Given China’s restrictions on foreign currency exchange, companies have to be strategic about their funding plans early in the pre-investment stage.
A common pitfall for foreign businesses is underestimating their costs, and overestimating their profits, leading to a shortfall of capital.
In one case, Company A optimistically established itself in China with a lower amount of registered capital on the assumption that it would be able to generate revenue quickly. The assumption was based on an agreement with a large client whereby the client would place a sizeable order and settle payment within 90 days. However, the payment was delayed, and the company was unable to meet its cash flow target. Company A incurred substantial startup costs, including warehouse rent, raw materials expenses, and salary commitments.
To meet costs, the overseas parent company initiated steps to inject more registered capital, but it would be weeks before the entire process could be completed. In the meantime, Company A was unable to pay its employees and missed mandated social insurance contributions. Therefore, besides its initial costs, the company faced additional penalties including a fine and potential labour disputes.
- Restrictions on overseas transfers
FIEs may find that repatriating capital or profits out of China now includes increased layers of inspection and security from the government. Due to record levels of outbound direct investment (ODI) in recent years, the Chinese government introduced new capital controls through a number of announcements by government agencies at the end of 2016. The announcements indicated that certain outbound transactions would not be approved unless given specific approval. The transactions in question that can affect FIEs include:
- Outbound investments made by limited partnerships;
- FDI involving an acquisition of 10 percent or less of the shares of an overseas listed company;
- Overseas investments made by newly-established entities without substantial operations;
- Outbound transactions inside the core business of the company involving US$1 billion or more;
- Transactions involving domestic capital participation in the delisting of overseas listed Chinese
Government scrutiny of ODI varies based on the amount of money being sent, the industry of the target, the receiving country, and the investor. Starting July 2017, banks and financial institutions in China have to report all domestic and overseas cash transactions of RMB 50,000 (US$7,600) or more; the previous threshold was RMB 200,000 (US$30,350). Any overseas transfers by individuals of US$10,000 or more will also be reported.
Additionally, those seeking to transfer money will need to explain how they plan to use the foreign currency and fill out an online form pledging not to use foreign exchange to purchase overseas property, securities, life insurance, or similar products.
