To facilitate public understanding of Chinese circumstances regarding cross-border fund flows, especially the scale, channels, and influence of abnormal cross-border fund flows, the group for the analysis of the balance of payments of the State Administration of Foreign Exchange (SAFE) recently issued the Report on the Monitoring of Chinas Cross-border Fund Flows in 2010 (hereinafter referred to as the Report). The Report provides a comprehensive and in-depth analysis of the general conditions and major items in Chinas cross-border fund flows during the period from 2001 to 2010, in terms of the balance of payments, the cross-border receipts and payments, and the settlement and sales of foreign exchange.

The Report states that since implementation of the reform and opening-up policy, China has seen rapid development of its foreign-related economy. Economic contacts have increased and the size of the cross-border fund flows has multiplied. The sizable net inflows of cross-border funds are basically commensurate with the development of the real economy. Although there have been frequent occurrences of small inflows of illegal hot money, centralized and large-scale fund inflows of hot moneythrough legitimate financial institutions have not been found. The Report estimates the size of Chinas hot moneyflows. During the past 10 years, the trade surplus, the net inflow of direct investment, the return on overseas investment, overseas listings of domestic enterprises, and other legitimate foreign-related economic activities in compliance with the regulations basically accounted for the countrys increase in foreign exchange reserves. So far, the sustained net inflows of cross-border funds are deemed to be the result of the countrys rapid and steady economic growth. Arbitrage conducted by institutions and individuals featuring conversion of assets into the home currency and liabilities into the foreign currencies has, in part, increased the volatility of cross-border fund flows.

The Report states that the orientation toward a basic equilibrium in the balance of payments is explicitly one of the major goals of economic and social development during the 12th Five-Year Plan according to the Proposal of the CPC Central Committee on Formulating the 12th Five-Year Plan for National Economic and Social Development. The country will promote a basic equilibrium in the balance of payments by speeding up economic restructuring, expanding domestic demand (particularly consumer demand), reducing the surplus in the balance of payments, as well as broadening the channels for fund outflows. The country will concentrate on the scientific development of economy and society as well as on acceleration of the transformation of the economic growth model in order to achieve that aim.

The Report states that maintaining an equilibrium and the steady development of the macro-economy, perfecting macro-economic control measures, and improving the financial market system are of fundamental importance to avert the impacts of cross-border capital flows. Chinas capital controls have played a vital role in combating the global financial crisis as well as in maintaining the stability of the foreign-related economy and finance. With the deepening of the open economy, there have been increasing challenges to the monitoring of cross-border fund flows. During recent years, active efforts have been made by the foreign exchange authorities to establish a framework to balance foreign exchange administration, to moderately tighten the policies on foreign exchange collection and settlement and external debt management, to struggle against the inflow of illegal funds, and to broaden the channels for fund outflows. The foreign exchange authorities will continue to keep a close eye on cross-border fund flows, strengthen supervision of the regulatory compliance of cross-border fund flows, broaden the channels for the outflow of foreign exchange funds, diversify instruments to avoid exchange-rate risks, improve plans to guard against the risks, and take active steps to prevent and defuse the risks caused by cross-border fund flows.

The group for analysis of the balance of payments of the SAFE will issue a Report on the Monitoring of Chinas Cross-border Fund Flows on a yearly basis. To facilitate public understanding of Chinas circumstances regarding cross-border fund flows, the SAFE will, based on monthly release of data on aggregate cross-border receipts and payments and foreign exchange settlement and sales by banks on behalf of their clients, make public the time-series data categorized based on the transaction items about the aforesaid operations during the period from 2001 to 2010, and will publicize data on detailed items on a monthly basis as of February 2011.