China

Introduction

 

About China

China, the world's second largest economy, continues on its path to internationalising its markets with foreign companies. While capital flows in and out of China are controlled, China has launched a number of Free Trade Zones, including in Shanghai, which offer less controlled foreign currency exchanges and tax breaks to certain industries.

Despite capital controls, China has the 8th largest foreign exchange market in the world, and its bond market is the second largest in the world, with a diverse range of public and private debt. Foreigners can invest in it through the Qualified Foreign Institutional Investor Program, the RMB Qualified Foreign Institutional Investor Program and Bond Connect.

China is more popular as a location for Shared Service Centres rather than Regional Treasury Centres. Currency controls in and out of China make it advantageous for companies with significant operations in China to also have a treasury operations base in the country. The setting up of the Cross-border Interbank Payment System (CIPS), which connects with SWIFT, has made cross-border payments in renminbi faster and easier for businesses.

China's banking sector is dominated by four large state-owned commercial banks. Foreign banks have a growing presence in the country, but they account for only a small percentage of the sector's assets.

 

 

 

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Corporate Treasury in China

China, the world's second largest economy, continues on its path to internationalising its markets to foreign companies. Here, we highlight some of the key benefits relevant to treasury and cash management in China.

 

Financial Market Development

  • The World Economic Forum ranks China 29th in the world for its financial system in The Global Competitiveness Report 2019.
  • The report ranks China 8th for access to domestic credit for the private sector but 95th for the soundness of its banks. China is also rated 126th for banks’ regulatory capital ratios.
  • China has the largest banking sector in the world. It is dominated by four large state-owned banks, which are also the four largest banks in the world. Concerns have been raised about the level of non-performing loans in the sector as China’s economy slows.
  • Foreign exchange controls are in place in China and money can only be moved in and out in accordance with strict rules and approval from or registration with the State Administration of Foreign Exchange.
  • China has launched a number of Free Trade Zones, including the Lingang area in Shanghai, which permit less controlled foreign currency exchanges and offer tax breaks to certain industries.
  • China is continuing to internationalise the renminbi, which was added to the IMF's Special Drawing Rights basket in October 2016.
  • The Outline Development Plan for the Greater Bay Area sets out a range of measures to increase capital flow between Hong Kong, Macau and the nine cities in Guangdong Province, including the creation of a cross-border two-way RMB capital pool, and the introduction of cross-border RMB settlements.

 

Sophistication of Banking Systems

  • China's banking sector is dominated by four large state-owned commercial banks, which are also the four largest banks in the world. In addition, there are more than 1,000 commercial, rural and city commercial banks. Foreign banks have a growing presence in the country, but they account for only a small percentage of the sector's assets.
  • Despite capital controls, China has the 8th-largest foreign exchange market in the world, accounting for 1.6% of global turnover (Bank for International Settlements triennial global survey 2019).
  • China's bond market is the second largest in the world, valued at around USD13 trillion. It has a diverse range of public and private debt. Foreigners can invest in it through the Qualified Foreign Institutional Investor Program, the RMB Qualified Foreign Institutional Investor Program and Bond Connect, although, as investors, they currently hold only around 2% of the debt.
  • The setting up of the Cross-border Interbank Payment System (CIPS), which connects with SWIFT, has made cross-border payments in renminbi faster and easier, with 33 direct participants and more than 900 indirect participants in around 90 countries and regions taking part in the scheme.

 

Regulatory Bodies

  • The main regulatory body is the China Banking and Insurance Regulatory Commission, which was created through the merger of the China Banking Regulatory Commission and China Insurance Regulatory Commission in 2018. The central bank, the People's Bank of China (PBOC), is responsible for monetary policy and maintaining financial market stability, as well as drafting regulations for the sector.
  • The State Administration of Foreign Exchange (SAFE) regulates foreign-exchange activity and manages the state foreign-exchange reserves.
  • Regulations differ in the Free Trade Zones and within the Greater Bay Area.

