Got a call the other day from a U.S. law firm that frequently uses our China lawyers to consult on litigation matters involving Chinese companies. The law firm was initially calling to see about our serving a Chinese defendant in a products liability action.

First thing we did was tell them how until recently we had a 100% success rate in serving Chinese companies with process via the Hague Convention, our strong sense was that “the rules on that had changed.” We explained how China right now is seeking to prevent foreign currency from leaving the country and the possibility of a Chinese company losing a lawsuit outside China meant the possibility of foreign currency needing to leave China. And for that reason, we have over the last few months been encountering China service of process issues where none existed previously.

The above is just one of the many ways the rules for conducting business with China (legal business in the above instance) have changed due to China’s efforts to block or at least slow down a foreign currency exodus.

We first wrote about China’s newish foreign currency restrictions in Getting Money out of China: What the Heck is Going on? In that post, we wrote how “in the last week or so, our China lawyers have probably received more ‘money problem’ calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.”

We then said that the common theme we were detecting was that “China banks seem to be doing whatever they can to avoid paying anyone in dollars.” We then listed how the following examples we were seeing and hearing about:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much on questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this. For what is ordinarily necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

Then again exactly a month later, we wrote Getting Money out of China by Losing in Arbitration about a company that wanted to use our law firm to plot out a fake U.S. arbitration that it would lose so it could then get a large sum of money out of China as payment on the arbitration award. The Wall Street Journal then interviewed me on this incident for its own story, China Capital Flight 2.0: Lose A Lawsuit On Purpose, which in turn was picked up by the Chinese media and Internet and pretty much went viral from there.

Not much has changed.

Earlier this week, Canada’s National Post did a story, Crackdown on Chinese capital flight ‘will impact’ local real estate, quoting me on how China’s crackdown on foreign currency outflows would necessarily impact the influx of Chinese real estate buyers in Vancouver:

Much of that money was destined for hot West Coast real estate markets from Vancouver to Los Angeles. In Vancouver it’s debated whether President Xi Jinping’s government can stop the flood. Seattle lawyer Dan Harris ­— an expert on facilitating trade with Chinese businesses — said that since January, China has aggressively clamped down on capital flight. Harris said U.S. realtors are calling his firm more and more often for help in getting cash out of China for luxury home sales that were easily completed in the past. “That will impact real estate in Vancouver and Seattle,” Harris said in an interview. “If anyone thinks the Chinese government will not stop people from sending $3 million out to buy a house in Vancouver? Wow. I don’t know what they know that I don’t.” Harris said Chinese companies seeking to invest in North American real estate started having trouble about three months ago as business transfers were examined more closely.

Yesterday, in Chinese Consumers Race to Buy Dollars as Yuan Slides, the Wall Street Journal wrote again on how China’s crackdown on foreign currency flows is impacting international business transactions. The article starts out by affirming exactly what our China lawyers have been hearing and been saying: that Beijing is telling China’s banks and others to slow down the foreign currency outflow. In other words, China’s laws on the books have not changed, but its on the ground reality has:

Chinese officials are trying anew to slow an unprecedented money exodus from the country, clamping down on individuals seeking to flee the yuan and making life tougher for companies that need to trade the currency for US dollars to do business. China’s foreign-exchange regulator in recent months has deployed a new system to monitor individual purchases of foreign funds and has asked banks to reduce foreign-currency transactions. It has summoned bankers to its offices to give guidance and has grilled them when foreign-exchange activity spikes, according to executives at Chinese and foreign lenders. Banks, in turn, have increased scrutiny of foreign-currency transactions by businesses ranging from Chinese entrepreneurs investing abroad to companies paying overseas bills.

The article then provides the following examples of companies having trouble due to China’s foreign currency clampdown:

A European chemicals manufacturer (presumably its China WFOE) was delayed in obtaining US dollars in Shanghai, threatening its deadline for an overseas licensing payment.

The Bank of Tianjin is having trouble getting funds from mainland investors for a planned Hong Kong public stock offering.

A water-treatment company struggled to withdraw $US2000 ($2690) for an engineer to travel to the US.

A Chinese company was having problems wiring $US15 million to a Hong Kong company that for two years has been helping the Chinese company buy equipment for a South American factory.

This foreign currency clampdown is apparently working as “economists say tightened capital controls are one reason China’s foreign reserves fell only $US28.6 billion in February, less than a third the drops of the two previous months.”

The WSJ article ended with this fascinating/scary statistic: “If 5 per cent of China’s 1.4 billion people used their full quotas [USD$50,000 in funds allowed to leave China each year], the $US3.5 trillion in foreign-currency demand would drain its ­[China’s] reserves.”

China’s new restrictions on foreign currency outflows are literally changing the way our China attorneys practice law in the sense that we now account for this on any transaction that will involve money flowing from China to some other country. I do not want to get specific on what we are doing but I can say that we are now always looking at whether the money can come from somewhere other than China and, equally importantly, we are also always looking to write our contracts so as to minimize China currency blocking triggers.

What are you seeing out there?