The US-China Business Council (USCBC) is a private, non-profit, non-partisan, member-supported organization. It is the principal organization of US corporations engaged in business relations with the People's Republic of China (PRC). In November, the USCBC surveyed its member companies to assess how they have been affected by the recent circulars on foreign exchange issued by the State Administration of Foreign Exchange (SAFE) and the People's Bank of China (PBOC). Most of the circulars were issued starting from September of this year, and to date still have not been made easily available to affected companies in China.

Attached are the results of this survey, including recommendations and requests for clarification sought by member companies. These results, recommendations and requests have been presented to representatives of SAFE and PBOC and forwarded to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). The results provide a striking profile of the adverse impact of these circulars on a large percentage of the respondents (over 50 companies), most of which are major multinationals operating in a variety of sectors, including but not limited to the automotive, telecommunications, electronics, computer, oil and gas, banking, food and restaurant and agriculture sectors. As the survey was broken down into different areas of operation (investment/financings; trade-related transactions; intangibles and service-related contracts; and foreign exchange bank accounts) not all questions were relevant to all respondents. Therefore, the percentages given reflect the responses of those for whom the question was relevant.

These recent circulars affect not only US, but all foreign and PRC domestic companies. At least with regard to the effect on US companies, the survey results indicate that:

Over 80% of the respondents report that these circulars have adversely affected them in a significant manner.

Nearly 50% of the companies advised the Council that, as a direct result of the impact of the circulars, they have decided to reconsider, delay, or even cancel intended investments and/or financing involving foreign currency.

With regard to sales to China (which include the raw materials used for re-export), over 75% report encountering severe problems. Even delivery of foreign made airplane repair parts is being delayed, reducing passenger safety.

Over 60% of the respondents report that their investments and/or financing have already been adversely affected by these circulars and the atmosphere in which they are being carried out. Exporting goods from China is made especially difficult given the inability to import raw material inputs.

The USCBC supports the goals that we understand to be the motivation for the issuance of these circulars. These include the fight against fraud, corruption and illicit trade channels from and to China. Regrettably, the immediate effect of the circulars, as evidenced by this survey and through continuing dialogue with member companies, upon legitimate business in China has been adverse, with trends that are not sustainable for business and cash flow planning. The major concern is that the current PRC regulatory environment, to a great extent, prohibits foreign companies from choosing or controlling import channels. Thus, foreign parties bear the full risk of non-payment in the event of illicit activity engaged in by other parties beyond their control (often PRC domestic firms). Increased trading rights for foreign companies would assist foreign companies in gaining some measure of control over import channels and related documentation flows, upon which payment ultimately depends.

