[Wang Yungui]: Good afternoon, ladies and gentlemen and friends from the press. We welcome you to this press conference of the State Administration of Foreign Exchange (SAFE). Given that foreign exchange administration reforms for trade in goods and trade in services have attracted wide concern, the SAFE has worked hard to implement reforms in recent years, and is holding this special press conference to release relevant information. The press conference is entitled “Practicing the 'Five Changes' to Promote Trade Facilitation.” Du Peng, director of SAFE Current Account Management Department, will host the conference. Let us welcome him to introduce the foreign exchange administration reforms under the current account. [14:58]
[Du Peng]: Good afternoon, friends from the press! [15:00]
[Du Peng]: In May the General Office of the State Council issued its “Opinions on Supporting Stable Growth of Foreign Trade” (Guo Ban Fa [2014] No. 19), proposing many measures to support the stable growth of foreign trade, including optimizing the structure of foreign trade and further improving the foreign trade environment. Among these measures, many are relevant to foreign exchange administration and are our work priorities for the next phase of the reform. I am delighted to have this opportunity to introduce to you the role of foreign exchange administration under the current account, especially under trade in goods and trade in services, in driving the reforms, promoting facilitation, guarding against risks, and serving the stable growth of foreign trade. The current account is closely related to our life. It primarily consists of two parts, the first is trade in goods, or imports and exports, and the second is trade in services, including cross-border travel, study abroad, transportation, and intellectual property rights. The current account, together with the capital account, comprises the major parts of a country's balance of payments. Receipts and payments of foreign exchange under the current account in China are characterized by the following three major features: [15:01]
[Du Peng]: First, large size and rapid growth. Since it joined the WTO in 2001, China has witnessed rapid growth in terms of the size of the receipts and payments of foreign exchange under the current account. Increasing at an annual average of 56 percent, China's receipts and payments of foreign exchange under the current account amounted to USD 5.14 trillion in 2013. [15:01]
[Du Peng]: Second, receipts and payments of foreign exchange under the current account constitute a large proportion of the overall receipts and payments of foreign exchange. They have accounted for an annual average of 70 percent since 2001, representing a major part of China’s overall receipts and payments of foreign exchange. [15:01]
[Du Peng]: Third, the surplus under the current account as a percentage of GDP has gradually decreased to within the internationally recognized rational range. This percentage has been lower than 3 percent for three consecutive years, and at 2 percent in 2013 and a further decrease to 0.3 percent in the first quarter of this year. [15:02]
[Du Peng]: First, the principles and objectives of foreign exchange administration under the current account [15:06]
[Du Peng]: Foreign exchange administration under the current account has undergone rigid regulation and gradual liberalization to realize RMB current-account convertibility. At the end of 1996 China announced that it would accept the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund to commit to RMB current-account convertibility and would remove restrictions on international payments provided that such transactions are true and legitimate. The "authenticity verification" has since become a fundamental principle of foreign exchange administration under the current account for the purpose of preventing funds without true transactions from flowing in or out through the current account during our current special phase when the current account is fully convertible while the capital account is partially restricted so as to ensure the overall effectiveness of foreign exchange administration. [15:06]
[Du Peng]: In addition to guarding against the risks of abnormal capital flows, administration of the current account aims to promote trade facilitation for the healthy development of the real economy. However, because risk prevention and facilitation promotion are contradictory, finding the best balance between the two to deliver good performance in services and administration is a significant challenge. After years of exploration and innovation, the reform of foreign exchange administration under trade in goods and the reform of foreign exchange administration under trade in services that were launched by the SAFE in August 2012 and September 2013 respectively are the best examples of the SAFE's efforts. The two reforms have effectively promoted trade facilitation via integrating regulations, simplifying documents, and removing prior approvals, while enhancing risk prevention via constructing systems that stress post monitoring and risk regulation and improving cross-departmental information sharing and joint regulation, thus effectively combining risk prevention and facilitation promotion. These reforms are the highlights of the SAFE's exploration and practice of the "five changes." [15:07]
[Du Peng]: Second, the foreign exchange administration reform under the current account under the guidance of the "five changes." [15:08]
[Du Peng]: The "five changes" are the overall guiding principles for the reform of foreign exchange administration. Under the fully open economic framework, in 2009 the foreign exchange authorities reviewed foreign exchange administration in China and proposed the "five changes" to deepen foreign exchange administration reform for a new phase: first, by changing approvals to monitoring and analysis; second, by changing prior regulation to post administration; third, by changing behavioral management to market-player management; fourth, by changing the presumption of guilt to the presumption of innocence, and; fifth, by changing the "positive list" to a "negative list." [15:08]
