China Eases Currency Controls, Allowing Free Exchange of Foreign Currency Capital
Recent months have seen a number of regulations by the Chinese government aimed to ease some of the restrictions that are part of China’s currency control system. The latest of these changes is the announcement by the State Administration of Foreign Exchange (SAFE) on March 30, 2015, stating that foreign-invested companies may now convert RMB to and from foreign currency in the capital account.
The Chinese currency control system distinguishes between transactions under the current account and the capital account, and requires foreign investors to open separate bank accounts for both. Current account foreign currency transactions include the import and export of goods and services, earnings from interest or dividends from portfolio securities and regular transfers. Capital account transactions are mainly related to the purchase and sale of fixed assets, foreign direct investment (i.e. changes in a company’s registered capital), the purchase and sale of equity or debt securities, and trade credit or loans.
In general, capital account transactions need approval from SAFE, whereas current account transactions can be made directly through the bank.
When the new regulation takes effect on June 1, capital account transaction will not need SAFE approval either.
The same rules were first implemented in the Shanghai Free Trade Zone (FTZ) in 2013 and further expanded to 16 Chinese main financial reform cities last year. As of February 2015, qualified banks approved by SAFE may take care of foreign currency transaction registrations for outbound and inbound direct investment. Previously, investors would have to first register their intended transaction with SAFE before wiring the funds through the bank.
Companies can register their foreign currency transactions with a qualified bank in the area where the business is incorporated. This change will reduce the time needed to set up a new company in China or make changes to a company’s equity or registered capital. The regulation released in February also removes a number of bureaucratic procedures:
- The registration of non-monetary contributions by inbound investors and foreign acquisition of Chinese equity.
- The filing of foreign currency reinvestment abroad.
- The annual inspection of foreign currency used in inbound investment.
Instead, foreign investors need to submit an annual report on inbound and outbound investments to SAFE before September 30. The new rules will enter into force on June 1, 2015.