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A recap meeting on carrying out the CPC's mass line campaign was recently held by the State Administration of Foreign Exchange (SAFE) to study the spirit of the speech delivered by General Secretary Xi Jinping at the CPC meeting for summarizing the first stage of the mass line campaign and for making plans for the second stage, and to sum up the SAFE's efforts in carrying out the campaign and to make plans for implementation of the "two programs and one plan," i.e., The Rectification and Implementation Program for Carrying Out the CPC's Mass Line Campaign by the Party Leadership Group of the NDRC, The Special Rectification Program for Carrying Out the CPC's Mass Line Campaign by the Party Leadership Group of the NDRC, and The Plan for Developing Systems for Carrying Out the CPC's Mass Line Campaign by the Party Leadership Group of the NDRC. Yi Gang, secretary and administrator of the Party Leadership Group and group leader of the Educational Practice Group, chaired the meeting and, on behalf of the SAFE Party Leadership Group, summed up the SAFE's efforts in implementing the campaign. The twenty-ninth Supervisory Team of the CPC's mass line campaign attended the meeting. Zhang Geng, head of the Supervisory Team, confirmed the achievements made by the SAFE in implementing the campaign and offered guidance on carrying out the spirit of Xi's speech and on further rectifying and carrying out the campaign. Also present were deputy administrators, heads of the discipline team, chief economists, chief accountants, and CPC members and officials, as well as heads of public institutions directly under the SAFE. It was agreed by the participants that Xi's profound speech is thought-provoking, relevant, and instructive, and is of significance for guiding the SAFE to sum up the mass line campaign. The meeting pointed out that under the guidance of the twenty-ninth Supervisory Team, CPC organizations at all levels, and CPC members of the SAFE, while focusing on building a progressive and clean government, have worked pragmatically for the people, have studied the CPC's mass line theories, have examined and corrected undesirable work styles, including formalism, bureaucracy, hedonism, and extravagance, have carried out rigorous criticisms and self-criticisms, and have worked hard to ensure verification and implementation, thus realizing obvious improvements in terms of awareness, reform and practice, and system building. As a result, CPC cadres and members have secured their ideals and beliefs, and their thinking and understanding have improved significantly. To be specific, the SAFE carried out “five shifts” in the concept and methodology of foreign exchange administration, straightened out the laws and regulations and streamlined administration, delegated power to lower levels more rigorously, deepened the results of the reform of the institutional mechanisms, and worked very hard to clean up undesirable work styles so as to achieve practical results. The meeting stressed that CPC organizations at all levels and CPC members of the SAFE must comply with the requirements of the twenty-ninth Supervisory Team of the CPC's mass line campaign to learn and implement the spirit of General Secretary Xi’s speech and align their thoughts and actions with the plans of the central government so as to perform their tasks well. Specifically, efforts should be made to improve the political life of the CPC by drawing on the valuable experiences of the first stage of the campaign, to clean up undesirable work styles as a long-term task, and to advance implementation of the "two programs and one plan" by focusing on verification and implementation and strengthening systemic construction, and especially rigorously combating formalism, bureaucracy, hedonism, and extravagance. As required by the meeting, all branches and sub-branches of the SAFE should participate in the second stage of the campaign under the leadership of the local branches of the People’s Bank of China. Drawing on the experiences of the first stage of the campaign, they are expected to improve their across-the-board capabilities to perform their tasks, enhance the cleaning up of undesirable work styles in the spirit of reform and innovation, and gather strength from the results of correcting undesirable work styles for deepening the reforms in an all-round way and with the aim of driving foreign exchange administration to a new high. 2014-01-24/en/2014/0124/1104.html
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The National Foreign Exchange Administration Work Conference that was recently held in Beijing conveyed the spirit of the 18th CPC National Congress, the Second and Third Plenary Sessions of the 18th CPC Central Committee, and the Central Economic Work Conference. It summed up foreign exchange administration work in 2013 in an all-round way, deeply analyzed the current status of the economy, finance, and the BOP, and made plans for foreign exchange administration in 2014. Yi Gang, deputy governor of the People's Bank of China (PBC) and director of the State Administration of Foreign Exchange (SAFE), delivered the work report, and deputy directors, discipline team heads, chief economists, chief accountants, and heads of the SAFE branches (foreign exchange administration departments) and divisions of the SAFE attended the meeting. It was pointed out at the meeting that under the guidance of the PBC party committee, foreign exchange administration departments have accelerated changes in the concept and approach to foreign exchange administration, vigorously streamlining administration and delegating power to lower levels, adhering to administration by law, and continuously deepened reform and innovations of the foreign exchange administration system in 2013 consistent with the unified arrangements of the CPC Central Committee and the State Council, with the aim of promoting a BOP equilibrium. They also improved monitoring and management of cross-border capital flows and enhanced the response to risks. They organized and carried out the CPC's mass line campaign, improved their practical work styles, and further strengthened their capability to serve the real economy, thus completing the tasks defined at the beginning of the year and delivering good performance. It was stressed at the meeting that acquiring a deep understanding of the strategic plans of the CPC Central Committee and the State Council is a foundation for delivering good performance in foreign exchange administration in 2014. The foreign exchange administration departments should follow the uniform arrangements of the Third Plenary Session of the 18th CPC Central Committee and the Central Economic Work Conference as well as the guidance of the "five shifts" in the concept and approach to foreign exchange administration to make progress while maintaining stability and carrying out reforms and innovations. With a focus on promoting a BOP equilibrium, they should accelerate reform and liberalization of foreign exchange administration, promote facilitation of trade and investment, speed up advancing the convertibility of the RMB capital account, and make use of the market's decisive role in allocating foreign exchange resources. They should also improve the operation and management of foreign exchange reserves, guard against shocks from two-way capital flows across borders, and maintain a bottom line of avoiding systemic and regional financial risks, so as to drive the economy and the society in the direction of continued and healthy development. Plans for work priorities in foreign exchange administration in 2014 were also made at the meeting: First, accelerating advancement of reforms and innovations in foreign exchange administration by giving the market a decisive role. Second, accelerating improvements in the construction of a regulatory system for cross-border capital flows based on the requirement of promoting a BOP equilibrium. Third, speeding up the functional transformation of foreign exchange administration in accordance with the requirements of making better use of the role of government. Fourth, accelerating the pace of improving the operations and management system for large-scale foreign exchange reserves so as to maintain and to increase the value of the foreign exchange reserves. Fifth, accelerating advances in CPC construction, government integrity, the building of official teams, and internal management for the purpose of building a long-term mechanism for the CPC's mass line campaign. 2014-01-10/en/2014/0110/1100.html