[Du Peng]: Yi Gang, director of the SAFE, has mentioned and elaborated on the "five changes" on many occasions. Under the guidance of the "five changes," the foreign exchange authorities have remarkably raised awareness of market services and the and the concept of costs, dramatically changed the methods of foreign exchange administration, and put the construction of a mechanism for the system of foreign exchange administration onto a fast track. What changes have occurred to the foreign exchange administration model under the current account since the announcement of the "five changes"? To put it vividly, the traditional airport security check-in model has been changed to a novel traffic camera like model. Specifically, prior regulation, front-office approval, and behavioral regulation have been changed to post regulation, back-office monitoring, and market-player regulation. This new model is like a traffic camera that allows compliant cars to pass through but keeps track of violating cars. With front-office approval changed to back-office monitoring, the visible hand of foreign exchange administration has become an invisible hand, allowing the foreign exchange authorities to timely lock up the few violating companies without interrupting the operations of the absolute majority of companies, thus improving the relevance and effectiveness of administration and reducing the costs of regulation. [15:08]
[Du Peng]: First, changing approvals to monitoring and analysis [15:08]
[Du Peng]: Premier Li Keqiang has said the government departments at all levels should, with an output capacity of great courage, further streamline administration and delegate more power to lower-level governments. Thus far, the SAFE has removed 65 administrative approval items for foreign exchange administration, accounting for more than 73 percent of the total approval items, and it has declared nearly 700 regulatory documents abolished or null and void. In terms of current- account administration, since 2009 in terms of the foreign exchange reforms under trade in goods and trade in services, the SAFE has canceled 82 percent of the administrative licenses and integrated and rescinded 80 percent of the regulations, and has nullified 123 and 52 regulations respectively, constituting a total of 175. On this basis, the SAFE has established a clear and concise regulatory system primarily comprised of guidance provisions and operation procedures. The two reforms have benefited the absolute majority of market players and have effectively promoted trade facilitation. For example, after implementation of the reform of trade in goods, the average time to receive and pay foreign exchange for each transaction has been shortened by 70 percent and 85 percent respectively, thus substantially improving processing efficiency; the cost for traveling between the SAFE and the bank has also been slashed significantly and the costs for human resources have dropped by one-third. Data from company investigations and estimates of the number of companies show that foreign trade companies in China saved nearly RMB 4.8 billion in labor costs and transportation fees during the one year after implementation of the reform. Since implementation of the reform of foreign exchange under trade in services, verification documents are no longer been required by banks for the absolute majority of receipts and payments of foreign exchange under trade in services and the time that banks spend on processing has been shortened from more than 20 minutes to 5 minutes, thus helping companies save RMB 30 50 in transportation fees for each transaction. To support the reform of foreign exchange under trade in services, the tax authorities no longer require that taxpayers submit tax certificates. They have been replaced by filing for the record for outbound payments of foreign exchange, thus significantly shortening the payment cycle. [15:09]
[Du Peng]: How do the foreign exchange authorities manage and safeguard our bottom line against risks since the administrative approvals have been cancelled? We depend chiefly on monitoring and analysis as well as on follow-up management. Currently, we primarily analyze and compare information, such as capital flows and goods flows of companies and individuals, using an advanced IT-based management system and we share information with Customs, the tax authorities, and the commercial authorities to comprehensively, promptly, and accurately monitor data about the transaction players. As monitoring is conducted in the back office, ordinary companies and individuals are not aware of the foreign exchange administration, but once a company or an individual violates the regulations, the SAFE will instantly take note and begin processes such as follow-up verifications, classifications, and punishments, which is the underlying meaning of “traffic camera like” administration. To guarantee the effects of the regulations, we have made great efforts to improve our hardware, making sure each key business is supported by the system, such as the monitoring system for foreign exchange under trade in goods, the monitoring system for foreign exchange under trade in services, and the monitoring system for individual settlement and sales of foreign exchange. We also are working to improve our software. The system regularly and automatically screens abnormal market players based on the early warning indicators and threshold values that we have set, and we conduct further screening manually to combine the brain with the computer. An off-site macro-medium-micro monitoring management system, or a system that identifies capital flows and overall trends based on the macro situation, understands