Meaning
A regulatory framework through which the Chinese state controls the flow of foreign currencies across its borders to maintain balance of payments stability and protect the value of the national currency. The State Administration of Foreign Exchange executes this control through a strict division between current account and capital account transactions. While current account transactions such as trade payments are relatively free, foreign exchange administration imposes rigorous registration and approval requirements on capital flows.
Capital Control
Direct investment, foreign loans, and security transactions represent capital account flows that require prior regulatory approval or registration. Foreign-invested enterprises must establish specific capital accounts and submit to annual compliance audits to ensure that foreign currency is used only for approved corporate purposes. Remitting equity dividends or repatriating capital requires the presentation of audited financial reports and tax clearance certificates.
Remittance Procedure
Foreign partners in Chinese ventures must undergo specific bank-level checks to execute outward remittances. Banks act as the primary examiners on behalf of the regulatory authority, verifying that the transactional documents match the declared purpose of the transfer. This procedural step prevents the unauthorized flight of capital under the guise of trade payments.
Compliance Audit
The administrative authority conducts regular and retroactive audits of corporate transactions to detect unauthorized capital flows. Companies that violate the rules face penalties including the suspension of foreign currency accounts and administrative fines. The regulatory agency maintains a credit rating system for trading enterprises, and those with poor compliance records are subject to closer transaction-by-transaction inspections.