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To further deepen the reform of foreign exchange administration under the capital account, advance the streamlining of administration and delegating power to lower levels, and promote the facilitation of trade and investment, the State Administration of Foreign Exchange (SAFE) recently released the “Circular of the SAFE on Further Improving and Adjusting Policies on Foreign Exchange Administration under the Capital Account” (HuiFa [2014] No. 2, hereafter referred to as the Circular) The highlights of the Circular are as follows: First, streamlining foreign exchange administration under the foreign debts of financial leasing companies. Overseas financial leasing of these companies should be implemented after registration with the local foreign exchange bureaus. These companies can open a special account directly at a local bank for overseas lending to retain the rental income from overseas financial leasing, with the foreign exchange income under the account settled directly with the bank. The companies will not be subject to the existing limits on overseas lending for domestic companies. Second, simplifying foreign exchange administration under non-performing assets (NPA) transferred to foreign investors. Approvals by the SAFE for foreign exchange receipts, payments, and conversions involved in the disposal of NPAs by financial asset management companies will be cancelled. The registration procedures for transferring domestic NPAs to foreign investors will be simplified. Verification by the SAFE for settling the foreign exchange in the disposal of the income from NPAs by financial asset management companies will be canceled. Verification by the SAFE of purchases and payments of foreign exchange using returns from the disposal of NPAs by foreign investors will also be canceled. Guarantee items involved in the overseas disposal of NPAs will be clarified. Third, further liberalizing upfront management of expenses for outbound direct investments. Chinese institutions can carry out the relevant business after registering with a local foreign exchange bureau if the upfront expenses are less than USD 3 million and less than 15 percent of the total investments by the Chinese side. Fourth, further liberalizing management of overseas lending by Chinese companies. Qualification requirements for overseas lenders will be lowered to allow Chinese companies to lend money to associated overseas companies that have either direct or indirect shareholding relationships with them. The 2-year limits on the validity of overseas lending limits will be removed and domestic companies can apply to a local foreign exchange bureau to extend the validity of the overseas lending limits based on their business needs. Domestic companies will also be allowed to apply to a local foreign exchange bureau to write off the registration, if they are really unable, for objective reasons, to recover the principal and interest from overseas lending. Fifth, streamlining verification of the profit remittances by Chinese institutions. The requirement that, in principle, the amount of profits disposed of in the current year should not exceed, in principle, the combined dividend payable and the unappropriated profits of foreign shareholders during the latest issue of the financial audit report will be removed. Sixth, improving management of the “Business License for Foreign Exchange Involved in the Securities Business for Securities Companies.” The requirement that licenses be renewed every three years will be canceled and securities companies will be required to report to the SAFE their foreign exchange business every year for filing. The Circular will come into force as of February 10, 2014. 2014-01-24/en/2014/0124/1103.html
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A briefing on policies for inspections of trade financing by banks was recently held by the State Administration of Foreign Exchange. The heads of the relevant business in thirty-six Chinese and foreign banks attended the meeting. The meeting provided information about the special campaign to combat false intermediary trade (the special campaign) launched in 2013. By the end of November 2013, 1,076 documents had been inspected for false intermediary trade, involving 112 enterprises and a total amount in excess of USD2.5 billion. Forty-one enterprises were subject to the procedures for administrative penalties, with the twelve enterprises that were suspected of committing crimes transferred to the public security organs. The meeting, providing information on the recently adopted foreign exchange administration policies for trade financing, urged banks to carry out the policies earnestly, to actively support the authentic trade financing demands of the real economy, and to prevent the defrauding of bank loans by enterprises with fictitious trading activities. The SAFE will intensify monitoring of the authenticity and compliance of trade financing by banks, evaluate the due diligence of bank transactions, and when necessary carry out on-site verifications or inspections. Emphasis was placed on the relaxation in the banks’ procedures for the handling of foreign exchange business, as was identified in the “special campaign.” It was stressed at the meeting that banks should follow the correct operating philosophies, bring into full play the role of finance in serving the real economy, and promote the healthy development of trade financing. Banks should follow the prudential operating principle of “understanding your client,” strengthen verification of the authenticity and compliance of trade financing, improve the mechanism for risk prevention and internal control, and control funding risks. Banks should provide trade financing services to serve the needs of the real economy, strictly examine the authenticity of trading activities to prevent operations of fictitious funds, and guard against speculation and arbitrage of foreign exchange funds. Banks should implement the foreign exchange administration policies in an earnest manner and should prevent non-compliance in implementation of the relevant rules or in the provision of assistance to evade the foreign exchange administration regulations. It was stressed at the meeting that the SAFE will actively carry out the spirit of the Third Plenary Session of the Eighteenth Party Congress, vigorously promote facilitation of trade and investment, and intensify efforts to support and facilitate operations of law-abiding and compliant enterprises. Efforts will be made to enhance analysis and monitoring of cross-border fund flows, to crack down severely on illegal and non-compliant foreign exchange transactions in accordance with the law, to guard against the risks of cross-border flows of abnormal foreign exchange funds, and to ensure the security of the foreign-related economy and finance. 2013-12-16/en/2013/1216/1096.html
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A meeting was recently held by the State Administration of Foreign Exchange (SAFE) on broadening theoretical studies among the central teams of the party leadership group. The meeting was convened to convey the spirit of the Third Plenum of the 18th CPC Central Commission for Discipline Inspection (CCDI) and to formulate a plan for implementation of the relevant measures. Yi Gang, administrator and secretary of the Party Leadership Group of the SAFE, chaired the meeting. It was agreed by the participants that Xi Jinping, general secretary of the CPC Central Committee, had provided in his speech an overview of current circumstances regarding the construction of a clean government and the fight against corruption, offering in-depth insights into the significant theoretical and practical issues related to the building of a clean government and putting forward the general ideas and major assignments for combating corruption and for upholding integrity both in the present and in the foreseeable future. This is of far-reaching significance to the spirit of reform in CPC self-discipline by Party members, in the rigorous enforcement of Party discipline, and in the advancement of the building of a clean government and an anti-corruption campaign . The meeting will require that all participants carry out the spirit of Xi's speech as a current key political task. Officials and staff members under the administration of the SAFE are required to acquire a deep understanding of Xi's speech, align both thoughts and actions with the strategic planning of the CPC Central Committee, and implement the relevant measures to meet the needs of the foreign exchange administration. They are required to make innovations in the current mechanisms for combating corruption, implement relevant measures including institutional guarantees, strictly enforce CPC political, organizational, and financial discipline, earnestly carry out the eight-point guidelines issued by the CPC leadership, and persistently rectify undesirable work styles, including formalism, bureaucratism, hedonism, and extravagance. The use of power by officials will be placed under stricter scrutiny, with intensified efforts to combat corruption. A system of punishment and prevention of wrongdoings will be introduced to promote the building of a system and a mechanism to prevent the risks of corruption. Efforts will be intensified to combat corruption and to uphold integrity in a more scientific manner, thus making more significant contributions to the building of a clean government and to the implementation of the anti-corruption campaign. It was decided at the meeting that in the near future the SAFE will hold a working conference on construction of Party conduct and construction of honest and clean government, with the aim of conveying and studying the theory of the Third Plenum of the 18th CPC Central Commission for Discipline Inspection, and formulating a plan for implementation of the relevant measures. 2014-01-17/en/2014/0117/1101.html
