized administration on companies that conduct foreign exchange goods trade based on the onsite/offsite inspection findings and the status of the company’s compliance with the regulations. SAFE categorizes each company as Category A, B or C:

• Category A: Companies that comply with the regulations and have normal FX payments during the inspection period
• Category B: Companies that:
  • Fail to provide a reasonable explanation during an onsite inspection when data exceeds indicators set by SAFE
  • Fail to perform reporting obligations according to the regulations
  • Fail to complete the registration on the List
  • Fail to provide a report or materials to SAFE within the stipulated period and via the stipulated method during onsite inspection
  • Are subject to joint regulation in accordance with the requirements of the relevant administrative authorities
  • Exhibit any other conditions identified by SAFE
• Category C: Companies that:
  • Have been punished by SAFE or are under investigation by the judicial authorities for a serious violation of regulations during the past 12 months
  • Hinder or refuse onsite inspection by SAFE or provide false materials to SAFE
  • Are Category B enterprises found in the general assessment by SAFE to comply with the standards for Category B enterprises upon expiry of the validity period of categorized regulation
  • Have been punished by the relevant administrative authorities for serious violations relating to the foreign exchange administration
  • Exhibit any other conditions identified by SAFE

When there is, or may be, a serious discrepancy in the balance of payments, SAFE may directly categorize enterprises under special monitoring for unusual or suspicious signs in scale and structure of funds flow and logistic flow as C Companies.

SAFE implements dynamic adjustments based on the results. The validity period of the result for categories A, B and C is one year.

Each bank will conduct each company’s transactions based on the Category assigned by SAFE:

• Category A: Companies enjoy a simplified process for their FX payments.
  • Normally, banks will verify the following documents to prove the authenticity of the transactions:
    • For payment under LC or collection, documents will be verified according to the international settlement practice.
    • For payment on delivery for goods, the import customs declaration form or contract or invoice will be verified.
      • For outgoing remittance with amount exceeding 100,000 USD, the bank must verify the customs declaration information through SAFE’s system, other than contract or invoice, according to the new regulation in April 2017.
      • For the outgoing remittance with amount below 100,000 USD, the bank may decide if they will verify the customs declaration information or not according to their own internal policy.
    • For payment for goods to be settled by payment in advance, the bank will verify contract or invoice.
• Category B/C: Companies are subject to prudential supervision to verify documents, business type, handling procedure, settlement method, etc., before the bank will conduct the FX payments.
  • For companies rated Category B, SAFE verifies the enterprises’ electronic data for payments, implements verification and administration of electronic data and approves a quota for its receipts and payments. The banks are allowed to conduct payments for the company within the quota.
• Category C: SAFE implements pre-event registration and administration for each transaction, and the bank will handle the company’s transactions based on the registration on SAFE case-by-case.
• In any event, the banks may require additional supporting documents to meet their own policy requirements if they have concerns on the transactions.

The bank will also mark the company in the system (similar to the “black list”) if the company:

• Fails to provide the customs declaration information to the bank and doesn’t have reasonable explanation in a given period
• Is suspected of repeatedly using the customs declaration information and doesn’t have reasonable explanation
• Is suspected of using false customs declaration information
• Supplies other information that needs to be marked

The mark is available for all the banks in China for 2 years.

The mark is another item which will be checked by the banks besides the List and the category of the company when the banks conduct the cross-border business.