The year 2019 marks the 70th anniversary of the founding of the People's Republic of China. Over the past seven decades, China has gone through fundamental changes of historic significance after trials and tribulations. Foreign exchange authorities, uniting around the Communist Party of China and the central government, have efficiently allocated and harnessed foreign exchange resources, making great contributions to China's economic growth and national development at different periods. Since the reform and opening-up, foreign exchange authorities have followed the paths of reform towards a socialist market economy, remained committed to the basic national strategy of opening-up, and effectively coped with the impact of all previous global financial crises while promoting trade and investment liberalization and facilitation. Since the 18th CPC National Congress, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping at its core, foreign exchange authorities have been committed to serving the new open economic system and the Belt and Road Initiative. As foreign exchange administration has continued to pursue the opening-up policy and the market-oriented reform of RMB exchange rate has constantly made progress, foreign exchange authorities have managed to withstand the intensive risk shocks from cross-border capital flows, effectively ensuring China's economic and financial security in the complex and challenging environment. As a result, foreign exchange administration systems and mechanisms, which are aligned with the new pattern of comprehensive opening-up in the new era and modernization of national governance systems and capabilities, have witnessed constant improvement in practice.

A highly centralized foreign exchange administration system that was grounded in national realities provided a strong support for economic recovery and growth (1949-1978)

After three years of economic recovery since the founding of the People's Republic of China, China started socialist construction in 1953 under the comprehensive planned economic system. Due to strong demands for foreign exchange in economic activities, foreign exchange that was already scarce was in a serious shortage. To support economic recovery and growth in such political and economic environments, China adopted a highly-centralized foreign exchange administration system, which played a positive role in safeguarding the balance of foreign exchange receipts and payments, maintaining stability of foreign exchange rates, and serving the nation’s foreign policies and socialist construction.

Centralized administration and unified operations of foreign exchange were performed in this phase. Foreign exchange administration was the shared responsibility of the Ministry of Foreign Economic Relations and Trade, the Ministry of Finance, and the People's Bank of China, with their roles clearly defined, and foreign exchange operation was the sole responsibility of the Bank of China. Foreign exchange equilibrium and uniform allocation across China were ensured by the National Planned Economic Committee under the guideline of "centralizing receipts and payments, determining payments based on receipts, realizing basic equilibrium and retaining a certain balance". All foreign exchange receipts shall be sold to the government, and foreign exchange was allocated and granted in line with the state plan in case of need. Moreover, the balance of payments (BOP) policy featuring "determining payments based on receipts and determining inflow based on outflow” was adopted to ensure the equilibrium of foreign exchange receipts and payments in accordance with mandatory plans and administrative approaches.

Almost no external debt was registered in this period. Following the guideline of "independent growth complemented by foreign assistance" to shore up economic growth, China made petty government loans from the Soviet Union only in the early days of the New China and during the First Five-year Plan period to support fundamental industrial and agricultural development. China paid off both the principal and interest in 1964, ahead of schedule. For a long time that followed, China made no borrowings and forbade FDI. As international relations changed in the 1960s and 1970s, China began turning to the West for foreign investment, chiefly in the forms of export credit and foreign deposits. Overall, however, China leveraged a limited amount of foreign funds in this period.

RMB exchange rates stayed stable in this phase. Along with the country’s economic recovery and financial integration, the uniform RMB exchange rate was launched in 1950. Announced by the People's Bank of China, the uniform exchange rate was chiefly used as an instrument for planning and accounting. As domestic prices were gradually stabilized after 1953 and the fixed foreign exchange rate regime was adopted in Western countries, the RMB exchange rate against pound was basically fixed at 6.893:1. After the Bretton Woods System collapsed in 1973, Western countries began adopting a floating exchange rate regime successively. In line with the floatation of exchange rates in Western currencies, RMB exchange rates were adjusted to the weighted averages against a basket of other major currencies to remain stable.

With the establishment of a dedicated foreign exchange authority, a foreign exchange administration model which integrated planned administration and market-based adjustment took shape (1979-1993)

In December 1978, the Third Plenary Session of the 11th CPC Central Committee decided to introduce the reform and opening-up policy, shifting the focus of the Party and the central government to economic development, which signaled the kick-off of the foreign exchange administration system reform. Ratified by the State Council, the State Administration of Foreign Exchange (SAFE) was officially established on March 13, 1979. After several rounds of adjustments, the existing foreign exchange administration system came into being.