 

Tax

  • The corporate income tax rate is 25%.
  • Resident enterprises are taxed on their worldwide income whilst non-resident enterprises are taxed on all China-sourced income.
  • A lower corporate income tax rate of 5%, 10% or 15% is available under certain circumstance, including enterprises with new/high-technology status and companies situated in certain special zones or areas.
  • A number of CIT reductions and exemptions are also available for companies in certain industries or those engaged in certain projects.
  • Value Added Tax (VAT) is charged at 6%, 9% or 13% depending on the type of goods or services. Some goods and services are zero-rated.
  • Withholding tax is charged at 10% on interest and dividends for non-residents. Companies can defer withholding tax on dividends distributed to foreign investors by reinvesting into 'encouraged investment projects' in China and meeting certain other conditions. Rates range from 0% to 15% for countries where a tax treaty is in place and a non-resident can provide a Certificate of Residence.
  • Interest income and capital gains are treated as ordinary income. Interest expenses that are used for business purposes are generally tax-deductible although excessive interest expenses from related party financing will not be tax deductible. The debt-to-equity ratio for enterprises in the financial industry is 5:1 and for other industries it is 2:1.
  • Unrealised exchange gains are generally taxable, while loses are tax deductible.
  • Stamp tax of between 0.005% and 0.1% is charged on a number of different types of contracts and documents.
  • Foreign tax credits can be claimed by tax-resident enterprises for foreign income tax paid overseas on income derived outside of China, subject to fulfilment of certain criteria prescribed.
  • China has tax treaties with more than 100 countries and territories.
  • China is a signatory to the Organisation for Economic Co-operation and Development's Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises.

 

Benefits for Regional Treasury Operations in China

China is more popular as a location for shared service centres (SSCs), rather than regional treasury centres (RTCs). Companies with a strong China focus are more likely to base their treasury centres in Hong Kong or Singapore.

  • Currency controls in and out of China have made it advantageous for companies with significant operations in China to have a treasury operations base in the country.
  • The People's Bank of China and State Administration of Foreign Exchange have introduced a number of pilot schemes that relax foreign exchange rules for foreign-owned companies, including allowing cross-border RMB lending and cross-border sweeping of RMB and foreign currencies.
  • China has stated that it wants Shanghai to be an international financial centre, and market infrastructure and access to treasury professionals in the city is improving. The Lingang area in the Shanghai Free Trade Zone offers simplified cross-border financial management for the receipt and payment of funds.
  • Domestic payments require Chinese characters in some fields, so treasurers must ensure their enterprise resource planning (ERP) systems can support this.
  • The Outline Development Plan for the Greater Bay Area sets out a range of measures to increase capital flow between Hong Kong, Macau and the nine cities in Guangdong Province, including the creation of a cross-border two-way RMB capital pool, and the introduction of cross-border RMB settlements.

 

Regulatory Considerations for Payments

  • Entrustment loans are the only form of lending between subsidiaries in the same group that are allowed in China.
  • Notional pooling is unavailable on a domestic and cross-border basis in both RMB or foreign currencies. 
  • Netting is closely monitored, and companies must provide monthly balance of payments reporting on an original transactions-basis. If the original cross-border transaction before netting is related to trade, companies are required to submit a tax certification form.
  • A number of schemes exist for cross-border sweeping, including RMB outbound lending and a scheme enabling companies to link their onshore and offshore cash pools, subject to controls on the inflow and outflow of funds.
  • Different regulations affect payments and collections, with supporting documentation requirements differing for payments for services and trade, and for current accounts and capital accounts.
 

