Getting Money out of China: An Update

How to get paid by a Chinese company

I always love it when “my” blog posts are written for me via an email from one of my law firm’s China lawyers on which I am cc’ed. The following is such an email, relating to the ability of a Chinese company to invest in a project outside China. Broken down to its most simple element, the question relates to the difficulty Chinese companies face when trying to send more than $50,000 (this is the yearly cut-off number) outside China. Here is the email, modified slightly to strip it of any possible identifiers:

[Dear Client]:

Briefly.

The Chinese government must approve in advance the transfer of funds outside China in excess of USD $50,000.  Chinese government regulations state this approval is routine and will be completed in three days. This is not even remotely true. In fact, the PRC government restricts all foreign investment by all private Chinese investors.

Your investors are claiming this investment is supported by the local government and so approval is guaranteed. In that case, they simply need to obtain the approval. However, any transfer made without approval is a violation of Chinese law and nearly impossible in any case.

To deal with this issue, most Chinese companies (private and government owned) make their overseas investments with funds already located outside of China — usually from Hong Kong, Cayman Islands or BVI. How these funds got to these locations is never clear. However, once the funds are located outside of China, Chinese government approval is no longer required.

To answer your specific question about how to secure investment in your project from China, you essentially have the following two options:

1. The PRC person or entity should request approval as soon as possible. We can help draft the documents they will need from you to secure this approval.

2. The PRC person or entity should make arrangements for payment from a source located outside China.

With China’s recent stock market fluctuations, the PRC government is restricting even more the investment of funds from China.. Your PRC investors are well connected and this project is supported at the local level. In that case, approval should be easy to obtain. Accordingly, the application should be made as soon as possible.

For information on the related issue of getting paid by a Chinese company that owes you money for services your company provided, check out How to Get Paid from China.

8 responses to “Getting Money out of China: An Update”

  1. I’m sorry I didn’t understand that. Maybe I’m missing something. How does this “system” work to get money out of China? Please provide a step by step guide. You lost me on “Cayman Islands”. Do you mean if I set up a company there my Chinese staff can transfer any money they want to it? And is thst something you can do for me? Please clarify I don’t get this at all. But I’m sure you’re right it just needs a bit of explaining. Thanks!

    • What they’re saying is that some Chinese companies have already managed to get money out of the country (by means that may not be entirely legal) and that this money is now deposited in loosely-regulated tax-havens like the Caymans and BVI, and are using these monies for overseas transactions and thus avoiding having to get government approval. They are definitely NOT saying that you can simply set up a company in the Caymans or BVI and get money out of China without Chinese government approval.
      My reading of the piece is that Chinese companies that want to send more than 50,000 USD overseas need to get approval for doing so, and that local government support for doing so would aid this. I really doubt (having tried to get money out of China) that there is any simple, straight-forward process for getting this much money out of the country that they can give you a step-by-step how-to.

