Regulations And Foreign Exchange Control

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Investing in China is subject to several layers of regulations. In addition to the approvals required of the various structures and acquisition means, the foreign investor is required to clear foreign exchange compliance as well. The Chinese government has introduced a new system for registration of FIEs and has adopted policies to allow capital movement and a wider band of its currency movement.

New Registration System

In 2004, China introduced new procedures for its enterprise establishment process. The objective is to move from a project approval system to a registration system. Under the new system, examination and approval will no longer be required for projects that do not involve government investment. Instead, the new system requires verification and examination or registration. The new verification system applies to major projects and restricted projects aimed to safeguarding public interest. The registration system applies to other projects.

In conjunction with introducing the new system, China also issued a List of Investment Projects to be Confirmed by the Government. This list sets out the major and restricted projects invested in and established by enterprises without using government funding. Any project on the list is subject to the verification system, and the applicant needs to submit an application to the government. It is not necessary to go through the procedures for examination and approval of project proposals or feasibility studies. All projects not on the list need only complete registration. Except where other regulations apply, registration is to be carried out with local authorities.

All foreign-invested projects are subject to the new verification system. The National Development and Reform Commission (NDRC) has authorities over the following foreign-invested projects:

• Encouraged projects and permitted projects with a total investment of $100 million or more

• Restricted projects with a total investment of $50 million or more

The NDRC verification does not replace the existing Ministry of Commerce's approval requirements. The following foreign-invested projects must be examined and approved by the Ministry of Commerce:

• Projects with a total investment above the prescribed limit

• Restricted projects

• Projects subject to quota and licensing restrictions

Furthermore, the Ministry of Commerce must approve: (1) the contract and articles of association of large foreign-invested projects and (2) major changes in capital, equity transfer, or mergers. All other projects not covered by these guidelines are to be approved by local government in accordance with relevant regulations.

Foreign Exchange

The State Administration of Foreign Exchange (SAFE) regulates foreign exchange transactions in China.3 Four types of transactions involving the movement or conversion of foreign exchange are subject to strict regulatory control. There are:

1. Inward remittance: Remittance of foreign exchange into China from a foreign party.

2. Settlement: Conversion of foreign exchange to RMB.

3. Sale: Conversion of RMB into foreign exchange.

4. Outward remittance: Remittance of foreign exchange to a foreign party.

In regulating foreign exchange transactions, the SAFE distinguishes between current account items and capital account items.4 The SAFE allows current account convertibility. Companies are only required to submit documents of the underlying transactions to the designated foreign exchange bank for verification. Prior approval by the SAFE is not required.

Foreign exchange transactions with regard to capital account items are heavily regulated. The Chinese government has planned to gradually move toward full capital account convertibility of its currency. For large cross-border transactions, prior approval by the SAFE would be necessary.

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