Companies doing business in mainland China will likely find they need to transfer payments into and out of the country. Generally, there aren’t issues getting money into China. Rather, it can be difficult getting it out. If you find that your business or specific individuals have funds that you would like to transfer out of China, or if you are outside of China and are expecting payment for services rendered, be sure that you are aware of the process and any limitations that apply. You run the risk of delayed payment or even the prospect of not being paid at all if you do not take certain steps and understand how payment transfers are controlled.
We recently interviewed Robert Resnik of AFEX, a company focused on global payment and risk management solutions, and captured some of the most important things to keep in mind when making international payment transfers into and out of mainland China. Following are some of the key points we’d like to share with you from our conversation.
1. The People’s Bank of China sets policies and limitations on funds transfers between China and other countries and their goal is to retain foreign currency.
The People’s Bank of China (PBOC) is the central bank of China. It sets the policies and limitations for funds being transferred into and out of China. The PBOC is striving to retain foreign currency rather than sending it out of the country in payment; therefore, companies and individuals trying to send money out of the country may find unexpected roadblocks along the way in payment approval.
2. Individual banks in China must follow PBOC policies and they can, and often do, impose their own limitations or requirements on top of those set by the PBOC.
Furthermore, policies may change from day to day and from bank to bank, so you will always want to consult with your Chinese bank to be sure you meet the requirements for taking or sending money out of China every time you wish to do so. In many countries, you can go to a government website and see the specific process for sending and receiving international payments. Not so with China.
3. There are many ways that money might leave China and each will have its own restrictions.
Purchase of raw materials for manufacturing:
China is a huge manufacturing hub; therefore, it requires raw materials that may come from other countries. While it is understood that China will have to pay for the raw materials needed to support manufacturing, banks will require substantial proof that payment is for raw materials.
Payment for services performed for a company or person in China by a company outside of China:
A foreign company may perform services that will require payment out of China. There will likely be a great deal of documentation required to prove that legitimate services were rendered.
Individuals taking/sending money out of China (e.g. taking a salary in China and sending a portion out of the country):
Individuals are limited to $50,000 per year and no more than $2,000 per day – though check with your bank before assuming that an individual can easily take these funds out of the country.
Corporate funds/profits:
Companies are limited to taking/sending funds out as dividends, which are subject to huge taxes. Get expert advice to determine your best options for this situation. It may make sense to keep funds in China and avoid the significant taxes.
Investments:
The Chinese government is monitoring how much money is leaving China to invest into companies and real estate around the world. Don’t be surprised if funds take a long time to release and in the case of larger deals, funds may never be released.
4. Expect that documentation will be required to send payments out of China
To send payments out of China, your Chinese bank will have to assist you. It’s not as simple as going online or calling them up to do a wire transfer – you will need to go to your branch and determine your limitations. Each new time you want to transfer money out of China, you will need to ask the bank what their limitations and requirements are – and policies and limitations may change from day to day and from bank to bank – even from bank employee to bank employee. Expect that your bank may require a great deal of documentation for why you want to send out funds. They can ask for any kind of documentation they want and you can expect delays in approval. In fact, they have no incentive to approve your request – and they may not.
The PBOC is interested in verifying that the money was legally acquired. It is also interested in limiting how much foreign exchange leaves China. You will be required to provide proof of a valid business reason for sending payments out of China. Documentation is one way to ensure these goals.
Documentation could include things such as:
- Invoices (and separate proof for every individual payment)
- Proof that the invoice is for raw materials
- Proof that the company you are sending money to actually exists
Even with documentation, there is no guarantee your payment transfer request will be approved. Therefore, ask a lot of questions and be sure you understand what you will need.
5. Set your terms carefully if you are selling into China
If you are selling services into China, it is very important that you set terms that will protect your interests and favor your likelihood of getting paid.
- Make sure your payment terms are very clear, both in writing and orally.
- Contracts should be written in Chinese by a qualified Chinese lawyer well versed in your business situation and the local area you wish to do business in.
