China

Country starter pack
Business practicalities in China
109
Foreign exchange controls
WFOEs and JVs being set up in China must register
with the foreign exchange authorities – SAFE – within
30 days of securing a business licence. The entity can
then buy and sell foreign currency (including exchanging
RMB) at authorised banks for current account items,
such as importing or exporting goods and services. But
sufficient documentary proof of each transaction must
be made available. Authorisation is needed from SAFE
for capital account transactions – those that change
a company’s capital base, such as new loans, direct
investment or investment in securities.
While China has promised to end such foreign exchange
controls, little change is likely in the near future. As a
general rule, controls are more strictly applied to funds
being moved out of the country rather than funds flowing
into China, although China in recent times has sought
to temper the latter in a bid to take the steam out of the
economy.
Financing
A distinction that puts representative offices in China at
a disadvantage is that they are not permitted to borrow
money in China, so all working capital must be remitted
from Australia. Further, Australian WFOEs tend to
fund their activities by using cash flow from China, or by
tapping a loan facility from a foreign bank with offices in
both Australia and China. While it is possible to secure
financing from a Chinese bank, this tends to be the
preserve of very big corporations. International banks will
lend for domestic purposes too, where they may already
have an established relationship with – or can potentially
develop one – the Australian parent of the WFOE
operating in China.
Business overdrafts are not used in China. Instead,
banks prefer to top up the working accounts of entities
by drawing on a parallel loan account at regular intervals
(essentially, at three, six or nine months).
Paying business expenses in China
In most circumstances, supplies must be paid for in
advance or on delivery using cash or credit cards. It may
be a long time before a Chinese supplier extends credit
to a newly established business and certainly not before
they have a well-established relationship. It is common,
too, to be asked to pay a deposit for utilities such as office
telephones. Cheques, once the most common form
of payment in China, have been superseded with more
than 90 per cent of payments now sent electronically.
Bank acceptance drafts (essentially post-dated cheques)
remain common practice in certain industries, and their
use will tend to increase or decrease depending on the
state of the economy and general liquidity. Managing
these variables and idiosyncracies effectively, given the
impact on finance and risk, is a major factor in a foreign
entity’s success or failure in China. While cash is still king
in some sectors of the economy, the rapid growth of
credit and debit cards is changing the payment landscape.
For now, however, only a small fraction of China’s several
million merchants and retailers accept credit cards and
ATMs for cash advances are few and far between even in
major cities. Things to note:
• The commission paid to credit card companies by
retailers can often be added to bills. For example,
paying for travel in China by credit card can incur a
2.5 to four per cent additional charge.
• Representative offices and WFOEs can open US
dollar accounts and RMB accounts for paying local
expenses. When paying overseas bills, an invoice must
be provided (or other evidence) to be able to remit
money out of China.
• To pay salaries, companies will need to open a payroll
deposit account.
5.7 REPATRIATING PROFITS
AND GETTING PAID
Australian businesses need to tread carefully to ensure
they meet regulatory requirements when setting up
in China, or they risk running into taxation or other
compliance issues when seeking to repatriate profits. They
should also devise a clear strategy for minimising the risk
of their customers defaulting on payments, as chasing
debts through China’s legal system is difficult, timeconsuming
and costly. Local Chinese attitudes towards
contracts and contracted prices can jar with Western
ideals and Australian businesses will not want to find
themselves cornered into renegotiating prices of goods
once they have been dispatched.
Repatriation of funds
Foreign entities operating in China can repatriate up to
90 per cent of their profits. But this can be stymied by
carelessness if, when establishing a business, it fails to
comply with all regulations. At worst, a company could
be denied the necessary approvals needed to send profits
out of China.
Before remitting profits, a corporation must have filed its
fourth quarter tax return with SAT, confirming its liability
for Foreign Enterprise Income Tax. Once calculated,
net profit can be declared, freeing funds for sending out
of the country. However, not all of a company’s profit
can be repatriated. Instead, a portion (at least 10 per
cent in the case of WFOEs) must be placed in a reserve
account, which is capped at 50 per cent of the company’s
registered capital. Repatriating the rest requires a board
resolution authorising distribution and the lodging of
an application with SAT (in Mandarin) that includes an
annual audit, tax receipts and other documents. In turn,
SAT will issue a Foreign Enterprise Income Tax Payment
Certificate, which enables the bank to convert RMB and
then remit funds.