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On January 2, 2014, governor of the People's Bank of China (PBC), Zhou Xiaochuan, accompanied by Hu Xiaolian, deputy governor of the PBC, and Yi Gang, deputy governor of the PBC and administrator of the State Administration of Foreign Exchange (SAFE), paid a visit to the SAFE Central Foreign Exchange Business Center to call on officials devoted to administering foreign exchange reserves. On behalf of the Chinese Communist Party Committee of the Zhou Xiaochuan expressed his concern and care for all officials devoted to administering foreign exchange reserves and confirmed their achievements in 2013. As Zhou put it, in the complex global economic and financial situations in 2013, officials administering the foreign exchange reserves revealed an enormous sense of mission and accountability by carrying out the Chinese Communist Party’s mass line in educational practice and they conscientiously performed their responsibilities, thus ensuring the security, liquidity, and preservation and increases in the value of foreign exchange reserves assets, and making administration of foreign exchange reserves more regulated, professional, and globalized. According to Zhou, over the past several years, SAFE officials have been very low-key, down-to-earth, dedicated, and hardworking in terms of administering foreign exchange reserves and they have steadily strengthened their administration and management skills, have made new achievements in innovative uses of foreign exchange reserves, and have continuously improved risk controls and internal operations, thus ensuring the efficient management and use of foreign exchange reserves and making significant contributions to accomplishing China’s reform and development objectives as well as its China's economic and financial security. As Zhou emphasized, because the year 2014 marks the first year to implement the spirit of the Third Plenary Session of the 18th CPC Central Committee and to deepen the reforms in an all-round way, officials devoted to administration of foreign exchange reserves must rigorously implement the spirit of the 18th National Congress of the CPC, the Third Plenary Session of the 18th CPC Central Committee, and the Central Economic Work Conference, further strengthening their sense of mission and accountability, enhancing their confidence and cohesion, and working assiduously, despite the difficulties, to push ahead with the administration of foreign exchange reserves and to make foreign exchange reserves better serve the real economy and the reforms, thereby contributing to fulfillment of the Chinese dream of revitalizing the nation. 2014-01-02/en/2014/0102/1099.html
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For the purpose of further improving the transparency of statistical information on the balance of payments (BOP), enhancing the capacity to service the real economy by BOP statistics and facilitating utilization of the BOP statistics by the general public, the State Administration of Foreign Exchange (SAFE) will, beginning in January 2014, in addition to the current practice of releasing USD-denominated statistics, release RMB-denominated BOP-related statistics from 2013. Such statistics include statistics on the annual exchange settlements and sales by banks, foreign-related exchange receipts and payments on behalf of clients, the balance of international payments, and direct investments of financial institutions as well as external debts. With regard to the sequence of the release of the statements, the RMB-denominated statistical statements will precede the USD-denominated statistical statements. The released RMB-denominated BOP-related statistics are directly converted from the USD-denominated statistics based on the exchange rate of the USD against the RMB. In order to help the general public use the relevant time-series statistics, the SAFE will, at the same time, release the historical RMB-denominated statistics for 2010–2013. With regard to the statistics prior to 2010, users can select the historical time frame needed and make the conversion in line with the aforementioned method. 2014-01-24/en/2014/0124/1102.html
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To further improve the functions of China's RMB foreign exchange derivatives market, to help market players, such as businesses and banks, to manage exchange-rate risks, to promote the development of China's foreign exchange market, and to give the market a decisive role in allocating foreign exchange resources, the State Administration of Foreign Exchange (SAFE) recently released the Circular on Adjusting the Management of RMB Foreign Exchange Derivatives (HuiFa [2013] No. 46, hereafter referred to as the Circular). The highlights of the Circular are as follows: 1. Simplifying management of access to foreign exchange swaps and currency swaps to support the banks in better serving the real economy via streamlining administration and delegating power to lower levels. 2. Increasing the patterns in the exchange of the principal in currency swaps to help businesses manage the risks of foreign currency debts. 3. Supporting banks to improve options pricing and risk controls so as to enable banks to accurately identify, measure, and manage exchange-rate risks. The Circular will come into force on January 1, 2014. 2013-12-19/en/2013/1219/1097.html
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Hu Kaihong: Good morning, ladies and gentlemen. Welcome to the press conference of the State Council Information Office. Mr. Guan Tao, director of the BOP Department of the State Administration of Foreign Exchange (SAFE), will unveil the data on foreign exchange receipts and payments for 2014 and take your questions. Now let us welcome our old friend Mr. Guan. January 22, 2015 09:39:37 Guan Tao: Good morning, ladies and gentlemen. Welcome to today's press conference. I’m very glad to meetthe friends from the press again. If I remember correctly, it has been a year since the SAFE's first press conference on the data on foreign exchange receipts and payments on January 24 last year. Please allow me to extend my heartfelt thanks to you for your vigorous support to the SAFE’s press release effortsduring the past year. Now I am going to unveil the data on the foreign exchange receipts and payments for 2014 and take your questions on behalf of the SAFE. The year 2014 is the first year of China’s efforts to deepen its reforms in an all-round way. During the year, the international environmentremainedcomplex and volatile, the world economy was still under deep adjustments, the monetary policies of themajor economies were differentiated to some extent, and the international financial market experiencedsharper fluctuations; while the domestic economyran within a reasonable range, economic restructuring witnessed positive changes, and the reform and opening up made significant progress. The SAFE actively adaptedto the new normal of economic development, and energetically promoted administrationstreamlining and power delegation, reform and innovation. Overall, China's cross-border capital flows in 2014 were basically balanced amid oscillations. January 22, 2015 09:51:36 Guan Tao: Banks settled foreign exchange of RMB 11.64 trillion (USD 1.90 trillion) and sold foreign exchange of RMB 10.87 trillion (USD 1.77 trillion) in 2014, with a surplus of RMB 768.6 billion (USD 125.8billion). Meanwhile, according to the data on foreign-related receipts and payments through banks, banks registered cumulative foreign-related income of RMB 20.39 trillion (USD 3.32 trillion) and made external payments of RMB 20.14 trillion (USD 3.28 trillion) on behalf of clients, with a surplus of RMB 247.9 billion (USD 40.5 billion) China’s foreign exchange receipts and payments in 2014 show the following characteristics: First, the situation of massive cross-border capital inflows was significantly improved. In the first half of the year, after adjustments for foreign exchange rate factors (the same below), the foreign exchange settled by banks was up 1% year on year and the foreign exchange sold by banks was up 10% year on year, representing andecrease in the surplus of 53%. Meanwhile, the foreign-related income received via banks was up 12% year on year, and external payments made through banks were up 18% year on year, representing a decrease in the surplus of 79%. Second, market players were less willing to settle foreign exchange but more motivated to purchase it. As a measure of the willingness of companies and individuals to settle foreign exchange, foreign exchange settlement through banks as a percentage offoreign-related foreign exchange income (i.e., foreign exchange settlement rate) declinedfrom 77% in Q1 to 68% in Q2 and Q3 and then rebounded slightly to 71% in Q4, representing an annual average of 71%, which was 1 percentage point lower than that in the previous year; foreign exchange sales through banks as a percentage offoreign-related foreign exchange payments (i.e., foreign exchange sales rate) that measures the motivation to buy foreign exchange registered a quarter-on-quarter increase from 61% in Q1 to 73% in Q4 with a year-round average of 69%, and the foreign exchange sales rate gained 6 percentage points over last year. January 22, 2015 09:54:49 Guan Tao: Third, the bidirectional fluctuations of cross-border capital became more evident. The surplus in foreign exchange settled and sold by banks stood at USD 159.2 billion in Q1, dropped to USD 29 billion in Q2, and became a deficit of USD 16 billion in Q3, which further decreased to USD 46.5 billion in Q4. According to the data of foreign-related receipts and payments through banks, there was a surplus of USD45.5 billion and USD40.7 billionin Q1 and Q2 but a deficit of USD20 billion and USD25.7 billion in Q3 and Q4. Fourth, the forward settlement and sales of foreign exchange of banks were more balanced. In 2014, the surplus of contracts for forward settlement and sales of foreign exchange reached USD56.1 billion, 58%lower than the year earlier. Specifically, in the first two months, the monthly surplus of contracts for forward settlement and sales of foreign exchange averaged USD24 billion, a continuation of the high level since the end of 2013. But after March, market expectations for the RMB exchange rate were differentiated and contracts for forward settlement and sales of foreign exchange recorded surpluses and deficits alternatively, and the monthly average surplus from March to December amounted to USD800 million. Fifth, the foreign exchange market realized autonomous balance. In 2014, the balance of spot and forward foreign exchange settled and sold by banks (or the balance of foreign exchange settled and sold by banks and the balance of the combined undue net forward foreign exchangesettled), an indicator of the supply and demand for foreign exchange in the retail market, amounted to a surplus of USD 85.6 billion, down by 74% from 2013. Specifically, thebalance registered a surplus of USD 164.9 billion in the Q1 and of USD 2.5 billion in Q2, and then a deficit of USD 30.5 and USD 51.3 billion in Q3 and Q4 respectively. These are the major statistics I want to disclose regarding