Question	Responses
1. Has your company been affected by the recent foreign exchange circulars issued by the State Administration of Foreign Exchange and/or the People's Bank of China?	Over 80% of the respondents report that they have been adversely affected by the recent foreign exchange circulars issued by SAFE and/or PBOC.
2. How significant an issue are these foreign exchange matters to your company?	Of those affected, 100% have been affected in some significant manner. Over 40% report the adverse effects as extremely significant.
I. Trade-Related Transactions A. Sales to China
3. Has your ability to sell to China been affected?	Over 75% of respondents report that sales have been adversely affected.
4. If yes, what new problems have arisen with regard to your company's sales activity? For each item, please grade any problems you may be experiencing by indicating 1 through 3 (1= very problematic, 2 = somewhat problematic, 3= not a problem)	Of those responding: 85% find the new rules are not being applied consistently. 80% find that the system is not transparent; they don't know what the rules are or how to comply. 80% have had difficulty receiving foreign exchange payments for goods delivered prior to September 1, 1998. Over 80% have experienced increases in accounts receivable. The increases are typically between 10 and 30%, (i.e. between USD 1-10 million). For some, the amount is over USD 30 million. 70% are having difficulty in making or receiving payments under import contracts that are due or actually paid more than 90 days after the date of delivery of the goods. Over 75% are experiencing delays with PRC domestic banks honoring letters of credit. 75% are finding that restrictions make it difficult for PRC domestic enterprises to open letters of credit that call for payment in foreign currency. 80% are turning away new business due to the uncertainty as to the legality of import channels chosen by domestic PRC trading companies and distributors. Other illustrative responses include: The regulations themselves are conflicting. Insufficient access to foreign exchange to make payments to foreign suppliers, which slows exports from China. Difficulty in getting money repatriated. One company was told that many contracts are to be examined for "fairness." If they are deemed not to be "fair," the contract will have to be renegotiated before foreign exchange can be repatriated.
B. Exporting from China
5. Has your ability to export from China been affected?	Approximately 20% of respondents report that their ability to export from China has been adversely affected.
6. If yes, what new problems have arisen with regard to your company's export activity from China? For each item, please grade any problems you may be experiencing by indicating 1 through 3 (1= very problematic, 2 = somewhat problematic, 3 = not a problem)	All respondents report having problems importing raw material inputs because of restrictions on payments in foreign currency. 70% report that they are encountering severe problems. Other illustrative responses include: Imports (and thus related exports) have stopped until payment problems are solved. Have not been able to convert RMB to foreign currency to pay for imports priced in foreign currency.
C. Issues Specific to Bonded Zones
7. Is your business affected by the rule that provides that enterprises located in bonded zones can only use their foreign exchange to make payments for importing goods (and such foreign exchange cannot be otherwise purchased)?	Over 25% of respondents with activity in the bonded zones have been affected by this rule. At the same time, regulations generate uncertainty because of their inconsistent application, sudden changes in practice, and because transactions must be conducted through an intermediary (i.e. import/export agents).
8. If yes, what is the effect? Please explain.	Discontinuation of sales. If these enterprises are unable to continue their operations in the bonded zones, they may source their China customers from overseas, resulting in, among other things, reduction of domestic employment. Using other foreign exchange revenues to cover foreign exchange requirements, a situation that is not sustainable. Transaction time and costs have doubled. Restrictions on growth.
9. If you have a foreign trading company in Shanghai WaiGaoQiao, have you been able to buy foreign exchange through other means, such as distribution centers and manufacturing companies?	None of the companies have been able to obtain enough foreign exchange for their needs. It is reported that when foreign exchange has been made available, it is for parts only, not equipment.
II. Intangibles and Service-Related Transactions
10. Has your company had any trouble receiving royalty payments that are to be paid in foreign currency?	About 50% of the respondents have had such trouble.
11. Has an already registered technology import contract been subject to substantive review?	About 20% report having experienced such after-the-fact review.
12. If yes, has there been any attempt by PRC governmental authorities to lower royalty rates or amounts that had already been contracted for and approved?	For those respondents with relevant contracts, no such attempt was indicated.
13. If service contracts contemplate reimbursement of certain expenses, or payment of services already performed, in foreign currency, have PRC domestic banks been willing to allow such foreign currency payments when such expenses have been incurred, or such services already performed?	Approximately one-third have found PRC domestic banks unwilling to allow such foreign currency payments. One company so far unaffected observed that bank scrutiny is increasing, particularly with regard to inter-affiliate transactions.
14. Have you had difficulty planning how to structure future payments for services in light of recent restrictions? If yes, please explain:	All respondents have had difficulty planning how to structure future payments for services in light of recent restrictions. The nature of such difficulties include, but are not limited to: Goods In light of restrictions and lack of uniform implementation, businesses are unclear how to structure future payments for goods with any degree of certainty. Difficulty recovering payments over 90 days past due when the documents required haven't been obtained, or are incomplete in some fashion, through no fault of the foreign invested enterprise. The entire letter of credit practice must be restructured, with the prospect of higher prices for PRC customers. Uncertain whether businesses with domestic sales should locate in bonded zones. Services No clear, reliable way to convert service payments. The regulations do not clearly provide for service contracts. The banks are asking for contracts for all payments. Not all transactions merit full written contracts. Balancing on this micro-transaction level is impractical.
III. Investment/Financing-Related activities and plans
15. Have your investment/finance-related activities and plans been affected by the circulars?	For those respondents involved in such activities, over 60% have been adversely affected.
16. Has your investment/financial planning or cash flow planning been affected by the inability to obtain RMB funding, or to repay or refinance foreign currency loans following the circulars?	80% of relevant respondents have been adversely affected.
17. Do you expect you will be adversely affected by the new announcement that certain foreign exchange swap centers are to be shut as of December 1, 1998?	For those respondents for whom this question is relevant, about 40% expect to be adversely affected. This is inconsistent with the PRC government's contention that such swap centers are no longer necessary.
18. Has your company decided to reconsider, delay, or even cancel intended investments/financing which involve foreign currency-related investment or financing?	For those respondents with such plans, nearly 50% have decided to reconsider, delay or even cancel such intended investments/financing.
19. If yes, what new problems have arisen with regard to your company's investment/finance-related activity and plans China? For each item, please grade any problems you may be experiencing by indicating a number 1 through 3 (1 = very problematic, 2 = somewhat problematic, 3 = not a problem)	For those respondents for whom this question is relevant, about 80% have been affected by the requirement to include a foreign exchange plan into feasibility study reports. This requirement apparently fails to appreciate the benefits to China's foreign exchange balance provided by import-substitution investments and investments that enhance China's export ability. 40% feel uncertain regarding the ability to convert foreign exchange capital into RMB if the need exceeds that included in the annual plan. Other problems include: Difficulty with regard to all debt financing in RMB Difficulty converting USD loan proceeds to RMB. Payments to foreign suppliers are being delayed.
IV. Foreign Exchange Bank Accounts
20. Have you had any difficulty in withdrawing foreign exchange in the company's foreign exchange bank accounts?	Over 35% have experienced such difficulty.
21. If yes, what has been the effect on your company's business? (Place an "x" by those applicable	Of those affected: None have been able to withdraw funds necessary for operational functions. None have been able to withdraw funds necessary for other contractual obligations. None have been able to withdraw funds necessary for travel abroad. Other illustrative responses: Companies cannot pay foreign vendors in a timely manner. SAFE policies on remittance or toward the documentation required are unclear.
22. Have any employees had difficulty withdrawing foreign exchange funds from their personal foreign exchange accounts?	No respondents were aware of such difficulty.