regional and industrial capital distribution structures based on the medium level, and monitors and screens violating companies at the micro level, has been initially set up, thus organically combining three levels of efforts. For example, in 2013 we determined from our system that the capital flows and goods flows of Company A, which was engaged in "entrept trade" that attracted wide concern among the foreign exchange authorities at the time, were seriously mismatched, and the frequency of its receipts and payments of foreign exchange as well as its counterparties were questionable. Using the system to conduct a correlation analysis, we found that Company B was running in the same way and its registered address and contacts were the same as those of Company A. We immediately cooperated with government departments to conduct an on-site investigation and confirmed that the company was defrauding government subsidies through entrept trade. [15:10]
[Du Peng]: The above case indicates that monitoring and analysis have an obvious effect. Since the end of May of this year, the SAFE has shifted its focus of regulation from monitoring 540,000 companies on the list to monitoring 80,000 90,000 key companies, conducted strict supervision of 3,584 Class-B companies and 623 Class-C companies, wrote off 3,793 shell companies, transferred more than 300 companies to the foreign exchange inspection authorities, and punished 189 violating companies across China, thus promoting trade facilitation while effectively improving our capability to guard against risks. [15:11]
[Du Peng]: Second, changing prior regulation to post administration. [15:12]
[Du Peng]: Since the cancellation of the prior approvals, we have established and continued to innovate in providing effective approaches for post administration. [15:12]
[Du Peng]: First, developing a series of post administration systems during the reform, such as a comprehensive analysis system and an on-site verification system. The on-site verification system was created to require companies that are singled out by the system for abnormalities to explain such abnormalities through interviews with company heads and on-site verifications. The classified administration system was designed to classify companies based on their compliance with the laws and to provide adequate receipt and payment conveniences for Class-A companies, and to carry out strict supervision of Class-B and Class-C companies in terms of document verification, business processing, and methods of settlement so as to build a positive incentive mechanism that "offers conveniences to companies that abide by the laws, to identify suspects, and to punish violators," thus making discredited companies or individuals pay the price and smooth the way for trustworthy companies. [15:12]
[Du Peng]: Second, continuing to promote innovations in approaches to administration. For example, given that some companies created fictitious trade backgrounds and raised enormous funds overseas during the first half of 2013, we designed a risk notification system, that is, the SAFE sends letters to companies whose goods flows and capital flows are seriously mismatched, requiring them to make an explanation, and the SAFE will duly downgrade those companies that fail to explain or cannot make a convincing explanation within 10 days upon receipt of such a letter. [15:12]
[Du Peng]: Post regulation proves to be more cost effective. [15:12]
[Du Peng]: Third, changing behavioral management to market-player management. [15:15]
[Du Peng]: Over the long term, foreign exchange transactions by Chinese companies have been simple and small-sized, so behavioral regulation featuring transaction-by-transaction verifications were efficient. For example, the traditional verification system for receipts and payments of foreign exchange under trade in goods required companies to record the capital flows arising from receipts of foreign exchange for each export transaction and to record the capital flows arising from payments of foreign exchange for each import transaction. If the two capital flows matched each other, the company could smoothly undergo the various procedures; otherwise it could not receive or pay foreign exchange or file for the export tax refund as was normally the case. But as China's foreign trade surged in size in recent years, the number of companies on the list reached 540,000 and the types of trade in goods increased to 96. In the three years between 2008 and 2010, just before implementation of the pilot reform of trade in goods, there were nearly 137 million transactions involving verification of receipts and payments of foreign exchange from imports and exports, with an annual average of more than 45 million transactions. [15:15]
[Du Peng]: Under such circumstances, transaction-by-transaction behavioral regulation was not efficient and economic agent based management was needed. As a result, the current-account reform abandons the traditional model of "one-to-one matching and transaction-by-transaction verification" and conducts aggregate assessments of company information using comprehensive data acquired by the system and information involving the company profile, trade in goods and trade in services, advances from customers and prepayments, deferred income and payments, foreign exchange loans, import bill advances by overseas institutions, and the opening of letters of commitment. The reform provides comprehensive searches for company information, including receipts and payments under the capital account and the filing status and classification, thus avoiding drawing a conclusion from incomplete data. This shift enhances regulatory efficiency, reduces administrative interruptions for the absolute majority of market players, and creates a loose market environment for fair competition for trustworthy and law-abiding companies. [15:15]
