China Sets Stricter Capital Rules for New Companies Amid Slumping Economic Confidence

Companies rush to reduce registered capital ahead of new rule. The law adds to a host of factors that are driving negative economic sentiment in China.

An investor looks at an electronic stock index display at a securities company in Shanghai, on June 8, 2005. China Photos/Getty Images

The Chinese Communist Party (CCP) has rolled out changes to the country’s Company Law, tightening the capital rules for new firms. The new law, which imposes a five-year deadline for payment of registered capital, has triggered a surge of capital reductions across the country.

Registered capital is the initial investment committed to a company by its shareholders. In China, this amount must be registered with the State Administration of Market Regulation (SAMR) at the time of incorporation. The amount is included in the company’s business license, its articles of association, and the investment certificate issued to its shareholders.

The new Company Law will become effective on July 1. It reportedly will require shareholders of a limited liability company to pay the declared amount of capital within five years from the date of incorporation. For some key industries, the time limit could be shorter.

This new provision changes a previous rule, dating to 2013, which allowed shareholders to pay the capital according to their own timeline.

Business owners face fines of between 50,000 and 200,000 yuan ($7,000 to $28,000) if they fail to pay their registered capital as required by the new Company Law, according to Xiao Hua (a pseudonym), who works for a finance firm in Shenzhen, in China’s southern province of Guangdong. Her company provides services pertaining to registered capital modification.

As a result of the announcement on Dec. 28, Chinese companies have been scrambling to reduce their registered capital.

Ms. Xiao told The Epoch Times on Jan. 11 that her firm typically handles 12 to 20 cases of capital modification for Shenzhen companies each day. However, within just two weeks of the announcement of the revised Company Law, it has seen a staggering 40,000 companies seeking to reduce their registered capital.

The website of the Shenzhen Market Supervision Administration shows that announcements of capital reduction by limited liability corporations are popping up on a daily basis. For example, on Jan. 12, a financial management company announced that it had reduced its registered capital to 10,000 yuan (about $1,400) from 1 million yuan (about $140,000); a construction and labor service company proposed to reduce its registered capital to 30,000 yuan (about $4,200) from 48 million yuan (about $6.75 million); and a building construction contractor decreased its registered capital to 50,000 yuan (about $7,000) from 10 million yuan (about $1.4 million).

A recent post on X included a screenshot from an Anhui province newspaper, listing some 20 announcements of capital reductions. In one instance, a company stated that it would lower its registered capital a whopping 99.4 percent, from 5 million yuan (about $700,000) to a mere 30,000 yuan ($4,200).

Ms. Xiao said her firm is seeing “significant” capital reductions; usually down to the minimum registered capital amount of 10,000 yuan.

Not surprisingly, Ms. Xiao said the procedure for capital reduction is more troublesome than that for a capital increase. The process involves several government agencies and a sheaf of paperwork. There is a mandatory 45-day announcement period for companies requesting a capital reduction. In addition, companies with registered capital of 100,000 yuan ($14,000) and above must undergo an inspection prior to authorization. Adding to the urgency, the rule applies retroactively to companies established before the new law’s provisions.

Helping businesses reduce their registered capital is a lucrative business, said Ms. Xiao. In Shenzhen, the cost is about 800 yuan (about $110) per instance, while in Guangzhou it is higher, at 1,500 yuan (about $210), in line with the provincial capital’s stricter oversight.

Lack of Confidence in Economic Recovery

The surge in capital reduction cases reflects China’s economic setback, said Ms. Xiao. “Many business owners don’t have much money on hand to pay their registered capital in full, so they turn to reducing it.”

U.S.-based economist Li Hengqing agreed that Chinese people are becoming more cautious with their investments. “China’s economy is declining, and entrepreneurs lack confidence in the future, so they prefer to cut back [on] operating capital.”

Prior to the revised law, it was considered pragmatic to register with a high capital investment, as it would help obtain loans, Mr. Li explained. “For example, if you have a registered capital of 10 million yuan and ask for a loan of 1 million yuan, banks may give more credit, believing that you will be able to repay the loan.”

In the past, it was harder for Chinese companies, particularly those in the private sector, to acquire loans, Mr. Li said. As the Chinese economy weakened, the situation reversed. “With the economy weakened, especially in 2023, banks are seeking [to lend,] but people are unwilling to borrow money.”

A ‘Year of Grave Concern’

Currently, “the Chinese are not confident about the economy as a whole; they are not optimistic about the economic outlook,” Mr. Li added.

Three years of strict zero-COVID measures, and the ripple effects of those measures, drove many companies out of business and repelled foreign investors. Add to that the slumping real estate industry, which spilled over into industry, finance, banking, and other aspects of the economy.

On Jan. 8, the Eurasia Group, a prominent political risk consultancy headquartered in the United States, released its annual “Top Risks Report.”  The group calls the report its “annual forecast of the political risks that are most likely to play out over the course of the year. Somberly headlined ”a year of grave concern,“ this year’s report predicts that China—specifically ”No China Recovery—is a top global risk for 2024.

“China’s economy will underperform throughout 2024. Beijing’s failure to reform the country’s sputtering economic growth model, the country’s financial fragilities, and a crisis of public confidence will expose gaps in the Chinese Communist Party’s leadership capabilities and increase the risk of social instability,” the report said.