 

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Banking

 

Banking System

  • There are four main commercial banks in China: Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China. These banks, which are also the four largest banks in the world, are state-controlled, and they have majority government ownership and lead China's banking sector.
  • In addition, there are 1,222 rural commercial banks, 12 joint-stock commercial banks and 133 city commercial banks, among other provincial financial institutions.
  • The China Banking Regulatory Commission launched a pilot programme to introduce private banks to its banking sector, with ten applications approved in 2014 and 2015, five in 2016 and two in 2017. These banks have a focus on providing lending facilities to small and medium-sized enterprises.
  • Foreign banks (145) are active, although they make up only a small percentage of banking sector assets. In terms of regulation, they are treated as domestic banks. They may offer renminbi-denominated products and branches of foreign banks may offer time deposits for residents with RMB1 million or more per transaction.
  • Second-tier joint stock banks were originally wholly government owned, but these are now jointly owned by the government and commercial entities, with the government holding majority ownership.
  • The PBOC’s capital and currency controls have stemmed the depreciation of the renminbi and resulted in an increase in foreign exchange reserves.

 

Bank Accounts

  • Residents may hold foreign exchange and RMB accounts domestically. However, residents are required to gain State Administration for Foreign Exchange (SAFE) approval to open foreign exchange accounts overseas, excluding export enterprises using foreign exchange accounts for export transactions whereby only registration with SAFE is required.
  • Non-residents may hold foreign exchange and RMB currency accounts domestically and RMB accounts overseas. To open a bank account, strict local regulations require it to be carried out in person with extensive supporting documentation, the company's financial chop and the chop of the legal representative; SAFE approval is required to open foreign exchange accounts overseas. A special account is required in order to receive foreign currency from overseas for the purpose of clearing cross-border loans.

 

Onshore CNY 

Onshore Foreign Currency 

Offshore CNY 

Offshore Foreign Currency

Residents

Yes

Yes

No

(Note 1)

Yes

Foreign entities

(no permanent establishment)

Yes

Yes

No

(Note 3)

Yes

1. Only Shanghai registered companies can apply for foreign entity RMB accounts for their overseas investments subject to Ministry of Commerce and PBOC approval.

2. Chinese resident companies may open a foreign currency account offshore for specific trading or project investment purposes subject to SAFE approval.

3. Foreign entities can open NRA CNY accounts with Chinese banks or open NRA CNH accounts with overseas banks, with no PBOC approval required.

4. Foreign entities can open RMB denominated accounts outside China, such as CNH accounts in Hong Kong. RMB can also be held in other locations such as Singapore or London.

 

  • There are several types of domestic currency (RMB) accounts. The two main ones where transactions can be readily used are:

  • Basic account: Used specifically for payroll and cash withdrawals; one account per legal entity.

  • General account: Used for payments and receipts (cannot be used for payroll or cash withdrawals); unlimited number of accounts per legal.  

Account type

Purpose

Remarks

Basic

The primary account maintained by a company used for funds transfer, settlement, payroll, and cash deposits/withdrawals. The opening of a basic account is subject to PBOC approval where the company is registered.

A company is allowed to maintain only one basic account and it should be opened with a bank located in the same city where the entity is registered. This is an important account and care should be taken in selecting a quality bank near the company's offices.

General

The company can maintain any number of general accounts with multiple banks to meet additional business needs or for special purposes set out in the rules and regulations in China. May not be used for cash withdrawals or payroll. Tax accounts are a type of a general account used to pay local and provincial taxes. 

Can be used for the same type of payments and receipts as basic accounts, but not for payroll or cash withdrawals. There is no restriction in the location and number of general accounts. Tax accounts can only be opened with those banks that have an established link with the local tax bureau, and may not require the opening of an additional account. 

 

  • There are foreign currency accounts available in most of the major currencies including AUD, CHF, EUR, GBP, HKD, JPY, NZD, SGD and USD, and they fall into three broad categories of use: 
Account type Purpose Remarks
Capital

This account is established by the company to receive and disburse the foreign currency that is injected into China as capital for the enterprise.

Chinese entities are permitted to have this account in the RMB.

Registration with SAFE is required and expenditure from this account is subject to SAFE approval. Additional accounts may be opened thereafer without SAFE pre-approval. Holding multiple accounts is possible.