[Du Peng]: Fourth, changing from "presuming guilty" to "presuming innocent" and from a "positive list" to a "negative list." [15:19]
[Du Peng]: The traditional current-account system was aimed to guard against violating companies, so companies had to submit considerable evidence for prior verification and were required to undergo complex procedures. To have their business processed, each company had to go through a rigorous document verification, which could easily delay the business processing. Since the reform, document verification has been streamlined and the verification process has been simplified, offering a great convenience for companies and individuals. In particular, as the traffic camera like management is implemented, 99 percent of companies throughout the country can hardly perceive of the existence of foreign exchange administration. In addition, the letter of commitment system is based on a presumption of innocence, that is, the foreign exchange authorities will liberalize management of those companies that sign the accountability document and commit to abiding by the laws. [15:19]
[Du Peng]: Before the reform, current-account management stressed a "positive list," or "companies or individuals were not allowed to do anything that was not explicitly stipulated by law," because we traditionally introduced legislation by positively listing the items and attempted to list all the authenticity verification evidence for various ways of trading and various business formats. For example, before the current- account reform, verification evidence was listed one by one for more than 100 foreign exchange items under trade in services. But since the kickoff of the reform, except for transactions of trade in services that are explicitly prohibited by national laws and regulations, companies engaged in trade in services are only required to provide core verification elements, including contracts and invoices, for the banks to verify the authenticity in line with the three operational principles, thus basically meeting the requirements of "doing things not explicitly prohibited by the law." But, in general, the "negative list" management approach is still being explored and still needs time before it can be widely applied. [15:27]
[Du Peng]: To sum up, in response to the proposal of the Third Plenum of the Eighteenth CPC Central Committee that "efforts should be made to further streamline administration and delegate more power to lower-level governments," and to "give the market a decisive role in allocating resources," the foreign exchange authorities have actively made innovations in the concepts and methods of administration to align them with the direction of the socialist market economic reform and to meet the overall requirements of the central government and the State Council in terms of streamlining administration and delegating more power to lower-level governments and to accelerate the transformation of government functions. The foreign exchange authorities are working to improve risk regulation regarding receipts and payments of foreign exchange so as to enhance regulatory efficiency while serving the real economy and vigorously promoting trade facilitation, thereby integrating administration and services. [15:27]
[Du Peng]: Third, initial ideas on implementing the “Opinions on Supporting Stable Growth of Foreign Trade” to advance the reform of foreign exchange administration under the current account. [15:27]
[Du Peng]: The foreign exchange administration reforms under trade in goods and trade in services are the highlights of the SAFE's exploration and implementation of the "five changes." To achieve these changes, we still face with huge challenges. For example, some grassroots foreign exchange administration staff have not fully adapted to the new administration approach and their ability to focus on key tasks and priority regulations amid the heavy regulation loads and the short supply of regulatory employees needs improving. We also need to further enhance our professional capabilities to promote trade facilitation and to enhance risk prevention. [15:28]
[Du Peng]: As is known, in May the General Office of the State Council released the “Opinions on Supporting Stable Growth of Foreign Trade,” proposing requirements to sustain stable growth in trade in goods, supporting the development of trade in services, enhancing trade facilitation, improving financing services, and supporting the development of foreign trade companies. This also requires us to further deepen the reform of foreign exchange administration under the current account including trade in goods and trade in services. Our measures are as follows: [15:28]
[Du Peng]: First, vigorously promoting trade and investment facilitation. Develop systems and mechanisms of foreign exchange administration that can be copied and promoted to respond to China's new round of reform and opening up and to support the development of the Shanghai Free Trade Zone and the special economic zones; to provide more foreign exchange policy support for centralized fund management at MNCs to underpin the development of MNCs; to drive the upgrading of exports and the balanced development of trade, to promote the development of cross-border e-commerce, and based on the existing 22 pilot companies in 5 regions, to study how to expand the pilot regions and the scope of foreign exchange payments for cross-border e-commerce of third-party payment institutions; to provide foreign exchange policy facilitation for individuals to conduct foreign trade and policy support for the development of border trade to underpin the development of small and micro businesses. [15:28]
