Just got off a call with a U.S. law firm that frequently uses our China lawyers to consult on litigation matters involving Chinese companies. The law firm called to get our help in serving a complaint under the Hague Convention on a Chinese defendant in a products liability action.
We told them how until recently we had a 100% success rate in serving Chinese companies with process via the Hague Convention, but our strong sense was that “the rules on service of process in China had changed.” We explained how China is seeking to stop foreign currency from leaving China and the possibility of a Chinese company losing a lawsuit outside China meant the possibility of foreign currency leaving China. And for that reason, we have over the last few months been encountering China service of process issues where none previously existed.
The above is just one of many ways the rules for conducting business with China have changed due to China’s efforts to block and/or slow down a foreign currency exodus.
In Getting Money out of China: What the Heck is Happening? we talked about how “China banks seem to be doing whatever they can to avoid paying anyone in dollars” and listed the following as examples our lawyers have been seeing of this:
1. Chinese investors with all necessary Chinese government approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing.
2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday.
3. Money will not be sent to certain countries deemed high risk for fake transactions unless there is conclusive proof the transaction is real — a lot more proof than previously required. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there.
4. Money will not be sent for certain types of transactions, especially services, which are often used to hide moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this. For what is necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.
5. Money is not being sent to companies on services transactions unless the receiving company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is to prevent the sort of transactions ordinarily used to illegally move money out of China.
In China Capital Flight 2.0: Lose A Lawsuit On Purpose, the Wall Street Journal interviewed me on how Chinese companies are “losing” fake lawsuits in foreign countries and then using the judgment against them to move money out of China. And in Crackdown on Chinese capital flight ‘will impact’ local real estate, the National Post quoted me on how China’s crackdown on foreign currency outflows would impact the influx of Chinese real estate buyers in Canada:
Seattle lawyer Dan Harris — an expert on facilitating trade with Chinese businesses — said that China has aggressively clamped down on capital flight.
Harris said U.S. realtors are call his law firm for help in getting cash out of China for home sales that were easily completed in the past.
Harris said Chinese companies and individuals seeking to invest in North American real estate started having trouble about three months ago as business transfers were examined more closely.
Yesterday, in Chinese Consumers Race to Buy Dollars as Yuan Slides, the Wall Street Journal wrote again on how China’s crackdown on foreign currency flows is impacting international business transactions. The article starts out by affirming exactly what our China lawyers have been hearing and saying: Beijing is telling China’s banks and others to slow down the foreign currency outflow. In other words, China’s laws on the books have not changed, but the reality on the ground has:
Chinese officials are trying to slow a money exodus from China by clamping down on individuals seeking to flee the yuan.
China has deployed a new system to monitor individual purchases of foreign funds and has asked banks to reduce foreign-currency transactions.
The government has summoned bankers to its offices to give guidance and has grilled them when foreign-exchange activity spikes, according to executives at Chinese and foreign lenders.
Banks, in turn, have increased scrutiny of foreign-currency transactions by businesses ranging from Chinese entrepreneurs investing abroad to companies paying overseas bills.
The article then provides the following examples of companies impacted by China’s foreign currency clampdown:
- A European chemicals manufacturer (presumably its China WFOE) was delayed in obtaining US dollars in Shanghai, threatening its deadline for an overseas licensing payment.
- The Bank of Tianjin is having trouble getting funds from mainland investors for a planned Hong Kong public stock offering.
- A water-treatment company struggled to withdraw $US2000 ($2,690) for an engineer to travel to the US.
- A Chinese company was having problems wiring $US15 million to a Hong Kong company that for two years has been helping the Chinese company buy equipment for a South American factory.
This foreign currency clampdown is working as “economists say tightened capital controls are one reason China’s foreign reserves fell only $US28.6 billion in February, less than a third the drops of the two previous months.”
China’s new restrictions on foreign currency outflows are changing the way my law firm’s China attorneys practice law as we now must account for this with any transaction that involves money flowing from China to another country. We are now always looking at whether the money can come from somewhere other than China and writing our China contracts to minimize China currency blocking triggers.