This is an important account and care should be taken in selecting a quality bank. Proximity to the company's offices is not required. 

Companies can choose to establish a RMB capital account instead of a USD capital account if they want to manage their FX exposure directly. 

Settlement

This account is used for day-to-day operational needs that are transacted in foreign currencies, such as import and export transactions. It can also be used to pay and receive funds for services rendered under a service contract agreement. 

There is no restriction in terms of the number of settlement accounts, aggregate balances, and the location where the settlement account is maintained. Supporting documentation is required for third-party payments. 

Loan This account is used for any foreign currency borrowing from both banks and overseas shareholders.  Pre-registration with SAFE is required for each foreign debt contract. After registration, accounts may be opened without pre-approval.

 

Legal and Regulatory

  • The People's Bank of China is China's central bank and it is controlled by the State Council.
  • After China’s stock market turbulence in 2015, measures were put in place to tighten regulation of the financial sector. The China Banking and Insurance Regulatory Commission was established in 2018 under the auspices of the PBOC, a consolidation of the China Banking Regulatory Commission and the China Insurance Regulatory Commission. Its role is to manage and limit financial risk and supervise the development of the insurance and financial sectors.
  • The Financial Stability and Development Committee, under the State Council, was launched in 2017 to coordinate overall strategy for the financial sector and formulate policy at a local government and high level. 
  • The PBOC set up a financial technology (fintech) committee in 2017 to oversee developments in fintech and examine the effects on monetary policy and the financial sector. In parallel, the PBOC has increased the use of regulatory technology (regtech) to boost its capabilities in managing financial risk.
  •  

  • Definitions for resident and non-resident status, and for enterprises incorporated in China and those managed or controlled in China, are in the Enterprise Income Tax Law (EITL).

  • SAFE is responsible for all foreign exchange activity of residents and non-residents.

  • China has anti-money laundering legislation in place, is a member of various international anti-money laundering groups and has a financial intelligence unit at the PBOC.

  • Repatriating funds from China is subject to a strict process of accountability with SAFE, whereby relevant transaction documents and a detailed audit must be carried out and filed before the funds can be released.

  • The Renminbi Qualified Foreign Institutional Investor (RQFII) scheme allows overseas investors to access offshore renminbi deposits to invest in China's securities markets through selected Chinese financial institutions based in Hong Kong. As part of the initiative to further liberalise China’s capital markets, RQFII has been made less restrictive and Hong Kong’s quota for the scheme has increased to RMB 500 billion.

  • Free Trade Zones are specially designated areas that are free from customs intervention and where goods can be manufactured, re-exported and traded. The first FTZs were Shanghai, Tianjin, Shenzhen and Fujian, however, more have been added, to bring the total to 11.

 

Payments

 

Payment Systems

CNAPS

(China National Advanced Payment System)

 

Divided into 2 types:

 

 

  • Operated by PBOC.
  • To use CNAPS, participant must have settlement account with PBOC.

 

 

 

 

CNAPS–HVPS (High Value Payment System)

For high value (more than RMB 50,000) and urgent interbank transfers 

  • Available in 800 cities in China.
  • Possible for payments to be settled in real time (sending and recipient banks must be direct clearing CNAPS members); intercity transfers can take 48 hours.

 

CNAPS–BEPS (Bulk Entry Payment System)

For low value (less than RMB 50,000) electronic credits or debits

  • Effects final settlement of net balances originating from the Cheque Imaging System (CIS).
  • Payments settled on T+1; dated debits on T+2.

CCPC

(City Clearing Processing Center)

In-city clearing system

  • Operated by the PBOC.
  • Operates through the National Processing Center (NPC) network and in selected major cities such as Shenzhen and Shanghai.
  • In-city transactions are cleared through participant institutions.
  • Payments are cleared in respective CCPCs and settled and forwarded to NPC.
 