[Du Peng]: Second, safeguarding our bottom line against risks and enhancing regulation of cross-border capital flows. We will focus our attention on the impact that international economic and financial trends, especially the progress and methods of the QE tapering, will have on China's foreign exchange and will develop our response plans. We will enhance monitoring of key companies and special monitoring of key businesses, such as banks' on- and off-balance-sheet financing products, to guard against the rise of trade structuring; focus on system upgrading, improving system application capability, and exploring pragmatic and effective approaches, such as building a "regulator system" to assign fixed personnel to regulate and serve a batch of companies and a "sample bank system" to monitor and analyze companies with a large proportion of foreign exchange business; and, driven by classified management, further enhance the level of cross-departmental regulation. [15:28]
[Du Peng]: Third, deepening understanding and accelerating talent building to comprehensively transform management in accordance with the requirements of the "five changes." Training and instruction will be provided to foreign exchange administration staff through policy training, case communications, and professional instruction, so that all staff in the foreign exchange system will be transformed into those who are good at business management, monitoring and verification, and situation analysis by improving their comprehensive quality and professional skills, and to meet the transformation requirements as soon as possible. [15:29]
[Du Peng]: Thank you very much! Next I would like to answer your questions on the reform of foreign exchange administration under the current account, the "five changes" on foreign exchange administration, and other relevant issues. [15:29]
[Journalist from Economic Information Daily] Just now, you mentioned guarding against risks. We all know that at the end of last year the SAFE introduced the “Circular on Improving Foreign Exchange Administration for Bank Trade Financing.” I am wondering about the effect of this Circular and about any new measures to crack down on false trade financing. Thank you. [16:11]
[Du Peng]: You just asked two questions, the first is how to guard against risks after the implementation of the reforms. As I have just now said, there are two priorities in current-account management, one is promoting trade facilitation and the other is guarding against risks. These are somewhat contradictory with one another. If great efforts are made to provide trade facilitation, management may be weakened, whereas if management is enhanced with the introduction of many regulations, companies will face inconveniences. This is a good question, but it is very tricky. The foreign exchange authorities have long been struggling with this issue, which will be effectively addressed during the reform of foreign exchange administration under trade in goods and trade in services: documents have been significantly simplified, many administrative licenses have been canceled, and, as I have just now said, the two reforms will be followed by two major and four minor reforms. In processing their foreign exchange, companies no longer have to come to the SAFE for verification, thus substantially promoting trade facilitation. [16:12]
[Du Peng]: Regarding the regulations, an advanced comprehensive back-office monitoring system has been built. Currently, under the current account, including trade in goods, trade in services, and individual accounts, a sound and efficient monitoring system has been put in place. Scientific and rational threshold values have been established in the system, and basic information about companies can be obtained through the system. Under trade in goods, for example, companies need to first register, entering their relevant information into the system, so we can understand the industry in which they are engaged, their main businesses, the registered capital, and their business scope, and we must have a well-defined objective in mind when making analyses and comparisons. Second, a comprehensive regulatory system has been built within the system. Problems and issues at the macro, medium, and micro levels can be analyzed via the system. At the macro level, we can understand the overall situation regarding the receipts and payments of foreign exchange since the system can monitor any changes in receipts and payments. We can also promptly understand abnormalities in any region or any industry through medium-level analysis. Based on these problems, we can carry out a deep analysis and obtain some micro information, such as information about the company or the individual. [16:12]
[Du Peng]: Third, enhancing the classified management of companies through monitoring. Classified management of companies follows a specific standard. For example, under trade in goods, the standard is whether the flow of capital and the flow of goods match one another. If not, the company will be required to make explanation, or we will conduct an on-site verification to identify any violating behavior by the company. Under trade in services, since there is no issue of matching between capital flows and goods flows, we need to rely on the system to judge and identify whether a company's capital inflows and outflows match its overall size and type of business, and whether its capital inflows and outflows increase substantially and frequently. With these approaches, we can efficiently verify companies and carry out classified management on such a basis. [16:12]
[Du Peng]: Fourth, verification through banks and financial institutions. Since implementation of the reform of foreign exchange administration under trade in goods, documents have been substantially streamlined, and banks are now required to verify the authenticity and legitimacy of companies' transactions following the three principles of knowing your customers, knowing your business, and due diligence investigations. The above three approaches have been very helpful in guarding against risks. The following is some data that we should reveal: we took special actions last May to verify companies' structuring of trade after adoption of post regulation and during the month categorized 614 companies as Class-B companies and 3 companies as Class-C companies. This suggests that violating behavior by companies can be promptly identified using the above approaches. [16:13]