    • Currency transfers abroad by both companies and individuals are limited to the equivalent value of USD 50,000 per year. Essentially the only way to get around the requirement to receive approval for cross-border investment is to have funds in an account already outside of the Chinese mainland. The most typical way to hold funds outside of China are in a company which owns a bank account in a mid-shore or off-shore jurisdiction, primarily Hong Kong, Cayman Islands, or BVI.
      There are a number of ways individuals in China and private companies transfer funds overseas. Two common methods are legitimate but face challenges in the market going forward, while one method is a grey area. There are completely illicit smuggling channels as well, though those are probably best left for another discussion.
      1) Trading company: China co sets up a trading company in offshore jurisdiction, the trading company enters into trade agreements with international businesses, and the China company imports goods from the offshore trading company that is established, booking the bulk of profits of the trade in the offshore entity. There are a whole host of tax and affiliated control related issues with this old approach to building offshore capital, and if the company in China does not have any history with offshore trade this can be difficult.
      2) Offshore financing structure: The most basic of which is known as a 内保外贷 Nei Bao Wai Dai, which entails an offshore company being established with a cross-border guarantee over assets of a domestic company in China being issued. Various lenders overseas will then on the strength of the guarantee grant a loan to the offshore company. New registration requirements have been put in place under SAFE in an attempt to exert greater control over these types of structures, with a number of requirements, registrations and approvals to be met before the issue of a cross-border guarantee can be made on behalf of an offshore vehicle. New channels are being frequently introduced via Shanghai FTZ, Qianhai, and to a lesser extent Nansha/Hengqin/Fujian are being opened frequently allowing for direct offshore lending to Chinese domestic companies provided certain trial policy requirements are met. These new policies may or may not replace the need for Onshore Guarantee Offshore Credit structures as outlined above, but so far to my knowledge only larger private groups and SOEs have taken advantage of these trial programs. A company would still need to be financially capable of receiving the offshore loan regardless of the channel, so there may be some natural selection going on there as well.
      3) Parallel Markets: What is known as a Hawala system in South Asian/Middle East terminology exists in China, centred around Jiangnan (Shanghai-Zhejiang-Southern Jiangsu) and Fujian/Guangdong. This is a parellel market exchange very similar to what you see in Argentina with the blue dollar, and allows for large sum ‘transfers’ across the border. Essentially accounts domestically are netted against one another, and accounts existing across the border set off the domestic transactions, in something akin to an informal Nostro reconcilation money market for any banking geeks out there. Money never actually ‘transfers’, and consequently there is no reporting or no real trace of the activity. The HK CFA case of Yan Sui Ling from 2012 details how these systems work if one is curious.
      Originally these systems grew up in the 80’s and 90’s to obtain forex in support of export manufacturing, now they have taken on a duel role both to faciliate private outbound investment and also to help bring capital back into China where individuals have not wanted to be subject to FDI rules and regulations. The inbound flow increased substantially the last fews first with the rise of the Carry Trade and shadow banking industry across the country after the financial crisis in the west, and now with the recent refocusing of this trade into the stock market. Anywhere where large pools of offshore RMB exist these systems are available, but they still remained centred in Hong Kong and Taipei. Macau was very much engaged in this trade up until Xi Jinping visited last year. The increasing scrutiny on everyone’s favorite den of illicit Chinese behavior has put a substantial amount of pressure on both the major Portuguese and Chinese banks there to slow down the trade. Interestingly, with casino’s springing up in Vietnam, Cambodia, and other SE Asian jurisdictions there has been some increased activity noticable surrouding those jurisdictions, but that is again something for another day.
      None of these structures would be recommended for foreign investments in China, Chinese domestic persons use these systems because they have to. There is no other choice, and so they do what is needed when they see an investment or business opportunity. Foreign businesses are faced with heightened compliance scrutiny in China, as similar to most other emerging markets, so you leave yourself incredibly exposed by pursuing these routes. Nothing replaces proper legal and tax advice when preparing for an investment into a foreign market, regardless of China, India, Latam, or Africa (let alone developed nations), and although you may take a tax hit compared to not having a properly formed structure, it is better than losing everything or having assets frozen. If the industry you are in is restricted, and you are not happy with the legal options presented to you at the time of investment, and especially if you haven’t been satisfied with the approved methods of repatriating profits, simply don’t invest. If you do, accept the fact that you are operating in a grey area, and when/if the shit hits the fan, no professional will be able to resolve those grey area, non-compliant issues. Good on you if you have another way to resolve it, its your risk.

      • Hi Aaron are you able to elaborate on some of the points in this article, i’m very interested in the 2nd point in your article and looking to partner with people that can assist with this very problem in a completely legal way!

  2. I left a message here it seems to have got lost. I want to ask because it is confusing how I can set up a Cayman company offshore and use it so my Chinese staff can send money to it and avoid taxes. I think that’s what you are saying. If so can you help me set this up please?

    • What you are proposing is almost certainly illegal. Chinese companies have their own — non-legal ways of getting money out of China. There are various ways we have heard that they do this but as lawyers we do not advocate anyone do this and we certainly will not write about how to accomplish it.

Leave a Reply

Your email address will not be published. Required fields are marked *