How to Solve the Shortage of Funds for FIEs in China
1. Digest
In recent years, China has adhered to implementing a tight monetary policy. It has issued some new foreign exchange policies to limit the “hot money” into China, which result in the shortage of funds for some FIEs. In confronting this dilemma, it is imperative for FIEs to find a solution that is both economical and time efficient. The following case may shed some light on the recent developments in Chinese monetary policy and the adequate response strategies.
2. Facts
We have two customers as FIEs: one is a Japanese company, established for many years in China, and other is a U.S. company that has been operational for less than a year. The Japanese company seeks capital to fuel the expansion of its business, while the American company seeks a new lifeline after depleting its registered capital. Despite differing circumstances, the dilemmas of the two firms are indistinguishable: a shortage of funds. In addressing this issue, both firms came to us and asked for a complete solution.
3. The Legal Solution for This Dilemma
There are two solutions applicable to these two companies:
Solution 1: making a loan from domestic institutions or from abroad
A company can make loans from banks, individuals and other financial institutions; however, a loan between two companies is prohibited according to Chinese law. Furthermore, caution must be taken with foreign loans, due to strict restrictions for amount of the loan. According to the law concerning foreign investment, the external debt amount of a FIE is the balance between FIE’s total investment and registered capital. Additionally, external debt is divided into two types: Short-term and Long-term.
The loans with a term of 1 year (ST external debt) are calculated on basis of its balance, but the loans more than 1 year (LT external debt) shall be calculated by its accumulated amount. For example, if you are only allowed $10 million in loans and you have borrowed $5 million (LT external debt), the remaining amount you can borrow again at a later time is only $5 million, regardless of whether you have repaid the former $5 million; however, in the case of ST external debt, if you have borrowed $5 million (ST external debt) and then repaid in full, the remaining amount you can borrow again is still $10 million.
The external debt must also be registered with the local Administration of Foreign Exchange.
Solution 2: increasing registered capital
If both of companies stated above increase the registered capital, the proportion of the additional registered capital and the increased amount of investment shall be subject to the following provisions:
1. Where the total amount of investment is less than 3,000,000 U.S. dollars (including 3,000,000 U.S. dollars), the registered capital shall account for seven tenth of the total amount of investment at least.
2. Where the total amount of investment is between over 3,000,000 U.S. dollars to 10,000,000 U.S. dollars (including 10,000,000 U.S. dollars), the registered capital shall account for half of the total amount of investment at least. Where the total amount of investment is less than 4,200,000 U.S. dollars, the registered capital shall be not less than 2,100,000 U.S. dollars.
3. Where the total amount of investment is between over 10,000,000 U.S. dollars to 30,000,000 U.S. dollars (including 30,000,000 U.S. dollars), the registered capital shall account for two fifths of the total amount of investment at least. If the total amount of investment is less than 12,500,000 U.S. dollars, the registered capital shall be not less than 5,000,000 U.S. dollars.
4. Where the total amount of investment is over 30,000,000 U.S. dollars, the registered capital shall account for one third of the total amount of investment at least. If the total amount of investment is less than 36,000,000 U.S. dollars, the registered capital shall be not less than 12,000,000 U.S. dollars
Company shall submit the following documents to local Foreign Economic Relation &Trade Committee for approval, including but not limited to:
1. The application
2. Board Resolution
3. Capital Verification Report
4. Auditing Report of current year
5. Certificate of Approval & Business License
6. other required documents
When completing the above steps, the company shall apply for registration to the Administration for Commerce and Industry.
By Allen & John Law Firm
Vincent Sun
Attorney at Law
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