Many times over the years American clients of ours have asked us whether their buyers in China are telling the truth when they claim not to be able to pay the American company more than $50,000 in one year.  Our response has always been that we were dubious of such a claim because we have other clients who get paid millions of dollars each year by their China buyers, but if they want us to research this issue for them, we would be happy to do so, at our regular hourly rates.

We had never researched this issue….until now.

And even now, we did not exactly do the research ourselves and the research is confined to money from Chinese citizens, not companies.  We are involved in a case with a number of other law firms and in that case one of the Chinese parties said that they could not pay one of the law firms more than $50,000 this year.  As you might have guessed, when a law firm’s own money is at issue, the research gets done and the following is what the law firm found:

  • China controls inbound and outbound foreign exchange flows.  If a Chinese citizen needs to make an overseas payment it is required to purchase the foreign funds with RMB from a bank qualified to do foreign exchange business.  Most banks in China are qualified to do foreign exchange business.
  • When converting RMB to a foreign currency at a Forex Bank, the bank is required to review whether the outbound capital is for investment or for regular payment.  Outbound capital investment refers to overseas equity investment and is strictly restricted. Outbound regular payments are permitted, including those for overseas tours, training, relatives visitation, business negotiations, meetings, service, labor, etc.
  • Legal service fees paid to an American lawyer for the service rendered is deemed a regular payment item.  Chinese citizens can convert and remit freely up to USD $50,000 equivalent per year. Conversions exceeding the USD$50,000 quota is still possible, but the citizen cannot complete it at a bank counter freely; he or she must apply to the local State Administration of Foreign Exchange for written approval.  Chinese banks will not let the extra conversion go without seeing SAFE’s approval letter.
  • To secure approval to exceed the USD$50,000 limitation in yearly payments to an American attorney, the Chinese citizen needs to submit documents verifying the underlying transaction. The application documents mainly include: (1) an engagement letter/contract signed between the Chinese party and the American attorney; (2) notarization and legalization of the engagement letter/ contract; (3) tax return certificates of the US payee (theoretically the US attorney needs to pay Chinese withholding tax for the revenue gained from China); (4) a request for payment from the US attorney.

Well now we know.

  • Danil Shtoda

    Yes there is a USD50,000 limit for Chinese nationals as individuals to send/receive each year, or equivalent currency equivalent, it’s been a policy for years. I thought you would have known this it’s basic knowledge.

  • Jennie Tourel

    It’s been in place for years, every Hong Kong or overseas Chinese with relatives on the mainland who need retirement and living funds has had to deal with this for the past two decades. But you confuse the issue between the 50k cap on individuals and companies because the company rules are different although they still involve SAFE. It seems your US clients or other lawyers are buying/selling to very small SMEs actually private people if they have this problem. It isn’t a corporate problem when corporate banks are involved, it only applies to each individual person. And do the math: USD50k x 1.3 billion Chinese that’s the real figure. I find this a weird article to be honest. It’s common knowledge and not a business problem, not even at SME level….

  • I hope you’ll give us an update later on whether the application actually gets through… I’d assume that it will, but it seems like this application process is the point at which political pressure can be applied to any transaction if there is the will to do so.

  • Tim

    It’s not just Chinese citizens but individual bank accounts established in China. A foreign citizen in China will also be limited to bringing in US$50k before requiring additional approval. 

  • r_s_g

    Hence the spectacle of Mainlanders moving suitcases of cash across the borders into Hong Kong and Macau.

  • Chen Tuy

    You’ve forgotten to mention the payment of withholding taxes due on services (this includes legal fees if charged in China) that need to be deducted from the US invoice. You’ve missed a lot of procedural and tax processes out.   

  • Twofish

    A few points

    1) Companies are under SAFE restrictions, but companies that are involved in export business can open a dollar account in China.  They can then take any dollars that they earn through import business and then use those dollars to purchase overseas services.  Paying domestic people in dollars is prohibited.  If you can show that the dollars came from overseas and is being used to pay for overseas services, then those transactions get “rubber stamped.” 

    A lot of the reason that people are starting to bump into currency restrictions is that before they are working with export businesses that had access to dollars and could use them to pay for foreign services without bumping into SAFE.

    2) SAFE is notoriously fickle.  If you are actually trying to convert RMB to USD (instead of merely spending USD that you got elsewhere), then whether you get an transaction approved has a very, very strong random element with the answer likely (but not certainly) being no.

    SAFE has been known to reject transactions on Wednesday and then allow them on Thursday and then reject them again on Friday.  Also having a transaction approved means nothing since SAFE will often deny the same transaction that it approved the day before.  In fact SAFE, may deny a transaction *because* it approved one the day before.  Generally, SAFE has been known to be more permissive with one time extraordinary transactions then continuing ones.  The worry is that if you have a permission to undertake a continuing transaction, that you will use it to circumvent currency restrictions.  Also, I think that SAFE approvals has a random element precisely so that people won’t figure out the rules and go around them.

    One other thing is that I’ve never known of any situation in which anyone has had any difficulty changing US dollars to RMB.  Those also get “rubber stamped.”  The only time SAFE seems to get involved is if there is a suspicion that someone was “round tripping.”

    3) As far as political pressure, if you are reading this then you might as well forget about it.   The only case in which I know of in which SAFE was pressured to change its mind was a high profile transaction involving several hundred million dollars and the pressure involved several people at the ministerial level.  SAFE is a central government ministry that deals with trillions of dollars.  You don’t matter to them.  SAFE policy is like the weather.  You just deal with the randomness, and there’s no point in really trying to change it.

    4) There are several ways of changing RMB to USD with varying degrees of legality, and trying to get money from point A to B involves a lot of “connect the dots.”  One mechanism is to have an RMB account in Mainland China, a dollar account in HK.  You transfer X yuan to a currency broker in Mainland China, and they transfer Y dollars to your HK account.  This is completely legal and doesn’t involve SAFE since no money actually gets switched, but you need accounts in HK and Mainland China.  As far as how the currency broker moves the money across….  Well, that’s their problem, though I do find it interesting that no bank offers this service, and the people that do work out of run down booths in back alleys in Hong Kong.

    5) This is the type of thing that you really need a banker to handle rather than a lawyer.  One thing about bankers is that get paid if the transaction goes through so they are quite eager to help you get what needs to get done.  If you in the US, the easiest way of getting in touch with someone that knows about RMB currency transactions is to go to the local branch of a “megabank”.  The tellers won’t be able to help you, but they will be able to connect you with someone that is an expert in this sort of thing.

  • Horus Kai

    @Two Fish – “the only time SAFE gets involved….”
    No. SAFE always – let me spell it out clearly – ALWAYS – gets involved when converting RMB to Forex. They are the management barometer for China’s entire international financial transactions and without them there would be both chaos and mass corruption. The fact is, that this article deals with tiny annual amounts (USD50k per annum for crissakes) involving private individuals and isn’t related to any meaningful corporate forex. There is a huge difference in the procedures and administration. But this piece is useful to US SMEs selling tiny quantities to private individuals in China maybe via some online websites for example, such as USD10-500 dollar transactions, that sort of thing.

  • Jay Lovejoy

    While the comments below me obviously knew about Chinese law, I was seeking clarification. Thank you for the article.