the foreign exchange receipts and payments in2014. You can also find the relevant data released on the SAFE's official website. Now I would like to take questions you might have. January 22, 2015 09:59:05 Hu Kaihong: Thank you, Mr. Guan. Now please raise your questions and remember to tell us where you are from before asking your questions. January 22, 2015 10:02:49 Journalist from CCTV: My question is: Since the second half of 2014, China’s import and export trade has maintained a large surplus but the foreign exchangesettled and sold by banks has posted a persistent deficit starting from August, what are the primary reasons? Does it imply the outflow of “hot money” and what is the future trend? Another question is about European debts as the European Central Bank (ECB) will decide today if a massive stimulus package will be introduced to purchase European debts. Some European countries cut their interest rates recently, which was called the “European QE” by the market. What impact will thishave on the cross-border capital flows in China and on the RMB exchange rate? Thank you. January 22, 2015 10:03:10 Guan Tao: Thank you for your questions. Your questions cover two aspects: first, the foreign exchange situation of last year and its future development; second, the influences of the European QE on China. We have noticed that the trade surplus has been widening since the second quarter of last year, while the balance of foreign exchange settled and sold via banks has been on a decline and even swung from surplus to deficit. Thisquestion was raised repeatedly at the last two press conferences. We call this the deviation of trade surplus from the supply-demand relationship of foreign exchange. In the second half of last year, the surplus of import-export trade added up to USD277.8 billion, an increase of 66% over the first half. But meanwhile, spot and forward settlement and sales of foreign exchange witnessed a persistent deficit, with the accumulated balance transferring from a surplus of USD167.4 billion in H1 to a deficit of USD81.8 billion. From the perspective of balance of payments, the surplusunder the currentaccount reached USD72.2 billion in Q3, a significant rise from the quarterly average of USD40.2 billion in H1. However, cross-border capital flows turned from the quarterly average net inflow of USD38.9 billion in H1 to net outflow of USD9 billion in Q3.In the meantime, cross-border capital inflows changed from a quarterly average increase of USD74.3 billion in H1 to a decrease of USD400 million. It is preliminarily estimated the balance of payments in Q4 may resume the trend of “currentaccount is in surplus and capitalaccount is in deficit”. January 22, 2015 10:06:36 Guan Tao: China’s cross-border capital flows became more volatile for three main reasons: first, the floating band of the RMB against the USD was further widened in March 2014, the bidirectional fluctuations in foreign exchange gradually enjoyed popular support, and the expectations for the RMB exchange rate were differentiated, and as a result, enterprises were less willing to settle but more motivated to purchase foreign exchange, and conducted financial operations such as increasing foreign exchange deposits and reducing foreign exchange loans. At the end of 2014, the ratio between domestic foreign exchange loans and domestic foreign exchange deposits dropped 26 percentage points from the start of the year, and the operation of covering short dollar positions appeared in the financial operation strategy of the market. Second, in 2014, the world economy showed signs of an imbalanced slow recovery.The Federal Reserve gradually exited its quantitative easing monetary policy and the USD exchange rate was strengthened across the board with a rise of 12% in the dollar index for the whole year. Under this circumstance, substantial international capital flowed back to the US, putting many emerging markets under the pressure of capital flight and domestic currency devaluation. China was one of the affected. Third, since China’s economic development entered a “new normal” stage, market players have paid more and more attention to Chineseeconomic operations as well as the underlying risks and problems, indicating the market mood is being fluctuating. Besides, the RMB exchange rate has been close to a balanced and reasonable level and widelyaccepted and recognized by the market, thus inspiringdomestic market players to adjust the currency structure of their assets and liabilities. January 22, 2015 10:17:25 Guan Tao: As for how to view this bidirectionalvibration in cross-border capital, there are two key points: On the one hand, it is in line with the directions of macro control and reform. First, with the advancement of the market-oriented reform in the RMB exchange rate formation mechanism, the People’s Bank of China (PBC) has gradually relaxed its normal intervention in the foreign exchange market, and the pattern of “trade surplus and capital outflow” will inevitably be more normalized. Second, banks’ foreign exchange deposits have increased but domestic foreign exchange loans have decreased, which indicates that most foreign exchange deposits have been used by banks for overseas investments. Therefore, foreign exchange is dispersedly held by the market instead of being collectively held by the PBC in the past, which is a process of “making foreign exchange held by the people”. Third, domesticenterprises are accelerating their repayment of large amounts of dollar-denominated debts taken on in the early stage, which will help lowerthe leverage rate of the whole society and reduce currency mismatch. It is an expected and orderly adjustment. On the other hand, the current adjustment is moderate and tolerable. Although China faced certain pressure of capital outflows in H2 of 2014, the basic pattern of foreign exchange supply exceeding demand and increasing foreign exchange reservesremained unchanged for the whole year. Moreover, the market was running smoothly, corporate demand for foreign exchange was basically guaranteed, the liquidity of the foreign exchange market was abundant, and there was no panic stockpiling of foreign exchange by enterprises or individuals. In November and December, the gap between foreign exchange demand and supply was narrowed from USD20-30 billion two months ago to around USD 10 billion. January 22, 2015 10:29:20 Guan Tao: Furthermore, the bilateral RMB/USD exchange rate had a slight fall, but the the RMB exchange rates against currencies of major trade partners remained strong. Last year, the RMB nominal and real effective exchange rate indexes compiled by theBank for International Settlements hit new record highs with an annual appreciation of 6.4%and 6.2% respectively, and both of them have appreciated by 40.5% and 51%, respectively since the exchange rate reform in 2005. In the future, China’s cross-border capital flows will still face many uncertainties and instabilities. But it is certain that China will maintain a surplus under the current account, especially a surplus in trade in goods; China’s economic growth will remain at a high level in the world despite the shift from high speed to medium-to-high speed, and the RMB exchange rate will remain higher than those of major currencies, which can help maintain its attractiveness to international capital, particularly medium- and long-term capital. From the uncertain aspects, market players will continue to keep an eye on domestic economic operations and the financial risks involved, and the diminishinginterest rate spreads between domestic and foreign currencies will speed up the restructuring of asset and liability currencies of market players. There are many global uncertainties as well. For example, the monetary policies of major economies will be further differentiated, the US monetary policy will be normalized, and the quantitative easing monetary policies in Europe and Japan will continue to be intensified, in addition to the price adjustment of bulk commodities, currency turmoil in emerging markets, and geopolitical disputes. Overall, China’s balance of payments will maintain the structure of “a basic currentaccount balance and bidirectional fluctuations in cross-bordercapital flows” in the near future. January 22, 2015 10:50:41 Guan Tao: Now I would like to answer your second question, the influences of the European QE on China. Since the euro zone is a major economy and the euro is a main currency in the world, its macroeconomic policies have enormous spill-over effect which we have been paying close attentionto. It now appears that the QE which might be introduced in the eurozone will exert both positive and negative influences on China. For one thing, as the US monetary policy is being normalized, the European QE can somehowease the restrictive influence of the US QE tapering. For another, the differentiation of the monetary policy trends inleading economies will affect theexchange rates between major currencies, which will aggravate the volatility of the international financial market, especially the foreign exchange market, and increase the difficultyin managing cross-border capital flows and exchange rate expectations by emerging markets. What’s more, the European QE is only one of the important external factors influencing cross-border capital flows and the RMB exchange rate of China and otherfactors shall be considered to make an integrated analysis, a holistic judgment and relevant plans. Thank you. January 22, 201511:04:25 Journalist from the Xinhua News Agency: Good morning, Mr. Guan, you mentioned just now that the monetary policies of the world’s major economies were differentiated, and would be further aggravated. We know that the US Federal Reserve exitedits quantitative easing policy last year and it is widely expected that the interest-rate rise cycle will be initiated earlier or later than the middle of this year. If the Fed initiates