The following procedural and other suggestions were offered to ease the burden on legitimate business:

Companies have advised the Council clearly that foreign investment inflows will slow if foreign currency exchange problems persist in China. We ask that consideration be made to the rebuilding of investor confidence. One means of doing so would be to give foreign invested enterprises meaningful participation in import and distribution channels. Without increased means to participate in the choice of such channels, and ensure diligence in the reduction of fraud by other parties, foreign-funded enterprises lack certainty required for business and cash flow planning in China. Thus, we recommend the granting of trading rights to foreign companies so that they may choose import channels and have control over the lawfulness of those channels.

There is no regular procedure for the repeal of past legislation. Businesses are thus guided by practice. When practice changes, and regulations considered dormant are "reinstated," there needs to be a grace period for implementation and an allowance for legitimate past transactions. Changing rules or enforcement of rules makes China a volatile business environment. This has a negative effect on the country's reputation as a place in which to do business.

When issuing new regulations, first consider the practical procedures and effect and provide for a trial period of implementation. For example, with regard to payments to be received after 90 days, if registration with SAFE is required, but relevant documents cannot be obtained from government agencies within that time, it just ties the hands of business, which has no control over such internal PRC governmental and intergovernmental procedures. If rules are imposed on business, the government must be able to perform the processing upon which business is being required to rely.

Improve the efficiency of intergovernmental agency systems and documentation. For example, the match of data between Customs and banks should be streamlined.

Provide consistent training for SAFE and PBOC employees nationwide.

Make available clear channels of inquiry regarding application of rules to varying situations. For example, have a phone number that businesses can call with questions 8 hours a day. Trained employees able to answer questions from businesses would manage the line. These same employees would be in a position to make follow-up calls to local entities to advise how to proceed with application of the regulations to varied situations.

When creating regulations, separate legitimate and illegitimate foreign exchange flows. Companies that have been found to be using improper channels could then be treated with greater scrutiny. Companies that have not been engaging in illicit activities should not be set back by lengthy investigations that delay or deny payments, and discourage further trade and investment by good corporate citizens.

