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How to Deal with Chinese Foreign Exchange Regulation when a Chinese Company Refunds You?-CTD 101 Series

Thu, 29 Dec 2022
Contributors: Meng Yu 余萌
Editor: C. J. Observer

There is usually no obstacle if a Chinese company refunds you using its foreign funds. However, if it makes a payment to you outside China using its domestic funds, the payment shall be subject to foreign exchange control of China.

This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection. We will explain how debt collection works in China below.

As the Trade Commissioner Service of the Canadian government says, “In China, companies, banks, and individuals must comply with a “closed” capital account policy. This means that money cannot be freely moved into or out of the country unless it abides by strict foreign exchange rules.”

After you make a payment to the Chinese supplier’s bank account in China, the bank will review the foreign income.

When a Chinese supplier exports, it shall provide its trade contracts and customs documents to the bank, which shall review its income on behalf of the regulators. Only after the review and approval, the Chinese supplier can actually obtain the income.

When a Chinese company agrees to refund you, which was not mentioned in previous trade contracts, Chinese banks or regulators may view this as a collusion between the Chinese company and you to avoid foreign exchange regulation.

In this case, Chinese banks will review the deal closely. For example,

First, if the original transaction has been canceled and the trade contract has been rescinded, the bank will review it as follows:

In the case of a refund, the bank requires that it must be given through the original route, i.e. to the bank account originally used by the purchaser to pay for the goods.

In the case of compensation for losses on the overseas purchaser due to the cancellation of the original transaction, where both parties agree to additional compensation from the Chinese supplier, the bank will review the compensation agreement.

Second, if the original transaction has not been canceled and the trade contract has continued to be performed, the bank will review whether the refund or compensation agreement relates to the amount of the original transaction.

Last, in some cases, the bank shall further investigate the transaction background to determine whether there is a possibility that the Chinese company is evading foreign exchange regulations or even committing money laundering. For example, (1) the interval between the original transaction and the refund/compensation is quite long (more than 180 days); (2)the compensation amount is an unreasonable proportion of the original transaction amount, or even significantly exceeds the original transaction amount.

 

 

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(1) Trade Dispute Resolution
(2) Debt Collection
(3) Judgments and Awards Collection
(4) Anti-Counterfeiting & IP Protection
(5) Company Verification and Due Diligence
(6) Trade Contract Drafting and Review

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Photo by Marko Sun on Unsplash

 

 

 

 

Contributors: Meng Yu 余萌

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