theinterest-rate rise cycle, what impact will it have on China’s future cross-border capital flows? How do you make the judgment? What measures shall we take? Thank you. January 22, 2015 11:12:29 Guan Tao: Thank you for your question. Relevant questions were raised three times in the four press conferences last year. Each move in macroeconomic policy of the United States, the world’s largest economy and major reserve currency issuer, will create huge spillover effect,and the Fed's introduction or tapering of the QE monetary policy has drawn wide concerns from us. Currently our judgments are as follows: first, the Fed’s exit from QE had limited impact on China’s cross-border capital flows last year. TheFed’s gradual tapering of QE in 2014 exposed many emerging economies to pressure from capital outflows and currency devaluation. In China, amid the much sharper bidirectional fluctuationsof the RMB exchange ratesince the second half of 2014, the Fed’s tapering of QE, intertwined with the appreciation of the US dollar and other factors, boostedChinese enterprises to quicken their financial adjustment and posed a certain outflow pressure on cross-border capital. However, this did not fundamentally change the general landscape of a basic equilibrium in the balance of payments and foreign exchange supply and demand and a slight increase in foreign exchange reserves in the year, and China's foreign exchange market was basicallystable, with strong exchange rates of the RMB against other currencies, despite slight adjustment in the exchange rate of the RMB against the USD. Second, the continued normalization of the Fed’s monetary policy this year will pose both challenges and opportunities to China’s cross-border capital flows. I remember answering a similar question at the press conference of last January. At that time, we pointed out that we had the confidence and ability to cope with the influence of the Fed’s QE tapering. On the one hand, China’s economy has generally maintainedsteady and rapid growth with robust external accounts, abundant foreign exchange reserves and a high tolerance for the impact on cross-border capital flows. On the other hand, the Fed’s QE exit and monetary policy normalization are based on the prospects of the US economic recovery. If the US economy is well recovered, it means China’s external demand is improved, which is conducive to export expansion. These favorable conditions still exist at present. Meanwhile, we shall also convert the pressure from normalized US monetary policy to our motivation for further reform and openingup and acceleration of the building of a new open economic system. For instance, the normalization of US monetary policy may differentiate expectationsof the RMB exchange rate, which is favorable forthereformof the market-oriented formation mechanism of the RMB exchange rate and may accelerate the restructuring of asset and liability currencies of domestic enterprises. But as a correction of the early large-scale inflows, this can promote China’s balance of payments to a basic equilibrium and help improve macrocontrol. January 22, 2015 11:14:22 Guan Tao: It was specially emphasized at theCentral Economic Work Conference in late 2014 that, in face of the new characteristics of openingup, we should more actively foster a balance between domestic and external demand, between imports and exports and between introducing foreign capital and “going global”, to gradually realize a basic equilibrium in the balance of payments, which therefore remains a current target of macro control. The normalization of US monetary policy may propel domestic enterprises to accelerate debt adjustment, which helps reduce currency mismatch and the external vulnerability of China’s economy. The key point is that China should first put its own house in order,so as to respond to the impacts from external uncertainties and instabilities. Hence, attaching equal importance toreform promotion and risk prevention remains as the priority of foreign exchangeadministration this year: first, proceed with administration streamlining and power delegation in foreign exchange administration; second, keep improving trade and investment facilitation with focus on promotingthe convertibility of the capital accounts; third, enhance the two-way monitoring and early warning of cross-border capital flows, activelybuild a macro-prudential management system for external debts and capital flows, and step up efforts to investigate and punishillegalities and violations regarding cross-border capital flows; fourth, positively cultivate the foreign exchange market to better serve the needs of the real economicdevelopment; and fifth, innovate the application of foreign exchange reserves and keep improving the operation and management of foreign exchange reserves. Thank you. January 22, 2015 11:37:36 Journalist from the Economic Daily: Market institutions recently said that the net errors in China's balance of payments have hit USD300 billion in recent years, which possibly reflects secret capital outflows. Especially in the third quarter of last year,net errors and omissions set a record of USD-63 billion. What would you say about it, Mr. Guan? Thank you. January 22, 2015 11:47:12 Guan Tao: Thank you for your question. We have noticed this too. Ever since 2009, the “net errors and omissions” in the balance of payments of China has been negative with an aggregate value of USD346.3 billion in Q3 of 2014, when the currentaccount surplus was USD72.2 billion, capitalaccount deficit USD9 billion, reserve assets USD100 million less, and net errors &omission USD-63.2 billion. I would like to answer this question in four aspects: First, statistically speaking, the size of China’s net errors and omissions is moderate and the balance of payments statistics are reliable. Givenstatistical techniques, all countries have set the netting item of “net errors and omissions” when preparing the balance of payments statement to equalize debit and credit amounts. And as the balance of payments expands, the net errors and omissions may increase, and the errors in high-frequency data are probably larger than those of low-frequency data. For example, quarterly data may be more volatile than half-year data, which is then more fluctuating than annual data. According to international practice, the balance statement is reliable provided that the size of “net errors and omissions” accounts for less than 5%, positively or negatively, of the total export-import volume of trade in goods under the balance of payments in the same period. Since the international financial crisis in 2008, China’s net errors and omissions have accounted for about 2% of the total export-import volume of trade in goods, with 5.6% in Q3 of 2014 and only 2.4% in the first three quarters. According to the balance of payments statement of Q2 of 2014 just released by the US, the currentaccount deficit reached USD103.5 billion, the capitalaccount surplus was USD10.3 billion, the reserve assets was up by USD800 million, and net errors &omissions stood at USD94 billion, taking up 9% of the total export-import volume of trade in goods in the same period, compared with 15% in Q1 of 2012. January 22, 2015 11:48:04 Guan Tao: Second, whether they were recessive or dominant capital outflows, China’s current account surplus and capital accountdeficit in Q3 of last year were “to be expected”. At present, the PBC has gradually relaxed the normal intervention in the foreign exchange market, so “trade surplus and capital outflow” are an inevitable market result, which is reflected as “currentaccount surplus and capital accountdeficit” in the balance of payments statement. However, it is in line with the direction of control and reform and is a desirable balance of payments structure. In theory, there is an analytical framework which incorporates “net errors and omissions” into the capital account. Third, we need to pay close attention to cross-border capital flows that violate the laws or regulations, but should not overanalyze the economic implications of “net errors and omissions”. For example, the net errors and omissions in Q3 of last year amounted to USD-63.2 billion. There might be two statistical reasons for it – underestimated capital export or overestimated current account surplus, so it could not be simply concluded as the reason of capital flows. Indeed, the direction of net errors and omissions is not necessarily connected with that of capital flows. Since 2009, China’s net errors and omissions have been negative, but by 2013 our country had been under the pressure of capital inflow and appreciation of the RMB except 2012 when it was under an outflow pressure. From the angle of statistical techniques, if a reasonable and stable method is adopted, the specific scale of the two possibilities can be estimated and shall also be included in the corresponding trading items under the balance of payments statement. For instance, one of thediscrepancies between the imports & exports of trade in goods in BOP statement and theCustoms’ imports & exports statistics is because the BOPstatement will record the imports & exports of smuggled goods confiscated by the Customs under the item of trade in goods. If this method is accepted, the illegal capital flows shall be registered under the related trading items. Statistics are only an objective reflection of economic activities, not a tool to manage capital flows. We should monitor and analyze the illegal cross-border capital flows, without focusing on net errors and omissions. January 22, 2015 11:58:57 Guan Tao: Fourth, as data quality is the lifeline of statistics, the quality of balance of payments statistics shall be further improved. In face ofnew conditions and problems, the SAFE will continue to improve the statistical system and methodology to reduce net errors and emissions. For example, the recently implemented external financial assets and liabilities