- Negotiate to receive a large payment up front. Once the product has been delivered, you may not receive further payments from the buyer and the banks may not allow any additional payments.
- Be aware that amounts paid to foreign service providers are subject to Chinese tax, even if the service is done outside of China. You can write your contract to explicitly state that the Chinese party is liable for the taxes and the amount payable is net of taxes. Otherwise, the amount you receive could very well be reduced by the amount of taxes paid the government. And since the receiver of goods pays the same amount regardless of taxes (unless you negotiate otherwise), they will have little incentive to get the taxes reduced unless they are the party paying them.
- Do not do very much work until you have received the large early payment. You can confirm that they show good faith in paying you and that they will be allowed to make large payments to you outside of China before you expend your company’s resource.
6. Make sure your recipients know what they need to do to get the funds you are sending into China
As we stated earlier, there is less of an issue in sending money into China. Generally, if your bank outside of China is large enough, you can most likely request the transfer payment online, over the phone, or in person. Smaller banks may not offer the option to request the transaction online. There will likely be a wire transfer fee and some percentage charge on the amount being transferred.
If you are sending payment to China, one of the most important things you can do is determine if the recipient has ever received international payment. If not, they may not know what to do to collect their money. They will need to go to the bank to get their funds and they may have to bring documents to claim their money. They should check with the bank to determine what they will need. If they are not aware of this process, they may be wondering where their payment is and hold you responsible.
7. There are ways to address currency fluctuation and utilize risk management mitigation
Often times, when companies are expecting to make international payments at some future point against contracts they own today, they use strategies to control for currency fluctuation risks. For instance, if a company owes a large agreed-upon payment in 90 days, they could end up effectively paying a lot more than originally planned if the exchange rate changes so that more of their own currency is needed to meet that obligation payable in another currency. Because the CNY (Mainland China currency) is tightly controlled, it’s fluctuation against other currencies is a lot less than many other major currencies such as the Euro or British Pound against the US dollar. Even with smaller fluctuations, exchange rates cannot be guaranteed and it may make sense to use strategies such as buying and holding currency today to be used to pay at some future point. This is also true for payments to China. Banks and companies such as AFEX can help companies with this process, called ‘forward contracts’.
NOTE: This is not a strategy to use for making (or potentially losing) money on the foreign currency market. It is used to create predictability around costs and to guarantee profit margins.
What are advantages of non-bank providers?
Companies such as AFEX offer a more affordable and often speedier option for companies to make international payment transfers. In AFEX’s case, international payment transfer is their core business and they have much lower overheard than banks. Therefore, their % charges on transfers are generally 30% to 60% less than what banks charge. And due to their network of accounts around the world, they are not literally transferring money from one account to another, but are depositing the payment in their accounts in one country and paying out of their accounts in another country – thus providing a much quicker transfer payment.
While many smaller banks may not offer online money transfer services, AFEX can do it all online. As long as the foreign exchange markets are open (from Sunday afternoon to Friday afternoon Pacific Time) they can execute transactions at the current exchange rates.
If you are expecting to be making transfer payments into and out of China, follow these guidelines:
- Consult with attorneys who specialize in Chinese contract law to ensure you have a contract that protects your interests
- Check with Chinese banks involved in your payment to verify you know as much as possible about what will be allowed and what will be required to approve your money transfer – either into or out of China
- Make sure your partners in China know what they need to do to collect funds you have sent them
- Consider using ways to control for currency fluctuation to create predictability around costs and protect profit margins
- Consult with non-bank providers to determine if they can offer better rates and services than your regular bank
Treat anyone you deal with in China respectfully. Make sure they feel valued and don’t try to push through your agenda or strong arm them. Your willingness to be respectful and accommodating will strengthen your relationships and may even make the difference between getting transfer payments processed or not.
For additional reading on this topic, the China Law Blog has published an informative series including Getting Monday Out Of China: It’s Complicated followed by Part 2 and Part 3 of the same name, with potentially more to follow.
