China’s Capital Controls Choke Cross-Border Payments

by Erin Ennis and Jake Laband

Over the past year, China has implemented a variety of restrictions to stem capital flight in response to downward pressure on the renminbi (RMB). These restrictions have affected foreign companies’ routine business operations, including receiving payments from domestic customers, as well as the payment of dividends, royalties, and even routine trade payments overseas.


International rules on cross-border transactions

As a member of the International Monetary Fund (IMF), China accepted the IMF’s Articles of Agreement, which include commitments by member countries to avoid restrictions on current account payments. Those transactions include payments for business services, and imports and exports of goods and services. IMF rules allow member countries to control capital transfers, which relate to the purchase and sale of foreign assets and liabilities, such as investments, loans, and exchange rate transactions.


Even with the restrictions implemented in the last year, current account transactions are permitted under Chinese regulations, as long as the sending and receiving banks prove the transactions are legal. However, USCBC member companies report that capital account transactions are more strictly regulated.


Converting RMB to foreign currency is increasingly difficult because the distinction between restrictions on capital account transactions and current account transactions has been inconsistently interpreted by China’s regulatory agencies. As a result, current account transactions have, in some instances, been delayed based on capital account regulations.


For example, one foreign company told USCBC a sale of manufacturing assets in China to a Chinese company resulted in unexpected problems. The Chinese buyer was to make payments in USD to the American seller’s accounts outside China; 90 percent payment was required before the end of 2016 and the final 10 percent was due in January. When the deadline for the second payment arrived, the approval to convert RMB to USD was denied at the local level, perhaps due to an unpublicized quota requirement, delaying the deal’s completion.


US companies began to notice payment difficulties in late 2015 when restrictions were enacted in China limiting cross-border cash pooling. Cash pooling allows companies to consolidate individual subsidiary balances to increase treasury management flexibility. US companies in China may use cash pools to make dividend payments to investors in the United States or to consolidate funds from subsidiaries in multiple jurisdictions (and currencies) to make payments elsewhere. In addition to tightening cash pooling regulations, as restrictions on RMB conversion intensified in 2016, companies reported issues with everything from dividend payments to royalties and prepayments.


Early intervention can help

Companies report advanced consultation with the State Administration of Foreign Exchange (SAFE) increases the likelihood that normal business payments are approved, but companies also report pressure to reduce the size of payments. While no quotas have been publicly announced that would limit the size of these transactions, some suspect a nonpublic quota on transaction values for regional SAFE offices exists. In some instances, companies report that one large foreign exchange request can cease all transactions for an unspecified period of time. Other companies note that SAFE and People’s Bank of China (PBOC) regulators may be acting out of an overabundance of caution on what may constitute a capital account transaction.


Other companies have noted success asking their Chinese customers to meet with local SAFE and People’s Bank of China (PBOC) officials to share information verifying their transactions as legal, permissible current account transactions. Conversations with banks and PBOC indicate that companies who have a plan to remit funds overseas may have greater success making transactions if they meet with PBOC and their bank to discuss timing and amount in advance.


Success in securing smooth transactions varies by location and transaction type. Companies describe Shanghai as having the highest rate of approvals for RMB conversion. By comparison, Wuxi officials require more onerous documentation for RMB conversion, forcing payment delays and indicating that companies need to queue based on when its transaction was submitted for review. For example, one member noted that a company submitted a $1 billion conversion request to Wuxi in early January that they believe resulted in the entire local quota being consumed—despite the continued position of PBOC that no quotas exist. Nantong, in Suzhou, has been called “impossible” for RMB conversion.


Companies generally state a need for nationwide consistency in the application of the regulations. Because of the payment restrictions and the possible quotas, companies have found it hard to solicit quotes from banks to compare bids for rates charged to remit funds abroad. This restriction reduces competition among banks and raises costs for companies.  


Companies also report that cross-border transactions in dollars or other foreign currencies are less sensitive and can be more easily remitted abroad. However, few companies manage domestic Chinese transactions in USD, so this is less likely to be a feasible workaround.


USCBC advocacy

USCBC has regularly engaged with relevant Chinese authorities to address the problems that companies are facing. Direct advocacy in early 2016 with PBOC in Beijing and Shanghai led to improvements for some members. With the return of tightened payment controls toward the end of last year, USCBC has again stepped up its advocacy with PBOC, making the following points:

  • USCBC members have reported issues in making or receiving payments in RMB over the course of the previous 12 months because of recent changes to China’s capital policies. These restrictions have had an impact on routine business operations, including receiving payment from domestic customers, as well as the payment of dividends and royalties overseas.

  • Companies report a noticeable pressure to reduce the size of payments, and that some suspect the imposition of a nonpublic quota on regional SAFE offices, affecting the bidding system companies use to solicit quotes from banks for the remittance of funds abroad.

  • Normal, legal business transactions should not be disrupted. In general, the problematic transactions that China’s capital controls are trying to address are not being conducted by foreign businesses.

  • Capital controls should be clearly defined in written regulations or guidance and ultimately relaxed depending on the purpose of the transaction.

  • These policies should be uniformly implemented across jurisdictions, so that companies have a predictable operating environment in which to make financial decisions.

Companies with additional concerns or feedback on this issue can contact Jake Laband in USCBC’s Beijing Office.