CDFCPS

(China Domestic Foreign Currency Payment System)

 

Processes foreign domestic currency payments

  • Operated by PBOC.
  • Processes electronic transfers in AUD, CAD, CHF, EUR, GBP, HKD, JPY and USD.
  • Payments are settled on T+0.
 

CIS

(Cheque Imaging System)

 

National electronic cheque clearing house

  • Operated by PBOC via 59,500 nationwide local clearing houses (LCHs).
  • Cheques are truncated and cleared electronically.
  • Intracity transfers take 24 hours and intercity transfers take 48 hours.
  • Final settlement done via CNAPS–BEPS.
 

CIPS

(China International Payment System)

 

 

  • Operated by Cross-border Interbank Payment and Clearing (Shanghai) Corporation Limited.
  • Transactions are processed in real time.
 

IBPS

(Internet Banking Payment System)

Interbank credit and debit transfer system

  • Operated by PBOC.
  • An online payment facility available 24/7 and transactions are processed in real time.
  • Debit and credit limit of RMB50,000.
 

TIPS

(Treasury Information Processing System)

Electronic tax payment system

  • Operated by PBOC.
  • National electronic tax payment system that is connected to network of participant banks, where payment can be over the counter or online.
  • Connects to a nationwide tax management system at state and local provincial level bureaus.
  

 

 

Payment Instruments

 

Credit Transfers

  • Transactions are settled via CNAPS–HVPS or CNAPS–BEPS, depending on the value and urgency of the payment.
  • Domestic payments require Chinese characters to be used in specific fields, therefore, the corporate ERP systems must be able to support this qualification.

 

Direct Debits (auto debits)

  • Transactions are settled via CNAPS–BEPS, whereby dated debits are cleared the next day and pre-authorised debits are cleared the same day.

 

Card Payments

  • A common form of payment. There were 8.42 billion cards in circulation at end-Q1 2019, of which 7.55 billion were debit cards and 874 million were credit cards.
  • China UnionPay (CUP) is the most common card used in China, although Visa-branded cards are being increasingly adopted by local banks.
  • Chip-embedded payment cards in the form of IC-based bank cards are being promoted by the PBOC in a move away from renminbi-denominated magnetic cards.
  • Transactions are processed and cleared via CNAPS–BEPS same day or next day.
  • ATM and EFTPOS networks are operated by CUP. Coverage is increasing in line with the use of payment cards.

 

Online Payments

  • Fintech has been widely integrated across China’s banking industry, being adopted prominently in areas such as online lending, consumer finance, online money market funds, online insurance, personal financial management and online brokerage.
  • Mobile banking has become a rapidly increasing mode of banking by the big banks and third-party providers, offering a wide variety of banking services online. The most popular mobile banking apps are offered by China Construction Bank, Industrial and Commercial Bank of China and a smaller player, Ping An Pocket Bank.
  • Mobile wallet use is a major payment medium, with China having the largest mobile payment market in the world (in terms of value of transactions). Alibaba’s Alipay and Tencent’s WeChat Pay are the two dominant mobile payment apps. Both offer payment and transfer facilities, whether online or offline using QR codes and PINs, and target small and medium-sized enterprises
  • Online payments have outstripped the use of payment cards, with the three dominant players being Alipay, UnionPay and Tencent Finance.
  • Mobile banking and online lending are the two most prominent sectors in China’s fintech industry.
  • The Bank of Communications launched a mobile credit card in 2017, the first Chinese bank to make a credit card’s features completely digital.
  • A few Chinese banks have introduced facial recognition technology at ATMs in cities across China, doing away with the necessity to carry payment cards and improving financial security.

 

Digital Currencies

  • Cryptocurrency exchanges are currently banned in China and the PBOC has declared initial coin offerings to be illegal.
  • However, the central bank has also announced plans to develop a ‘sovereign digital currency’ and acknowledged the potential for this monetary system.
  • With the successful completion of pilot programmes, the digital currency has become formally incorporated into the monetary system of four cities and part of the local government salaries began being paid in it from April 2020.