and trade statistical systemdistinguishes the trade changes in externalinvestments and non-trade changes such as currency conversion, namely, the changes in external investments caused by trade and the changes in external assets caused by currency conversion. After they are distinguished, the data quality of foreign investment statistics can be enhanced. This system also collects the overseas consumption statistics via bank cards, which can be used to estimate the statistics of Chinese residents' overseas travelspending more accurately. Besides, in addition to continuing to collect transaction-by-transaction data through enterprise declaration, more sampling surveys and estimations will be conducted to ensure the comprehensiveness and accuracy of statistics at a lower cost and in a more reliable way. Thank you. January 22, 2015 12:14:59 Journalist from China Economic Times: Hello, Mr. Guan, you mentionedjust now that China’s cross-border capital inflows slowed down and bidirectional fluctuationsbecame more frequent in 2014. In the capital market, was there any new change to cross-border capital inflows and outflows after the Shanghai-Hong Kong Stock Connect was launched? What influences do you think will the Stock Connect have on the future cross-border capital inflows and outflows? Thank you. January 22, 2015 12:23:02 Guan Tao: Thank you for your questions. The Shanghai-Hong Kong Stock Connect was officiallylaunchedon November 17, 2014 as a major reform initiative to expand the two-way opening up of capital markets and facilitate the orderly flows of the RMB between Mainland China and Hong Kong.Since its official launch, the system has run smoothly, with theevaluation from relevant authorities meeting expectations. The balance of payments statistics show that in November and December, the northbound trading saw net inflows of capitalthat totaled USD11.4 billion, while the southbound trading saw net outflows of USD1.5 billion. After netting between northbound and southbound funds, the net inflows into the mainland stock market under the Stock Connect stood at USD9.8 billion, but only took a limited share of the overall cross-border capital flows in the same period, and also took a low proportion as compared with thefunds flowing in the same period into the stock market through a variety of legitimate channels, in terms of net capital inflows into the stock market. Therefore, even though the northbound funds were considerable and played a certain role, they were small-scale and at the initial stage. Second,China hasmade clear its intention to make the RMB convertible under the capital account at an earlier date and to expand the two-way opening up of capital markets, which represents thegeneral trend. After the markets are opened, cross-border capital fluctuations are likely to be more frequent. Given this, we shall first be more tolerant and well-prepared for capital outflows and inflows withmeasures, and second, we shall put our own house in order, which is the key for coping with the impact of cross-border capital flows after the openingup. China's steady economic growth will be beneficial to the inflows of long-term capital; if the reform is advanced successfully, some price distortions can be removed; and if a macro-prudential system and mechanism is established for the management of cross-border capital flows, we can deal with the impact from cross-border capital flows. In other words, we would better respond to the new situation of growing convertibility and further opening up of the market in the future if we are more tolerant and handle our internal affairs well. Thank you. January 22, 2015 12:24:55 Journalist from China Review News Agency in Hong Kong: Hello, Mr. Guan, I’d like to know the developments of London and Paris as emerging offshore RMB settlement centers, and their cooperative and competitive relationships with Hong Kong. Thank you. January 22, 2015 12:38:57 Guan Tao: This is a good question, but it has nothing to do with the theme of today's press conference. Thank you. January 22, 2015 12:39:37 Journalist from the Xinhua News Agency: I'm wonderingabout the monitoring of hot money in 2014. At the Davos Forum, Zhou Xiaochuan, governor of PBC, notedyesterday that hot moneywas still affecting the prices of bulkcommodities and the stock market of our country, so I want to learn about the SAFE’s monitoring and supervision in this regard in 2014. 2015-01-22 12:40:06 Guan Tao: Last year the foreign exchange administrationdepartments were closely monitored the inflows and outflows of cross-border capital based on the concept of balanced management. An overalljudgment was made on the situation of cross-border capital flows in thebeginning of the year, the monitoring focuswas adjusted in line with the changing situation in the middle of the year, and the situation of 2015 was forecasted and analyzed at the end of the year.Weproducedperiodic reports on the influences of cross-border capital flows on the stock and bulk commodity markets. Take the influences on the bulk commodity market for example. In early 2014, some domesticenterprises conducted carry trade with bulk commodities, but this arbitrage motivation faded away starting from the second quarter along with the significant intensification of bidirectional fluctuations of the RMB exchange rate and the drastic adjustments to the prices of international bulk commodities. In June in particular, risky events of trade finance took place in some places, which was a significant lesson for the market on risks. We noted that some regulators had tightened their regulatorypolicies, domestic banks had stepped up the authenticity verification of trade finance of bulkcommodities, and some overseas banks had reducedtheirChinese business for fear of possible risks, resulting in tremendous changes to the relevant financing activities in H2 of the year. Based on the trade finance data we monitored, the balance of cross-border trade finance for imports rose by USD42.8 billion in H1 but fell by USD87.7 billion in H2. This was not necessarily the financing under bulk commodities, but it mirrored a certain trend. Thank you. January 22, 2015 12:41:05 Hu Kaihong: This is the end of today's press conference. Thank you, Mr. Guan, and thank you all. January 22, 2015 12:51:37 (The original text is available at www.china.com.cn) 2015-03-06/en/2015/0306/1148.html
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The Way Forward for Reform and Opening up of Foreign Exchange Administration Yi Gang, PBC Deputy Governor and SAFE Administrator China’s economic development over the past 36 years has been miraculous. The key to this miracle is reform and opening up. Through reforms, China has built a financial system that is fit for the socialist market economy and improved the financial industry's capabilities to allocate resources and serve the real economy. Through opening up, China has further liberalized its financial industry, both to the inside and the outside, and optimized the industry's capability to allocate resources both horizontally and vertically. Reform and opening up are the two wheels that drive China's economic development. With the deepening of the reform of foreign exchange administration in recent years, we have focused on boosting the "five shifts" in foreign exchange administration, the implementation of administration streamlining and power delegation, and profoundly changing the functions of foreign exchange administration, with administrative interference in micro-level events on the decline. At the same time, we have optimized public services through enhancing ongoing and ex-post management. As a result, foreign exchange administration has played significant roles in maintaining economic and financial stability and ensuring fair competition, with a stronger ability to promote sustainable economic development. Reform and opening up of foreign exchange administration has achieved significant progress Following the uniform plans of the CPC Central Committee and the State Council, we have focused on promoting the "five shifts" in foreign exchange administration over the past few years, i.e., shifting from approval to monitoring analysis, from ex-ante regulation to ex-post management, from behavioral management to player management, from assuming people are guilty until proven innocent to assuming people are innocent until proven guilty, and from “positive list” to “negative list”. In so doing, we have improved our capabilities of coping with complex situations, and coordinated facilitation and risk prevention, thus making better use of the roles of foreign exchange administration while giving a decisive role to the market. New breakthroughs have been made in the reform of foreign exchange administration for trade in goods. Foreign trade development is an important part of China’s reform and opening up, of which trade in goods is of critical significance, accounting for nearly 80% of the total value of current account. In the past, foreign exchange receipts and payments under trade in goods needed to be verified transaction by transaction, involving tedious procedures. To improve trade facilitation and regulatory efficiency of foreign exchange, the State Administration of Foreign Exchange (SAFE) rolled out nationwide the import and export verification reform in August 2012, upon the approval of the State Council. The reform canceled transaction-by-transaction verification of foreign exchange receipts and payments under trade in goods, simplified certificates required and processes, and promoted aggregate review, dynamic monitoring and classified management, facilitating foreign exchange receipts and payments under trade in goods by 95% of enterprises doing business in compliance with laws and regulations and focusing regulation on a minority of enterprises with abnormal receipts and payments, thus ensuring trade facilitation and effective regulation. After the