Regulatory guidelines issued by the State Administration of Foreign Exchange regarding the management of capital account funds allow foreign invested enterprises to convert their registered capital from foreign currency into local currency at their own discretion. This policy represents a shift from a payment based system to a more flexible voluntary conversion model for international investors. Under foreign exchange bureau circular 19, companies can hold converted renminbi in a special account before they have a specific invoice to pay.
This instrument governs the movement of capital into the country and the limitations on how those funds can be used for corporate purposes. It applies to all foreign invested entities operating in the Chinese mainland that have received capital injections from their overseas shareholders. The boundary of the circular is defined by the prohibition on using these funds for speculative investments or personal lending.
Banks are required to monitor the usage of the converted funds to ensure they remain within the approved scope of the business.
Transitioning to the voluntary settlement method allows businesses to manage their currency risk more effectively by choosing when to convert their funds based on market exchange rates. A foreign exchange bureau circular 19 filing allows a company to convert up to one hundred percent of its foreign currency capital into renminbi at any time. These funds are placed in a designated account for settled foreign exchange pending payment, where they can stay until the company needs to settle a transaction.
This mode differs from the previous requirement where a company had to provide a contract or an invoice for every single conversion request. The flexibility provided by this rule reduces the administrative burden on corporate treasurers and speeds up the deployment of capital for local operations. However, the company still needs to justify the eventual use of the money to the bank through the submission of supporting documents after the conversion.
Control over the final destination of the converted capital is maintained through a negative list of activities that are strictly forbidden. Funds managed under foreign exchange bureau circular 19 cannot be used for the purchase of real estate that is not for the company’s own use or for investment in the securities market. The money also cannot be used to provide loans to other enterprises, unless the company’s business license specifically allows for lending activities.
These restrictions are in place to prevent the influx of foreign capital from creating asset bubbles or being used for shadow banking. The bank has a duty to verify that the spending matches the registered business scope of the enterprise, such as purchasing raw materials, paying salaries or renting office space. If a company is found to be in violation of these rules, it faces fines and may lose its right to use the voluntary conversion system.
Monitoring of the account activity is delegated to the commercial banks, which act as the primary gatekeepers for the foreign exchange administration. Every time a company wants to spend the converted renminbi from its special account, it must provide the bank with evidence of the underlying transaction. This foreign exchange bureau circular 19 requirement means that even though the conversion is discretionary, the actual spending is still subject to oversight.
Banks must check that the payments are consistent with the information provided during the initial capital registration. They are also required to report the flow of funds to the state administration of foreign exchange through a specialized electronic reporting system. This oversight ensures that the government can track the total volume of foreign capital entering the economy and its impact on the money supply.
For the enterprise, this means maintaining a disciplined approach to accounting and record keeping to ensure that all payments can be clearly linked to legitimate business activities. The bank’s verification process serves as a constant check on the integrity of the capital account.
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