Capital Mobility and Forex in China
Capital Mobility and Foreign Exchange Controls in China
December 17, 2014
This article has been produced by the efforts of the following team member:
Louis-Claude Perrault-Carré – Team Leader for China-Industry
Foreign business in China is subject to major regulation and restriction, including examination by the Ministry of Commerce (MOFCOM), and compliance with the National Development and Reform Commission, as well as the State Administration for Industry and Commerce. All matters of foreign exchange transaction are dealt with by the State Administration of Foreign Exchange (SAFE).[1]
A Foreign Invested Enterprise (FIE), or a foreign business working within China, needs to identify as either, a representative office, a wholly foreign-owned enterprise, a joint venture, or a foreign investment company.[2]
A wholly-foreign owned enterprise (WFOE) is perhaps the most attractive to foreign businesses, as it can be owned and operated by foreign persons and/or businesses, without the need for a Chinese partner, like other investment options.[3] Being a limited liability operation, a WFOE involves much less risk, as well as having an easier establishment process than a joint venture. It also produces a new ‘legal person’, of the business, unlike a representative office.[4] The process to register a new WFOE is nonetheless very complicated, involving registration with the State Administration of Industry and Commerce, Ministry of Commerce, Economy and Information Committee, Public Security Bureau, and many more to obtain various licenses, and certificates, allowing them to do business in the country.
In terms of foreign exchange controls, there are a few cities and/or regions within China, known as Special Economic Zones that “…have been granted a certain degree of autonomy and are designed to provide a more attractive environment for foreign investors.”[5] These zones include: Shantou, Shenzhen, Zhuhai, Xiemen, and Hainan. The major benefits for foreign businesses include less stringent tax laws, and a reduced rate of corporate tax.[6]
The emergence of these new methods for foreign businesses to invest into the country, and set up noteworthy enterprises makes this very significant. Of course, it is still a very complicated and rigorous affair to set up a business in China, but it has been improving, and it can only be assumed that it will keep improving. The benefits far outweigh the costs, as once the foreign invested enterprise is set up; a business has access to a brand new 1 billion person market. There is also the risk mitigation factor created by these FIE, especially a WFOE, as it allows the business to become a fully recognized legal entity within China, perhaps protecting it further from the Chinese government and regulations it would have had to endure upon arrival in the country.
