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 with actual business needs for foreign exchange receipts and payments for goods trade 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
        • Business license
      • Safe may remove companies from the list when:
        • Company terminates business or ceases doing foreign trade business
        • The regulator cancels or revokes the company's business license
        • The company has not handled FX payments/receipts for goods trade for two consecutive years
        • SAFE is unable to contact the company via application contact details when it attempts to implement inspection
      • Tax Bureau

 

Basic Principle and Requirement

  • The foreign exchange (FX) settlements (receipts and payments) for goods trade shall have true and legitimate transaction background; fabricating the trade background is prohibited.
  • The remitter and beneficiary must be the contract parties (importer and exporter). If the import/export is conducted through an agent, the payment/receipt must be paid/collected by the agent.
  • The banks are required to enhance the scrutiny on the transaction and verify its authenticity, logicality and reasonableness.
  • The banks may independently decide the types of supporting documents to be checked under the principles of “know your customers, know your business and due diligence.” The supporting documents shall include but not be limited to contract, invoice, customs declaration, entry and exit archival lists, transport documents, bonded verification lists, and other documents subject to the business nature.

 

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 adherence with the regulations. SAFE categorizes each company as Category A, B or C:

  • Category A: Companies that adhere with the regulations and have normal FX payments during the inspection period
  • Category B: Companies that:
    • Fail to provide a reasonable explanation on the related transaction when SAFE conducts inspection or sends risk reminder
    • Fail to perform reporting obligations according to the regulations
    • Fail to complete the registration on the transactions
    • Fail to provide a report or materials to SAFE within the stipulated period and via the stipulated method when SAFE makes inspection or sends risk reminder
    • Are subject to supervision by SAFE and the related administrative authorities
    • The company was removed by SAFE from the List in the latest two years and move back into the List, but unable to provide reasonable explanation on the previously checked transactions
  • Category C: Companies that:
    • Have been punished by SAFE for a serious violation of regulations during the past 12 months
    • Hinder or refuse inspection by SAFE or provide false materials to SAFE
    • After SAFE makes a comprehensive evaluation on the company categorized B at expiry of the valid period, the result shows that the company still meets the criteria to be categorized as B.
    • Being punished jointly by SAFE and the relevant administrative authorities

If a company fails to give a reasonable explanation or provide supporting documents in a timely manner when SAFE sends them a Risk Reminder Letter over a discrepancy in their flow of funds, SAFE may move the company to Category B.

SAFE implements dynamic adjustments based on the results. The validity period of the categorized supervision over B and C shall generally be 1 year, though the company can apply for adjustment of its category if the company has been downgraded for more than 3 months and meets the following conditions:

  • The company has rectified its violation.
  • The company has not committed any violations which may have caused it to be moved to Category A or Category B.

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.
  • 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/receipts.
  • Meanwhile, SAFE restricted the companies to conduct certain types of business, e.g.,the companies are not allowed to:
    • Conduct the business on deferred payments of more than 90 days
    • Sign export contract with receivable term longer than 90 days
    • Conduct offshore resale settlements
    • Participate in an inter-company cash pool, either as the master entity or a subsidiary entity
    • 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 customer declarations 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.

Ready To Help:

Established in 2008, PNC's Shanghai Representative Office (SRO) is available as a resource to PNC clients who are doing business with China or in China. The SRO can provide assistance and guidance on:

  • Corporate Establishment
  • Obtaining Local Banking Services
  • Market Information
  • Introductions to Local Resources

Should you have any questions, please contact the International Advisory Team; Grace Zhu, Chief Representative or Chris Chen, Representative, in the PNC Shanghai Representative Office.