[ By Daisy Huang and Rosario DiMaggio, Dezan Shira & Associates ]

For this, understanding the limitations in China?s foreign exchange system is important.

China tightened its foreign exchange regulations last year, issuing the ?Regulations on the Administration of Foreign Exchange of China.? Under these new regulations, more emphasis is placed on the administration of inflow and outflow of foreign exchange. Legal entities, including wholly foreign-owned enterprises and representative offices, that previously only had an RMB Basic Account in China are now required to open a specific Foreign Currency Settlement Account for collecting proceeds and the conversion of such forex income into RMB. For entities that only have small
or sporadic forex inflow and outflow, forex collections and payments can be processed through a bank?s miscellaneous conversion account.

The stringency of such requirements can easily delay reception of payments to a company, leading to unexpected cash flow shortages and unpredictable degenerative outcomes. To understand how the regulation works and what it means for companies operating in China, we will try to outline the main aspects of such practice.

Chinese authorities keep their control on foreign exchange through a close supervision of bank accounts. Foreign companies in China operate through three different types of bank accounts: capital accounts, settlement accounts and basic RMB accounts.

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