Han Lin deputy general manager and Global Banking senior relationship manager, helps us understand why a number of accounts may be needed to bank in China and what questions you should ask yourself.
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A treasurer at a U.S. company recently called me perplexed by the bank account structure for her company’s Wholly Foreign-Owned Enterprise (WFOE) in China. She was looking at 30 accounts in China and wanted to know why the company needed so many.

Needing several accounts to do business in China comes as a common surprise to many of the U.S. companies we work with. Chinese capital controls require separate accounts based on the purpose of the funds in an account. In this way, China can track the flow of foreign capital in and out of its borders.

Companies can use this decision tree to understand the common types of accounts they will need for which purposes.

USD to RMB foreign exchange decision tree
*Diagram for illustration purposes only
The genesis of China’s capital controls

In the 1990s, the fashionable Western prescription for economic development in Asia was to encourage Asian emerging markets to open their capital accounts. The theory was that the fluid movement of foreign capital through open capital accounts would encourage more efficient capital allocation, thereby fostering economic growth.

During the 1997 Asian Financial Crisis (AFC), however, it became clear that the volatile flows of capital could also generate economic and political instability as local currencies collapsed when foreign capital rapidly fled a market.

China was one of the few countries that came out of the AFC relatively unscathed because its capital account was still closed. One lesson it took to heart was that as China developed, capital controls needed to be in place to encourage “good capital” — capital used for trade or long-term investment — and discourage “bad capital” — capital used for speculative funds.

What type of accounts will my company need?

The State Administration of Foreign Exchange (SAFE) developed a framework to categorize inbound foreign capital by purpose. How companies would use the funds would dictate the accounts required. SAFE became the regulator responsible for policing the foreign exchange conversions between U.S. dollars (USD) and the renminbi (RMB) local currency, also referred to as the CNY or yuan.

In the following examples, you can follow the decision tree we created from the left to right.

When USD enters China, the top-level question (1) is whether the funds will affect China’s (a) capital account or (b) current account. For example, an equity injection to a WFOE in China is a capital account transaction. To facilitate this, a U.S. firm’s China subsidiary would need a “capital account” opened in a China-based bank to receive that initial USD injection for conversion into RMB. Capital accounts require regulatory approval, and this RMB amount can then be used for working capital purposes.

On the other hand, if the incoming funds are current account related, then the next question is (2) whether the funds are (a) trade related or (b) non-trade related. Trade-related transactions have no restrictions on USD to RMB convertibility. Nonetheless, a separate “trade settlement account” is needed to handle USD trade-related payments that need conversion to RMB.

If the incoming funds are non-trade related, we need to determine (3) whether they are (a) corporate or (b) retail focused. Retail-related transactions — an individual in the U.S. wires money to an individual in China, for example — necessitate “retail accounts.” Institutional or corporate entities do not use retail accounts.

If the transactions are corporate-related, we have to ask (4) whether or not the China inbound USD remittance is for (a) financing purposes or (b) operating expenses. In financing situations, such as an intra-company loan from the U.S. parent company, a “shareholder account” is needed to convert the parent USD loan into RMB. If the funds are intended to cover operating expenses, such as local salaries and other expenses, then a “basic account” is opened to convert USD to RMB for the handling of day-to-day activity payments. Although not related to capital controls, every company will also need a separate tax account to pay local taxes to the government.

In summary, the reason why WFOEs in China have so many bank accounts is that each account has a defined purpose that allows regulatory agencies to track the flow of foreign capital in and out of China. Companies with a Chinese subsidiary need to know what each account is for and when it is required.

Five types of accounts commonly used by Wholly Foreign-Owned Enterprises in China*

Account type Currency Purpose of account
Capital account USD Used when there is a U.S. dollar (USD) capital injection for WFOE Setup. The funds can be converted to renminbi (RMB) for local working capital purposes.
Trade settlement account USD Used to convert trade-related USD payments into RMB.
Shareholder account USD Used when a U.S. parent company lends to a subsidiary in China. The parent wires a USD loan, which can be converted into an RMB-denominated loan.
Basic account RMB Used as an operating account, this account can also receive USD for converting into RMB, for payment of local operating expenses (i.e. salaries).
Tax account RMB Used to making local tax payments.

*Note: The account information in the article is for general demonstration purposes only. The types, number of bank accounts and governing regulatory agencies required will largely depend on the scale of business operations. China is still a fast changing economy and practices and regulations can change fast with the macro objectives of the Chinese Government etc.

Han Lin
Han Lin is deputy general manager and a Global Banking senior relationship manager of Wells Fargo in China. Han advises Wells Fargo corporate customers on their U.S-China cross-border strategic, financing, and trade needs. He is based in Shanghai.