The foreign exchange retention system was put in place during this period. To further support foreign-related economic growth, the State Council made it known in August 1979 that, while ensuring centralized administration, consistency and equilibrium, and focused efforts, the foreign exchange retention system would be adopted for trading and non-trading activities, allowing local governments, sectors and enterprises which generated foreign exchange to access a proportional foreign exchange quota, so as to support the exports of materials and technologies necessary for production and business expansion. By linking foreign exchange utilization and earning, the retention system provided a strong boost to the momentum of local governments and enterprises to generate foreign exchange, with trade volume multiplying and turning the deficit in foreign exchange receipts and payments into a surplus. But this system also had its downside, leaving foreign exchange quota in excess or in short supply. Beijing and Shanghai conducted foreign exchange swaps in 1980, allowing enterprises to engage in paid transfers of the retained foreign exchange quota based on government pricing. The first foreign exchange swap center was established in Shenzhen in 1985. As of the end of 1993, there were a total of 108 foreign exchange swap centers across China, which allocated 80% of foreign exchange and formed a dual exchange rate system featuring the co-existence of adjusted foreign exchange rates and official foreign exchange rates.

Foreign exchange authorities stepped up FDI attraction in this period. In the initial stage of the reform and opening-up, given the fund shortage for domestic construction and introduction of advanced foreign technology, foreign exchange authorities introduced the "loose control on foreign exchange receipts and strict control on foreign exchange payments" policy in response to government policies, vigorously supporting enterprises to utilize foreign investments and rationally use overseas loans. In 1983, three types of foreign-funded enterprises were allowed to open foreign exchange deposit accounts, freely withdraw and remit out foreign exchange, and price some of their products and services in foreign currency terms in China. After 1986, to address the imbalances between foreign exchange receipts and payments, Sino-foreign joint ventures were allowed to swap foreign exchange within a certain scope, and foreign-funded enterprises to reinvest with RMB profits reaped and enjoy benefits related with foreign exchange investments. Afterwards, foreign exchange authorities and other industrial competent authorities introduced a series of policies and regulations on foreign investment to improve the investment environment in China, increase China's attractiveness to foreign capital and ensure healthy development of foreign investments.

The foreign exchange reserves operation and management system took initial shape. When the New China was just founded, it took planned and administrative approaches to balance foreign exchange receipts and payments. In the early stage of reform and opening-up, due to the rapidly-growing demand for foreign exchange along with fast growth of China's foreign-related economy, foreign exchange was in a serious shortage, even with negative foreign exchange reserves in particular years. To ensure the equilibrium of BOP and tighten foreign exchange reserves management, China began building a foreign exchange reserves operation and management system in the 1980s. At that time, China's foreign exchange reserves included state foreign exchange balance and foreign exchange balance of the Bank of China, but after the Bank of China was restructured into a commercial bank, its foreign exchange balance was no longer included in state foreign exchange reserves from 1993 onward.

As the market became increasingly important in allocating foreign exchange resources, the foreign exchange administration system that fits the socialist market economy kept improving (1994-2012)

In November 1993, the Third Plenary Session of the 14th CPC National Congress adopted the Decisions of the CPC Central Committee on Issues Related to the Building of a Socialist Market Economic System, a framework document for the new round of reform and opening-up. It outlined the fundamental framework of a socialist market economic system, proposed to speed up reform and opening-up as well as socialist modernization, and required "reforming the foreign exchange administration system, building a market-based and managed floating exchange rate system, and a unified and standardized foreign exchange market, so as to gradually make the yuan convertible". In this period, with continued reform and development, China preliminarily established a foreign exchange administration system framework that was fit for the socialist market economy.

Innovative foreign exchange administration concepts and approaches were explored. Distinctive practices were adopted by foreign exchange authorities at different stages. In 1993, the foreign exchange administration system reform was kick-started in an all-around manner, with the management mindset of “loose control on foreign exchange receipts and strict control on foreign exchange payments” gradually shifted. In 2001, China accessed to the WTO. In order to adapt to the open economy of a large country, "equilibrium-oriented foreign exchange administration" that is aimed at finding a BOP equilibrium was adopted. In 2009, foreign exchange authorities further proposed "five shifts" in the philosophy and approach of foreign exchange administration, i. e., shifts from focusing on approval to monitoring and analysis, from ex-ante regulation to ex-post management, from behavioral management to participant management, from "assuming guilty until proven innocent" to "assuming innocent until proven guilty", and from a "positive list" to a "negative list". Therefore, foreign exchange authorities became more capable to serve the real economy.