 

Cash, Cheques and Money Orders

  • The Cashless Alliance, a collaboration with the United Nations Environmental Agency and 16 other partners, was set up to develop financial mechanisms to eliminate the use of physical payment cards and cash.
  • The overwhelming growth of cashless systems has triggered a directive from the PBOC for vendors not to discriminate or refuse cash payments. Recent surveys rank cash as the fifth most popular form of payment in China, behind various mobile, credit and debit systems.
  • Cheques are a mode of payment used for retail and commercial payments. Cheques have to be validated with the company stamp and a handwritten signature; this medium of payment is not often used for personal use.
  • Valid only for 10 days and limited to a written maximum value of RMB 500,000.
  • Inter-city cheques are converted into electronic form and then cleared through CIS, with final settlement done via CNAPS–BEPS. Payments are usually cleared within 48 hours. Local cheques are cleared by local clearing houses.
  • Money orders are available in China through vendors such as Western Union and MoneyGram. Money can be sent domestically or internationally, either online or in person.

 

Foreign Exchange

 

China is pursuing a gradual internationalisation of the renminbi and an opening up of its financial systems. Despite these policies, significant exchange controls still remain in place.

 

FX Landscape

  • The official currency of China is the renminbi (RMB).
  • China’s monetary policy is set and managed by the People’s Bank of China (PBoC), which also sets interest rates.
  • China does not have a floating exchange rate determined by market forces. Instead the PBoC sets the trading range by currency pairs, so that the FX Spot rate of a currency against the RMB will be within a set range of the daily mid-point published by the China Foreign Exchange Trade System. For example, for the USD against the RMB, this range is 2%.
  • This fixed point takes into account the previous days’ trading and a basket of world currencies.
  • Onshore RMB and offshore RMB trade at slightly different rates, with the offshore RMB rate less tightly controlled
  • The IMF added the renminbi to the special drawing rights basket in 2016.
  • China has average daily foreign exchange trading volumes of USD8 billion, according to the Bank for International Settlements’ Triennial Central Bank Survey. (Bank of International Settlements, https://www.bis.org/statistics/rpfx19.htm, December 2019)
  • Foreign exchange policies, regulation and reserves in China are managed by the State Administration of Foreign Exchange (SAFE), which is overseen by the PBoC.
  • Hong Kong is the world’s largest offshore renminbi centre. Other leading offshore renminbi centres include London, Singapore and New York.
  • Cross-border RMB payments and trade are handled through the Cross-Border Interbank Payment System (CIPS), which connects with SWIFT.
  • Relaxations of foreign exchange controls are typically trialled in one of China’s free trade zones before being rolled out to the rest of the country.
  • The PBoC has launched a pilot scheme for the use of a central bank digital currency in four Chinese cities.

 

FX Management

  • Resident companies can have domestic accounts denominated in both RMB and a wide range of foreign currencies. To open foreign exchange accounts overseas, companies require approval from SAFE, unless they are export enterprises opening accounts for export transactions, in which case they only need to register with SAFE. Overseas accounts for other types of companies must be for trading or project investment purposes.
  • Non-resident companies or foreign entities may also hold accounts in both local and foreign currencies domestically and overseas, however, the process to open domestic accounts is highly regulated and requires extensive supporting documentation, as well as SAFE approval for foreign exchange accounts overseas.
  • Restrictions on the number of foreign exchange accounts eligible companies can open were recently removed.
  • Non-resident companies may take out foreign currency loans with overseas lenders for use in China.
  • A special account is required in order to receive foreign currency from overseas for the purpose of clearing cross-border loans. Pre-registration with SAFE is required.
  • A number of products are available to help companies manage foreign exchange risk in China, including FX options, FX spot and FX forward, cross currency swap, structured forward and non-deliverable forward.
  • Reserves are required to be set aside for the purchase of currency derivatives in the forward foreign exchange markets.
  • The recently launched Lingang area of the Shanghai Free Trade Zone offers simplified cross-border financial management for the receipt and payment of funds, including cross-border RMB transfers. The area also plans to conduct pilot projects on the integration of domestic and foreign currencies in free trade accounts and on further measures to facilitate the free flow of funds.