reform, enterprises can, on average, reduce labor costs by more than RMB 70,000 per year and banks can shorten time spent on handling business transactions from more than 20 minutes to just 9 minutes per transaction. New progress has been achieved in the reform of foreign exchange administration for trade in services. In the past, ex-ante approval was required for the receipts and payments of foreign exchange under trade in services, requiring enterprises to prepare a large quantity of materials and go to many authorities, which inhibited efficiency. In September 2013, the SAFE universally canceled ex-ante approval for trade in services and delegated the management of all foreign exchange receipts and payments transactions under trade in services to banks, requiring no approval of documents for transactions below the equivalent of USD 50,000 and simplifying instruments for approval for transactions above the equivalent of USD 50,000, with a dozen kinds of instruments simplified and consolidated. The strengthening of offsite monitoring and analysis enabled us to stick to our bottom line of guarding against systematic risks. After the reform, documents approval for nearly 15 million transactions of foreign exchange receipts and payments under trade in services has been canceled every year, which has significantly reduced processing costs and the total number of instruments to be approved by banks. Enterprise operating efficiency has been enhanced remarkably, with the time spent on processing shortened from 20 minutes to 5 minutes per transaction. Direct investment convertibility has reached a new high. Direct investment is a key channel for introducing foreign capital and supporting Chinese companies to go global. Previously, opening of foreign exchange accounts and entering an item in an account under direct investment had to be verified by a foreign exchange authority, and law firms were required to go through review and registration procedures of capital verification confirmation with a foreign exchange authority for foreign direct investment, thus having a negative impact on a company's investment efficiency. In recent years, foreign exchange administration for direct investment has been significantly simplified, with 35 administrative approval items canceled and 14 items simplified or merged, whereby facilitating capital operation in cross-border investments by enterprises, and achieving basic convertibility. For overseas direct investment, for example, the ex-ante approval for capital source and outward remittance verification has been replaced with ex-post registration, and the time spent on business processing has been shortened from 20 working days to 5 working days. In some provinces, such business services can even be processed on the day of application. New breakthroughs have been made in the two-way opening up of portfolio investment, an important area for global resource allocation. In the past, due to limited channels for cross-border portfolio investment, the level of facilitation was low. To promote orderly liberalization of the securities market, the SAFE captured the opportunity of a balanced foreign exchange situation, followed the logic of balanced regulation and two-way flows and improved the QFII and QDII schemes, on which basis, the SAFE launched the RQFII scheme. As of August 28, 2015, the SAFE had approved an investment quota of USD 76.703 billion to 276 QFIIs, USD 89.993 billion to 132 QDIIs and RMB 404.9 billion to 138 RQFIIs. At the same time, the SAFE has expanded channels for the two-way opening of capital and made institutional arrangements for facilitating the buying of public funds in Hong Kong by domestic investors and sales of public funds in mainland China to Hong Kong. In the future, "sales or issue of securities for collective investment overseas by residents" or "sales or issue of securities for collective investment domestically by non-residents" will no longer be restricted, suggesting the level of capital account convertibility will be further enhanced. A new chapter has been opened up for external debt administration to serve the real economy. External debt is an important channel for expanding financing sources for domestic entities. Previously, balance indicator management was adopted for a financial institution's external debt, with foreign-funded enterprises managed based on the difference between investment and registered investment and Chinese enterprises subject to strict regulations and having to go through tedious approval procedures. To further facilitate enterprise financing, the SAFE has vigorously pressed ahead with the external debt and cross-border guarantee management reform. The ex-ante approval for external debt and cross-border guarantee has been canceled, and banks are empowered to handle such business services directly, with the time span from opening of an external debt account and settlement of foreign exchange shortened by 3 working days, and thus essentially building an external credit and debt management framework focused on ex-post registration. A macro-prudential proportioned self-discipline management approach to external debt has been explored and a pilot program has been carried out in Zhongguancun of Beijing, Qianhai of Shenzhen, and Zhangjiagang of Jiangsu, allowing enterprises to borrow external debt that is within a certain multiple of net asset, and equalizing the external debt management policies for Chinese companies and foreign-funded companies. Estimates show pilot enterprises can save on capital cost by 2-3 percentage points. In terms of management concepts, efforts have been made to promote the shift from super-national treatment to national treatment, allowing eligible Chinese enterprises to use short-term external debt to support foreign trade. The foreign exchange market has reached a new high. The foreign exchange market is a key carrier for international economic communication and capital flows. Previously, the players and products in China's foreign exchange market were simplistic, and the infrastructure was not sound. In recent years, the SAFE has been consolidating the fundamentals of the foreign exchange market and optimizing the foreign exchange market services. Firstly, it has been enriching transaction products to satisfy diversified demand for management of foreign exchange rate risks. The type of transaction products has been expanded from spot transactions and forward transactions of some pilot banks to foreign exchange swaps, current swaps and futures products, thus establishing a basic product system that is popular in the international market. The transaction currencies also increased from the original USD, EUR, JPY and HKD to 14 other currencies regularly involved in cross-border receipts and payments in China. Secondly, the SAFE has been increasing market players to build a diversified market player hierarchy. As of the end of 2014, there were 465 institutions in the inter-bank foreign exchange market，of which 53 were non-banking financial institutions, 1 was non-financial company and 8 were overseas financial institutions. Thirdly, the SAFE has been involved in improving infrastructure to promote market operation, improve efficiency and prevent risks. The interbank foreign exchange market began centralized netting of over-the-counter trading in 2009 and officially launched central counterparties in 2014, which have actively helped reduce clearing risks and improve trading efficiency. Combining regulation and deregulation is a banner of the reform and opening up of foreign exchange administration In recent years, the SAFE has focused on the provision of services, and equal importance has been attached to pressing ahead with reforms and preventing risks, with the reform approach stressing ‘balance’ and the reform direction being guided by experience gained during trials and pilot programs that can then be widely adopted. After several years of exploration, the foreign exchange administration has taken on a new look. In order to promote the transformation of foreign exchange administration, focus must be placed on streamlining administration and delegating power. First of all, this means adhering to law-based administration in order to further streamline and integrate regulations on foreign exchange administration. As at the end of 2014, more than 700 invalid regulations were abolished and less than 300 regulations were retained. Secondly, focusing on major enterprises and easing control over small ones and classified management, with aggregate verification and dynamic monitoring adopted to promote the shift from ex-ante regulation to ex-post regulation. For the current account, for example, offsite monitoring allows us to identify violating companies at a lower cost and is a more targeted approach. In 2014, through offsite monitoring and analysis, we homed in on 1,774 abnormal enterprises that engaged in export but did not receive foreign exchange, with the export value accounting for 6% of the country's total. After verification, violating enterprises were either forced to close, be downgraded to class-B or C enterprises, or be transferred to procuratorate authorities for further investigation. Thirdly, shifting from behavioral regulation to player regulation. Full-coverage monitoring of foreign exchange receipts and payments by market players has been strengthened to better identify abnormal or violating behaviors; classified management has been adopted to facilitate enterprises that do business in compliance with laws and regulations and restrict violating players to improve the level of compliance among market players. Strengthening the capability of foreign exchange administration to support the development of the real economy, with focus on trade and investment facilitation. Improving the level of services is the basis for foreign exchange administration. We have always interwoven administration in services when