The RMB exchange rate formation mechanism was reformed. To adapt to the transition from planned economy to market economy, the official RMB exchange rate and the swap exchange rate were integrated in 1994 into a single and managed floating exchange rate system based on market supply and demand. In 2005, a market-based and managed floating exchange rate regime that is adjusted against a basket of currencies was adopted, indicating RMB exchange rates were no longer pegged solely to the US dollar. In 1994, in response to the RMB exchange rate formation mechanism reform, the foreign exchange retention and payment system was abolished, the bank-based foreign exchange settlement and sales system was established, and a nationwide uniform interbank foreign exchange market was created. In 1998, the foreign exchange swapping business was abolished. By the turn of the new century, with the advancement of the RMB exchange rate formation mechanism reform, the mandatory foreign exchange settlement and sales system came to its end.

The RMB convertibility increased. At the end of 1996, China accepted the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund, and announced full RMB current account convertibility and officially removed the remaining restrictions on frequent international payments and transfers. For trade in goods, verification transaction by transaction was replaced by aggregate verification, dynamic monitoring and classified management; for trade in services, approval was further simplified. In 2007, the annual facilitation quota of the individual settlement and sales of foreign exchange was raised from USD 20,000 to USD 50,000 to satisfy residents' needs for foreign exchange for overseas trips and studies. For capital account, foreign exchange administration for FDI and ODI was improved, and the external debt administration system and the qualified institutional investor system were established, in a bid to constantly meet investment and financing needs of domestic and overseas investors.

The adverse impact from cross-border capital flows was effectively prevented. During the 1997 Asian financial crisis, while adhering to current account convertibility, foreign exchange authorities intensified authenticity verification and tightened capital account management, thus ensuring orderly foreign exchange receipts and payments and strengthening market confidence. China's commitment of not devaluing the yuan helped avoid competitive currency depreciation in Asia and safeguard the stable economic and financial environment in the region, which was widely acclaimed by the international community. In the wake of the 2008 global financial crisis, major developed economies adopted the QE monetary policy, producing a huge impact on China's foreign exchange situations. By closely tracking the changes, foreign exchange authorities tightened monitoring, early warning and authenticity verification of cross-border capital flows, stabilizing the RMB exchange rates at rational and balanced levels, and effectively averting shocks from external risks.

Foreign exchange reserve operations and management were refined. Since the advent of the 21st century, China has no longer been short of foreign exchange and instead, it has come first in the world by foreign exchange reserves since 2006. Facing the sharp fluctuations in global financial markets, China has adopted a three-level foreign exchange reserve management system that involves the State Council, the People's Bank of China and the SAFE, in a bid to refine the mid and long-term strategies, prudentially optimize currency and asset structures, and ensure the security, liquidity and value preservation and appreciation of reserve assets. In addition, foreign exchange reserves have been used for diversified purposes, such as supporting the state-owned commercial bank reform through Central Huijin Investment Ltd. in 2003. The SAFE Co-Financing was created in 2011, laying a foundation for establishing equity investment institutions like the Silk Road Fund, and serving the Belt and Road Initiative as well as international production capacity cooperation.

With great efforts spent on the coordination and balance of facilitation and risk prevention, a cross-border capital flow management framework that fits opening-up at a higher level has been built and refined (2013-present)

The key to the economic system reform is to coordinate the relations between government and market, giving the market a decisive role in asset allocation while giving better play to the role of the government, the Third Plenary Session of the 18th CPC National Congress clarified in November 2013. The 19th CPC National Congress announced Xi Jinping thought on socialism with Chinese characteristics for a new era, signaling socialism with Chinese characteristics has entered a new era. While following its work guideline of achieving progress while maintaining stability, foreign exchange authorities have been committed to coordinating and balancing the efforts of trade and investment liberalization and facilitation and of guarding against risks arising from cross-border capital flows. Adapting ourselves to opening-up in an open environment, we have refined the integrated management framework of "macro-prudence + micro-regulation", and proactively coped with the severe shocks to foreign exchange markets, thus effectively safeguarding China's economic and financial security.

Capital account liberalization has been steadily advanced. Foreign exchange authorities have coordinated transactions and exchanges considering the stage of economic development, financial market developments and financial stability requirements, driving the liberalization of inconvertible accounts and strengthening facilitation to convertible accounts. For direct investment, foreign exchange authorities have dramatically simplified foreign exchange administration for FDI and tightened classified management for ODI, making direct investment basically convertible. With a focus on financial market liberalization, foreign exchange authorities have enabled cross-border securities transaction connectivity, refined the qualified institutional investor system, and fueled the opening of interbank bonds markets and domestic commodity futures markets, expanding the channels for cross-border securities investments. Moreover, foreign exchange authorities have built a macro-prudential management framework for full-scale cross-border financing, diversifying financing channels for market players and reducing their financing costs.