 

Exchange Controls

  • All foreign exchange transactions must be conducted through a foreign exchange bank account offered by designated banks. Prior registration with SAFE is required.
  • Working capital can only be moved in and out in accordance with strict rules and SAFE approval or registration.
  • All current account transactions made from foreign currencies into RMB to cover local operating expenses must be backed by supporting documents to show they are for business operations. Conversions from RMB into foreign currencies to pay foreign vendors must also be documented.
  • There is no tax on foreign exchange transactions.
  • Inward remittances can be made through telegraphic transfers and demand drafts. Restrictions were recently relaxed to offer foreign companies more scope in using foreign capital to establish enterprises in China.
  • Non-resident companies are generally allowed to remit dividends offshore providing certain conditions are met; 10% of post-tax profits must be allocated to a statutory reserve until the reserve balance is equal to 50% of registered capital. Dividends are also subject to 10% withholding tax. (Pinsent Masons,https://www.pinsentmasons.com/out-law/guides/doing-business-in-china-part-3--doing-business-in-different-industries-in-china, 2019 and PwC,https://taxsummaries.pwc.com/peoples-republic-of-china/corporate/withholding-taxes, 2020)
  • Outbound intercompany payments for supporting services and intangible assets can also be made by non-resident companies. Service fees are subject to VAT and royalties to withholding tax of 10%. Transaction documents must be maintained to demonstrate the payment is authentic. (PwC, https://taxsummaries.pwc.com/peoples-republic-of-china/corporate/withholding-taxes, 2020)
  • Financial services institutions must report all cross-border transactions made by companies when a single transaction or the cumulative transactions in one day exceed RMB2 million or the foreign currency equivalent of USD200,000. (Norton Rose Fulbright,https://www.nortonrosefulbright.com/en/knowledge/publications/278d4460/china-financial-services-regulation-increased-supervision-of-large-sum-and-suspicious-transactions, 2017)
  • Domestic intercompany lending is allowed, but is only tax deductible subject to thin capitalisation rules and a safe harbour debt/equity ratio for enterprises in the financial industry of 5:1 and for enterprises in other industries of 2:1. (PwC, https://taxsummaries.pwc.com/peoples-republic-of-china/corporate/group-taxation, 2020)
  • Cross-border outbound intercompany loans are allowed in both RMB and foreign currency as long as the maximum loan amount does not exceed 30% of the lender’s shareholder equity and certain other conditions are met. Prior registration with SAFE is required for all cross-border outbound intercompany loan drawdowns. (See attachment)
  • Companies can invoice foreign trade business in either RMB or foreign currency.
  • The Outline Development Plan for the Greater Bay Area (GBA) has set out a number of initiatives to increase capital flow between Hong Kong, Macau and cities in the GBA. These include: establishing the creation of a cross-border two-way RMB capital pool, and the introduction of cross-border RMB settlements.

Trade

 

Trade has played a significant role in China’s rapid economic growth. The country has a growing number of free trade agreements and free trade zones. Its largest trading partners are the European Union, the USA and Hong Kong.

 