launching a reform measure, and actively adjusted foreign exchange administration measures that are not in line with the market operation laws in recent years. For foreign-invested enterprises, we have introduced the discretional foreign exchange settlement policy, giving them the power to discretionally settle foreign exchange funds to lower their financial cost. This policy has been rolled out nationwide. For MNCs, we have introduced the administration policy for the centralized operation of foreign exchange funds by MNCs, with the number of pilot companies increasing from 250 to 570 in the first half of 2015, and facilitated the optimization of foreign exchange funds by more excellent companies, especially private companies. In cross-border e-commerce, efforts have been made to ease regional restrictions, delegate approval power, elevate the limit on a single transaction and expand the scope of payment. In January 2015, the pilot program was rolled out nationwide and as of the end of June, had generated funds totaling USD 4.181 billion. Strengthening the capability of preventing cross-border capital flow riskswith focus on safeguarding the risk bottom line. One of the key functions of foreign exchange administration is to prevent the internalization of external risks. In recent years, preventing risks has been our top priority. To this end, we have improved the regulatory system, administrative methods, technical means, and intensified team building, with a focus on building the capability of monitoring cross-border capital flows, and thus successfully guarding against systematic and regional financial risks, which we consider to be the bottom line of our efforts. To this end, we first intensified monitoring analysis to lay a solid foundation for preventing risks. Situational changes were closely tracked and the focus of monitoring analysis was shifted from monitoring of inflows to monitoring of both inflows and outflows, making prejudgment of situations more scientific and timely. We have built a monthly reporting system for cross-border capital monitoring analysis, and intensified analysis and judgment of macro trends, with dynamic fine-tuning and modification made on a monthly basis, whereby making monitoring analysis more comprehensive and precise. The second measure was accelerating data and system integration to provide technical support for risk prevention. We built a basic database for full-coverage cross-border capital flows, integrating data from different business systems for centralized sharing. We also built a cross-border capital flow monitoring and analysis platform, with focus on improving the system's functions of comprehensive analysis and data mining. We improved the warning system for balance of payments, monitoring the risks arising from imbalance of payments in a two-way manner, to provide data guarantee and system support for comprehensively monitoring the foreign exchange operation by market players and immediately identifying abnormal cross-border capital volatility. Thirdly, we improved foreign exchange inspection to provide effective means of risk prevention. We built and promoted the offsite foreign exchange inspection system, replacing the previous large-scale dragnet investigation with big data analytics, to identify clues to irregularities, thereby enhancing the relevance and effectiveness of regulation. We have focused our efforts on investigating cases involving serious violations and conducting special inspections of banks' foreign exchange transactions, to crack down on flows of hot money by key players and through key channels. From 2009 to 2014, we investigated and solved 17,000 cases that violated foreign exchange laws and regulations, confiscating illegal gains and imposing fines of about RMB 2.2 billion in total. Continuing to deepen the reform and opening up of foreign exchange administration Foreign exchange administration has entered a new normal, with continued net inflows of foreign exchange changed to balanced flows, ex-ante approval changed to ongoing and ex-post regulation, and current account convertibility changed to capital account convertibility. Developing a comprehensive understanding of and accurately grasping the foreign exchange new normal is a starting point for conducting the subsequent foreign exchange administration reform. Next, foreign exchange authorities will closely follow the new normal and accelerate the "five shifts", with focus on promoting the RMB capital account convertibility, to effectively perform their responsibilities for foreign exchange administration and make foreign exchange administration more scientific. Changing the philosophy and method of foreign exchange administration is the principle and the direction of foreign exchange reform. Efforts will be made to press ahead with the administrative approval system reform to comprehensively improve administrative efficiency, based on the relationship between the government and the market. Firstly, the SAFE will continue to streamline administration and delegate power. We plan to further slash administrative approval items, and sort through and simplify existing regulations on foreign exchange administration, making sure foreign exchange administration regulations are reduced, simplified and easier to operate, to facilitate market players and regulation. Secondly, the SAFE will comprehensively advance law-based administration. Following the requirements for the "five shifts" in the philosophy and method of foreign exchange administration, we will adapt to the needs of capital account convertibility in China, and build a forward-looking legal framework systemfor foreign exchange administration, with focus on changing from behavioral regulation-based legislation to player regulation-based legislation and switching from ‘positive list’ to ‘negative list’. Thirdly, the SAFE will diversify means for ongoing and ex-post regulation. For the current account, for example, we will enhance cross-departmental cooperation and deepen the administration of capital flow risks under the current account. Promoting trade and investment facilitation is both the starting point and the action plan. In terms of administrative mentality, we will raise the sense of service and put ourselves in others' shoes in order to promote the linkage between policy adjustment and the commercial operating models of market players and provide a favorable policy environment for market players that do business in compliance with laws and regulations. We will optimize processes and formalities, deepen reforms through improving services, effectively improve the level of facilitation for trade and investment, and reduce the social cost for foreign exchange administration, with the aim of improving administration through services. For administration objects, we will promote the change from behavioral regulation to regulation of key entities and from ex-ante approval to ex-post monitoring and analysis. For example, we will implement the upgraded version of the administration of centralized operation of foreign exchange funds by MNCs to further enhance MNC's efficiency in capital operation. Pressing ahead with the reform and opening up in key areas is the focus and the priority. Based on the building and improvement of the market mechanism and administration mechanism that adjust the balance of payments, we will further improve the middle and long-term working plan for the foreign exchange administration reform, determining the implementation steps, time frame and division of labor, as well as the roadmap and the timetable. In the capital market, we will promote the orderly two-way opening of the capital market, further improve the qualified institutional investor scheme, and implement the Mutual Fund Connect scheme to accelerate the RMB capital account convertibility. In the foreign exchange market, we will promote the opening of the foreign exchange market, expand the scope of trading, increase the number of trading entities, enrich the products for risk aversion and value preservation, and improve the building of a diversified and competitive trading platform that is subject to effective regulation, so as to build a sophisticated, advanced and multi-layered foreign exchange market system. Guarding against abnormal cross-border capital flow risks is the foundation and the guarantee of an effective foreign exchange system. In the long run, foreign exchange authorities should make risk prevention their top priority. To enhance warning, we will accelerate the building of a warning platform for cross-border capital flows, complete cross-border capital flow data integration and data warehouse construction to cover cross-border capital flows that involve different trading currencies, projects and entities such as domestic and foreign currencies, trade and investment, institutions and individuals, in order to provide regulatory authorities with reliable tools. Meanwhile, we will continue to improve the warning indicator system and offsite inspection indicator system for cross-border capital flows to immediately assess and prejudge the pressures from capital outflows and inflows. In addition, we will flesh out policy plans focused on counter-cyclical adjustment, study and introduce price adjustment means such as Tobin tax, URR and foreign exchange trading fees to contain the inflows and outflows of short-term speculative and arbitrage funds. To optimize the operation of foreign exchange reserves, we will encourage diversified and scattered investments and efficient management and use of foreign exchange reserves, enhance allocation of quality assets, and improve the abilities to manage and operate foreign exchange reserves, with the aim of ensuring the security and flows of foreign exchange reserves and the value maintenance and growth. (The original text is available in the 19th issue 2015 of China Finance) 2015-10-29/en/2015/1029/1172.html