[Du Peng]: We have long been concerned about such false trade and structuring of trade. We know that currently there are two markets, two exchange rates, and two interest rates. If the above circumstances are not changed, companies will continue financing from arbitrage through financial control. Given this, last year our foreign exchange inspection department conducted inspections of entrept trade, identifying within a short time and verifying 1,082 copies of false documents, which were worth USD 2.5 billion. In turn, in December 2013 the SAFE released a circular on improving foreign exchange administration associated with banks' trade financing business. As required by the circular, banks should verify the authenticity and legitimacy of trade financing, especially long-term trade financing that is longer than 90 days, while actively supporting the development of the real economy. Banks should conduct authenticity verifications based on the characteristics and abnormal transactions of a company, regardless of whether or not the deposit for trade financing has been paid in full. We have also enhanced monitoring of abnormal companies, especially those whose long-term trade financing has increased abnormally and has typical features of arbitrage. [16:13]
[Du Peng]: In the meanwhile, we have intensified punishment of violating banks and companies. By the end of 2013 after the release of the circular, we issued more than 1,500 copies of risk notifications to companies engaged in trade financing, requiring them to make an explanation and guiding them to carry out a verification. Among these, during the month 251 companies were categorized as Class-B and Class C- companies, including 193 Class-B companies and 58 Class-C companies. After release of the circular, especially in the first quarter of this year, the balance of receipts and payments from entrept trade was down 26 percent year on year and 29 percent month on month, the signing value of usance L/Cs of more than 90 days was down 3 percent month on month, and the growth of the balance was down 11 percentage points, indicating significant results have been achieved. We will continue to pay close attention to this issue during the next step. As long as there are interest- rate spreads and exchange-rate spreads between China and other countries, there will be violating companies. Given this, we will step up efforts to verify companies, continue to require banks to enhance verification in accordance with the three principles, intensify punishment of violating companies, and have the creditability of discredited companies lowered in various departments through information sharing and mutual recognition in enforcement to curb the growth of false trade. [16:13]
[Journalist from Economic Daily]: As you have just now said, China's surplus under the current account as a percentage of GDP has dropped year by year, and China's trade in goods surplus fluctuated sharply this year. Do you think China's surplus under the current account will continue to drop or will it remain stable in the near future? Thank you! [16:19]
[Du Peng]: You have noted that China's surplus under the current account as a percentage of GDP in recent years has dropped year by year. Of investment, consumption, and exports, the three drivers behind China's economic growth, net exports contributed most to the economy, but in recent years they have fallen significantly as a percentage of China's GDP. The statistics we have collected show that China's surplus under the current account as a percentage of GDP has fallen within the internationally recognized rational range, or 4 percent, since 2010. The ratio further dropped from 2 percent in 2013 to 0.3 percent in the first quarter of this year, which is a product of our efforts in recent years to expand domestic demand, restructure, reduce the surplus, and promote a balance. Overall, falling within the rational range will have a positive influence on the balance of payments in China. [16:20]
[Du Peng]: We believe that there will be a certain surplus in the receipts and payments of the current account for the foreseeable future, but its ratio to GDP will remain at a relatively low and rational level, and the trade in goods surplus will remain the major source of the surplus under the current account. Currently, the advanced countries that are our traditional export markets will see a stronger overall economic recovery than they did in 2013, so demand for our exports will rise. In the meanwhile, as the Chinese economy sustains stable growth while the prices of some bulk stocks in the global market remain low and lack sufficient momentum for growth, China's import growth will also remain stable. [16:20]
[Du Peng]: But it is likely that trade in services will see a widened deficit in the future, especially travel and study abroad that account for a large proportion of the balance of trade in services, because Chinese residents' consumption, including travel and study abroad, is in a rising phase, which leads to large outbound payments. Overall, as the deficit and surplus accounts evolve and influence one another, the surplus under the current account will be volatile at a low level. In the next step, the foreign exchange authorities will continue to pay close attention to economic and financial developments both at home and abroad, especially the influence of the U.S. QE tapering on China's foreign exchange receipts and payments. To respond to these influences, we will follow the principle of balanced management, study timely solutions, and develop relevant response plans, lest there are some abnormal in or out capital flows during a certain period. Thank you! [16:21]