Have SAFE conduct training sessions in major cities, Foreign Trade Zones, Special Economic Zones, and Bonded Zones for banks and companies.

Increase clarity, transparency, and regional coordination on letter of credit issues.

Improve clarity of regulations and the dissemination of such regulations to affected parties.

Clarify how long these regulations are to remain in effect.

For past due accounts over 90 days old, provide a special approval process by which SAFE can manage these debts quickly. Businesses cannot sustain business flow with this amount of accounts receivable outstanding. A grandfather clause for such transactions would relieve current pressure on legitimate business.

Suggest removal of the requirement for double verification of Customs clearance for imported fixed assets. The anti-fraud ticket on the original customer clearance form provides such verification.

Suggest there is no need for vendors to provide guarantee letter for payment amounts over USD 30,000 due to vendors' unwillingness and potential risk of losing customers' business.

For ocean shipments, it should not be the responsibility of the payer to match the forwarder's Bill of Lading number with the Customs clearance Bill of Lading number. Forwarders and Customs use different systems. A match between the vessel's name or number and the documents should provide a sufficient level of comfort.

Permit companies to trade on their own account.

Eliminate VAT duties on export sales. Such duties make it more expensive to export. Export sales by foreign invested enterprises account for a large percentage of export activity and growth. Imposition of export VAT will slow such activity and growth.

Create a clear, efficient means for the making of payments outside China for such contracted services.

It would be helpful to have a regulation that parts sales and repair services from SEZ/bonded zones can be collected in RMB, and that USD obligations for imported parts can be converted from this RMB revenue.

Foreign invested enterprises should be permitted to obtain foreign exchange without being required to conduct business through import/export agents.

Need greater flexibility to make advance payments on foreign-sourced materials.

Need greater flexibility to obtain long term RMB loans.

Need common voice from various government levels on stand-by letters of credit.

Allow a one-day maximum period of settlement between foreign exchange accounts within China. Without any maximum periods, there is no restraint and no certainty with regard to business and cash flow planning.

Reduce the amount of time required for foreign exchange payments. Current delays are not sustainable and undermine the credibility of China's business and banking environment.

Exporting from China

Can foreign exchange payments be made in the case of indirect export sales?

Sales to China

Clarification is needed for the principle that a letter of credit must be honored and if the importer has broken any rules, it should be held accountable. The foreign party should not be held responsible for the actions of importers over whom they have no legal means with which to exert control.

Assurance is needed of the principle that a contract for goods already delivered is a valid contract and cannot be encumbered by the banking system so that letters of credit are processed without undue delay and intervention.

How may a foreign-invested enterprise that makes sales in RMB generate foreign exchange to continue its business? For example, if an airline parts manufacturer buys parts abroad in foreign exchange, and then sells parts to PRC airlines in RMB, how can it obtain foreign exchange to support future sales in RMB?

Sales have in many instances stopped because import/export companies cannot or will not provide an acceptable letter of credit. How can this situation be improved?

With regard to payments beyond 90 days from Customs clearance, will delayed payments be considered foreign debt?

With regard to payments beyond 90 days from Customs clearance, do split payments, with the first payment made within the first 90 days, need to be registered?

May companies pay RMB to domestic trading companies that import goods from overseas?

Do vendors need to provide a letter of guarantee? If so, under what circumstances?

Clarification is needed for the principle that a contract for past services is a valid contract and cannot be encumbered by the banking system.

How does a company collect fees for intangibles where customers have failed to register with all proper authorities?

Clarify that RMB loans do not enjoy repayment priority over foreign exchange loans.

Clarify whether the regulations apply to all bonded zones or to free trade zones. Our companies have experienced confusion on the part of PRC officials in free trade zones that are not at the same time bonded.

Clarify the sources for foreign exchange in bonded zones or free trade zones.

Why are there delays or difficulties in transferring USD between accounts within China when the reasons for such transfers are clearly permissible?

Clarify any documentation required for withdrawals for operational purposes, contractual liabilities, payroll, foreign travel and other purposes.

Clarify the meaning of a demand deposit account.