Trading Landscape

  • Since 2002, China has negotiated 16 free trade agreements (FTA) with more than 24 trading partners, including ones with ASEAN countries, Oceania, South America, and Europe. (Ministry of Commerce, http://fta.mofcom.gov.cn/english/fta_qianshu.shtml, 2020)
  • It has Closer Economic Partnership Agreements (CEPA) with Hong Kong and Macau.
  • It is in the process of negotiating a further 13 free trade agreements, including a Regional Comprehensive Economic Partnership (RCEP), the China-Japan-ROK FTA, the China-Norway FTA, the China-Israel FTA, the China-Panama FTA, and the China-Singapore FTA upgrade. (Ministry of Commerce,http://fta.mofcom.gov.cn/english/fta_qianshu.shtml, 2020)
  • China is a signatory of the Asia Pacific Trade Agreement and a member of the Asia-Pacific Economic Cooperation (APEC).
  • China has 18 free trade zones, including the Shanghai Free Trade Zone. (HKTDC, https://research.hktdc.com/en/data-and-profiles/mcpc, 2020)
  • China is a member of the World Trade Organization, and its trade finance regulations conform to WTO standards.
  • China imposes sanctions on certain foreign corporations and individuals. The Ministry of Commerce is compiling an ‘unreliable entities list’ of foreign enterprises that are deemed to have damaged the rights and interests of Chinese firms or harmed China’s national security.
  • China also has anti-money laundering/combating the financing of terrorism measures in place, which are overseen by the China Anti-Money Laundering Monitoring and Analysis Center, the Anti-Money Laundering Bureau and the People’s Bank of China.

 

Import Regulations

  • Import documentation requirements vary by product and may include but are not limited to: bill of lading/airway bill, commercial invoice, shipping list, customs declaration, insurance documentation, certificate of origin, and sales contract. Certain goods may also require an import quota certificate, import licence and an inspection certificate. China has a number of labelling and packaging requirements that must be adhered to.
  • Import licences are required for certain products that are classed as restricted goods or regulated commodities, such as certain machinery, automobiles and chemicals.
  • Import duty is charged in ad valorem, specific, compound or sliding terms based on the customs valuation of the goods.
  • China has six different categories for import tariffs, namely general rates, most-favoured nation rates, agreement rates, preferential rates, tariff rate quota rates and provisional rates. Tariffs charged on goods that have been identified as being necessary for key industries may be significantly lower than published rates.
  • The importation of raw materials for processing and exporting may qualify for customs duty, import VAT and consumption tax exemptions on the part that will be re-exported.
  • The free trade zones may offer preferential tariff rates or even exemptions.
  • Additional tariffs have been applied to certain US goods due to ongoing US-China trade tensions.
  • Value-added taxes and consumption taxes are charged in addition to import tariffs and are normally assessed at the point of importation.
  • China has three categories of goods, namely: permitted, restricted, which require quotas or licences, and prohibited. Prohibited items, which are banned from import into China, include toxins, wastes, arms, explosives, counterfeit currencies, certain printed matter, addictive drugs, and disease-carrying animals and foods.
  • There are no import financing requirements. A range of options are available including letters of credit, documentary collections, contract advance and import factoring.
  • There are no risk mitigation requirements.

 

Export Regulations

  • Required documentation for exports include an invoice, packing list, certificate of origin, customs declaration and insurance certificate, as well as an export permit if required.
  • Export licences are issued by the Ministry of Foreign Trade and Economic Cooperation. The longest valid period of an export license is six months and must be used within the current year of the issuance date. In general, each export license can only be used for one batch of goods. However, the license can be used for multiple batches (no more than 12) under certain circumstances. A special export licence is required for restricted items, and each shipment requires its own licence.
  • Export duties are levied in ad valorem to the customs valuation of the goods. VAT is usually not refunded on exported goods.
  • Restrictions are in place on the export of a number of products including cultural antiques created before 1945, rare and endangered animals or plants, and material considered harmful to national security.
  • The China Export Credit Insurance Company provides credit insurance for exports.
  • Banks in China provide export credit financing and foreign exchange loans.
  • Companies registered in China can keep their export proceeds abroad, but they must report this income and expenditure to the State Administration of Foreign Exchange (SAFE).

Demographics

 

 

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Sources: World Economic Forum, PwC, International Monetary Fund, CIA World Factbook, Trading Economics, Organisation for Economic Co-operation and Development, Bank for International Settlements, Cross-border Interbank Payment System, China Banking and Insurance Regulatory Commission, People's Bank of China, Bloomberg, Association for Financial Professionals,China Banking Regulatory Commission.

 

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