In the original post in this series, Getting Money Out of China: It’s Complicated, I wrote about how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.”
That has turned out to be no exaggeration. That post has already had nearly 8,000 views and over the weekend, I alone received four reporter queries and nearly a dozen e-mails from people asking for help to get money out of China. I assume that were I to survey my firm’s China attorneys they would report something similar. But as I noted in part 2 of this series, most of the requests deal with purchasing single family homes in the United States and “slapping together 3-5 single family homes and calling it a fund is not likely to make a difference with the Chinese government allowing money to leave!”
In part 2, I discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. Part 2 focused on legitimacy. In this post, I will examine the “benefit to China” element.
There is no doubt in my mind that a key element to money leaving China is simply whether the Chinese government wants the money to leave for its intended purpose or not. Nothing scientific here and it is more art than science, but based on my experience and my conversations and my gut feelings, I would rank the likelihood of the Chinese government approving your deal in roughly the following ways.
- Near certain the money will leave deals. We have many clients who sell their products and their services to China for less than $10 million at a time, using China-centric contracts, and I cannot recall a single instance where any of them have had any trouble getting paid. These are real deals with real contracts with real parties with real pricing and it is pretty clear China so recognizes these and has little to no problem with them. These are the deals that help keep China businesses running smoothly. For what you need to do to make your contract work on these deals, check out Selling Your Product or Service Into China: The Contract Basics.
- It depends deals. Technology licensing deals fit into this category. The Chinese government wants its companies to acquire Western technology, but it is not clear that it wants its companies to pay too much for this technology, especially if a denial of payments will mean the Chinese company can pay less. For more on what is involved in doing a China technology transfer deal, check out Three Myths of China Technology Transfers and China Technology Transfers: The Relationship and Deal Structure Myths.
- It really really depends deals. Chinese companies investing in Western companies. Yes, you can read about this or that Chinese investment deal getting done, but you should know that many of these deals do not involve money going from Mainland China to the West: they involve money going from Hong Kong to the West. In trying to determine the odds of your deal going through the first question to ask is from where the money will be coming. If your Chinese counter-party has $200 million in an HK bank account and your deal is for $150 million, then what the Mainland will say about your transaction obviously becomes less important. But if you are counting on the money coming from the PRC, the nature of your business could well be determinative. If the investment is going to be in real estate, your odds are not good because it is difficult to argue how a Chinese company sending $150 million to the United States to buy a couple apartment buildings there will benefit China. But if the investment is going to give the Chinese company access to a technology needed or desired by China, the odds just went way up.
- Are you kidding me deals. We are not aware of a single instance where the Chinese government has said, “yes sure, go ahead and send that $5 million so you can buy a luxury condo in Vancouver or New York.” Sorry.
Determining whether money can come in on a specific deal — even when it is legitimate and the contract is good — is more art than science and nobody can get it right every time. For this reason, our advise is always to assume that getting the money will be difficult and act accordingly. We give this advice even for our lowest risk clients: the product sellers. See Payment Terms When Selling TO China: Possession Is Ten-Tenths Of The Law. This means setting up your deal to reduce your risk of not getting paid and to reduce your risk if you fail to get paid.
What are you seeing out there?