Trade facilitation has been constantly enhanced. While adhering to the principle of current account convertibility, foreign exchange authorities have endeavored to safeguard true and authentic international payments and transfers under the current account in line with the law. We have introduced a series of facilitation initiatives to support trade in goods, trade in services, insurance institution, foreign currency banknotes and individual foreign exchange businesses, and to boost applications of blockchain technology in foreign exchange administration. While pressing ahead with the "delegation, regulation and optimized service" reform, we have been committed to improving the SAFE's Internet Plus Government Services initiative to optimize the business environment. We also have supported new trading formats such as cross-border e-commerce, market purchasing trade, and integrated foreign trade services. We have been active in serving regional opening, innovation and special regional construction, and helped with piloting of foreign exchange administration reform in relevant regions. We have vigorously supported trade and investment activities along the Belt and Road, updating annually the Overview of National Foreign Exchange Administration Policy under the Belt and Road Initiative.

Heavy shocks to foreign exchange markets have been warded off. Since 2015, under the combined impacts of domestic and foreign factors, China's foreign exchange markets have experienced several rounds of negative spiral featuring "capital outflows, reduction of foreign exchange reserves and RMB depreciation". Facing these tough challenges, foreign exchange authorities followed the arrangements of the CPC Central Committee and the State Council, and promptly developed and implemented a package of measures such as increasing RMB exchange rate elasticity, using a selection of macro-prudential management instruments, and increasing market expectation guidance, thus stabilizing China's foreign exchange markets and safeguarding its economic and financial security. Since 2018, as the US-China trade tension has escalated and external environments become increasingly complex and volatile, foreign exchange authorities, led by the CPC Central Committee, have synthesized the learnings from coping with past external shocks and risks and taken proactive steps, ultimately stabilizing China's foreign exchange markets.

The macro-prudential management framework for cross-border capital flows has initially taken shape. To forestall systematic financial risks arising from large-scale, unstable cross-border capital flows, foreign exchange authorities, guided by the market and the principle of ensuring current account convertibility, have regulated trading behaviors of foreign exchange market players against business cycles. We have built and refined the monitoring, early warning and response mechanisms for cross-border capital flows and more effectively used policy instruments such as countercyclical factors of median prices, provisions of risk and macro-prudential framework for full-scale cross-border financing. The Measures for Assessing Micro-compliance and Prudential Operations of Foreign Exchange Business at Banks were introduced to increase the communication efficiency of foreign exchange administration policies.

The policy system for micro regulation of the foreign exchange market has been improving. Such micro regulation is aimed at ensuring a stable and reliable policy framework about convertibility, maintaining the orderly competition in foreign exchange markets, safeguarding legal rights and interests of consumers and forestalling operational risks to market players that are associated with foreign exchange. In addition, the policy objectives can be realized through three pillars, i. e., authenticity verification, behavioral regulation and micro-prudential regulation. To this end, foreign exchange authorities, while ensuring usual trade and investment activities, have sustained stability, consistency and predictability of cross-cyclical micro-regulation in foreign exchange markets. We have cracked down upon cross-border arbitrage, underground banks, illegal foreign-exchange margins and other behaviors violating foreign exchange laws and regulations, maintaining a good order in foreign exchange markets.

China is still and will remain in the window of opportunity for a long period to come. Foreign exchange authorities will unite more closely around the CPC Central Committee with Comrade Xi Jinping at the core, and guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. We will keep firmly in mind the need to maintain political integrity, think in big-picture terms, follow the leadership core, and keep in alignment. We should strengthen our confidence in the path, theory, system, and culture of socialism with Chinese characteristics. We should resolutely uphold General Secretary Xi Jinping’s core position on the Party Central Committee and in the Party as a whole, and resolutely uphold the Party Central Committee’s authority and its centralized, unified leadership. Following the decisions and arrangements of the CPC Central Committee and the State Council, we will become down-to-earth, break new grounds and make innovations to expand high-level opening-up, guard against risks arising from cross-border capital flows, and serve comprehensive opening-up, in a bid to make greater contributions to the building of a moderately prosperous society in all aspects and the achievement of great victory of socialism with Chinese characteristics in the new era.

(The original text is available in the 19th issue of China Finance in 2019)