[Journalist from China National Radio]: Since the current account in China is currently convertible whereas the capital account is not, some companies use funds under the capital account to conduct arbitrage through the current account. How will the reform of foreign exchange administration under the current account that enhances trade facilitation curb arbitrage and can it guard against risks in this respect? [16:21]
[Du Peng]: Good question. I have given this lady some answers to this in the first question, and here I would like to repeat them briefly: we will guard against these risks through first, the system; second, classified management; third, bank monitoring; fourth, punishment of violating companies with abnormal capital inflows. Thank you. [16:22]
[Journalist from People’s Daily Online] It has been emphasized by the central government that management by a negative list shall become the direction of management and reform, and you have also mentioned that among the “five changes” in foreign exchange administration there is also one “change” that focuses on replacing the “positive list” with a “negative list.” I am wondering how management by a negative list will be implemented during the reform of the current account. [16:37]
[Du Peng]: I have just now also mentioned management by a negative list, which means that any transaction can be carried out unless it is explicitly forbidden by law. Preliminary exploration has been carried out to reform foreign exchange administration under the current account. We know that China started to accept the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund in 1996. Since then, relevant foreign-related receipt and payment activities under the current account have not been restricted provided that such activities have authentic and legitimate transactional backgrounds. This means, in principle, we do not have negative-list management under the current account, or, in other words, any business under the current account can be conducted. However, we have also conducted exploration and made efforts in this regard. We have mainly implemented negative-list management measures based on the classified management under trade in goods, which are targeted at special entities. [16:37]
[Du Peng]: Currently we do not have specific document verification and approval requirements for Class-A enterprises engaged in trade in goods, and we only impose standards on the main principles that banks follow and the core vouchers that they require for authenticity verification as well as on certain key procedures. For Class-B and Class-C enterprises under trade in goods, we set limits on the scope of receipts and payments of their trade in goods in the form of a negative list. For example, it is stipulated that Class-B and Class-C enterprises are not allowed to make deferred payments of longer than 90 days nor are they allowed to sign export contracts that contain articles for receipt of foreign exchange of longer than 90 days, and Class-C enterprises are not allowed to handle receipts and payments of foreign exchange under entrept trade. In addition, we have set specific rules for personal businesses. All of this is what we have done to replace positive-list management with negative-list management. [16:38]
[Du Peng]: With the development of the foreign exchange situation and changes in business in the future, it is not unlikely that we may impose restrictions on other activities. Except for such restrictions, all business under the current account can be conducted. This is part of our work in the process of transferring from positive-list management to negative-list management. [16:38]
[Journalist from China Daily]: You have just now mentioned issues about cross-border payments, cross-border e-commerce, and third-party payments. Could you please say something more about this? [16:54]
[Du Peng]: Cross-border e-commerce has received vigorous support from the government. From the perspective of management functions, the foreign exchange authorities mainly perform monitoring and management of receipts and payments as well as monitoring and management of exchange activities of enterprises. Therefore, the foreign exchange authorities chiefly support the development of cross-border e-commerce in terms of fund receipts and payments. Presently, we are conducting a third-party pilot payment program for cross-border e-payment commerce in 22 companies of five regions throughout the country, i.e., fund transfers of cross-border e-commerce organizations and individuals via third-party payments. These 22 companies are located in Beijing, Shanghai, Shenzhen, Chongqing, and Hangzhou. We are very cautious about this program as this is still an emerging business.
[Du Peng]: Enterprises should first obtain a license from the People’s Bank of China for third-party payments if they wish to launch this business. Then they are required to set up an external electronic network based payment system. We will conduct an inspection of the system and allow them to launch this business if they pass the inspection. Based on the current situation, the volume of third-party payments is not very big because we have set some limits on the amount and scope of goods under trade in services, and we only allow micro-payments of less than USD 10,000 or the equivalent under trade in goods. [16:55]
[Du Peng]: Currently we are summarizing the experience of the pilot program to identify related problems. For the next step, we may further expand the pilot-program efforts in regions, business varieties, and funds, which are all under exploration now. We may introduce some specific measures this year, for example, expanding the scope of enterprises and regions included in the program. Thank you for your question! [16:56]
[Wang Yungui]: Thank you for your support and attention to foreign exchange administration. This is the end of the press conference today. Thank you! [16:56]
(The original text was released at people.com.cn)
