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Circular of the SAFE on Amending the Measures for the Assessment of the Banks Implementation of the Provisions on Foreign Exchange Administration
The branches and foreign exchange administrative departments of the State Administration of Foreign Exchange in all provinces, autonomous regions, and municipalities directly under the Central Government, and the branches of the State Administration of Foreign Exchange in Shenzhen, Dalian, Qingdao, Xiamen, and Ningbo, all Chinese-funded designated foreign exchange banks: Since the Measures for the Assessment of the BanksImplementation of the Provisions on Foreign Exchange Administration came into force on August 1, 2009, they have played a satisfactory role in encouraging banks to implement the provisions on foreign exchange administration and in promoting regulatory compliance and lawful business operations by banks. To further promote smooth progress in the assessment work and to make this work more scientific and fair, the State Administration of Foreign Exchange has amended the Measures for the Assessment of the BanksImplementation of the Provisions on Foreign Exchange Administration (see Annex, hereinafter referred to as the Measures). You are hereby notified of the relevant matters as follows: I. After receiving this Circular, all branches and foreign exchange administrative departments of the State Administration of Foreign Exchange shall immediately forward this Circular to the central sub-branches, sub-branches, urban commercial banks, rural commercial banks, wholly foreign-funded banks, Chinese-foreign equity joint venture banks, branches of foreign banks, and rural cooperative financial institutions within their respective jurisdictions, complete as soon as possible the operational training for the central sub-branches and sub-branches within their respective jurisdictions, and, in strict accordance with the Measures, carry out fair and just assessments of the banks within their respective jurisdictions. II. All designated Chinese-funded foreign exchange banks shall forward this Circular to their branches as soon as possible, earnestly implement the relevant requirements of the Measures, and conduct their various businesses in accordance with the relevant laws and regulations. III. From the date of issuance of this Circular, the Circular of the State Administration of Foreign Exchange on Issuing the Measures for the Assessment of the BanksImplementation of the Provisions on Foreign Exchange Administration (Huifa No.33 [2009]) shall be abolished. Assessments of the banks implementation of the provisions on foreign exchange administration in 2010 shall be governed by the relevant provisions in these Measures. If you have any problems during implementation of these Measures, please report them to the relevant departments of the State Administration of Foreign Exchange in a timely manner. Tel: 010-68402129 (General Affairs Department), 010-68402464 (Balance of Payments Department), 010-68402280 (Current Account Administration Department), 010-68402366 (Capital Account Administration Department), 010-68402361 (Supervision and Inspection Department). FILE: Appendix 1Contents and Scoring Criteria for the Assessments of the BanksImplementation of the Provisions on Foreign Exchange Administration FILE: Appendix 2Detailed List on the Assessment of the Banks' Implementation of the Provisions on Foreign Exchange Administration FILE: Measures for the Assessment of the BanksImplementation of the Provisions on Foreign Exchange Administration 2010-08-06/en/2010/0806/947.html
FAQs on Foreign Exchange Management Policies(1)
Editors Note: As an important part of foreign-related economic and financial activities, foreign exchange management has always been in the spotlight. The State Administration of Foreign Exchange (SAFE), in an attempt to communicate with the public, increase the transparency of policies and management, and facilitate and enhance public understanding of foreign exchange management, has extensively surveyed and collected issues of common concern in the media and among the public and has compiled a list of frequently-asked questions on foreign exchange management policies. These questions will be answered in succession in future issues for public discussion and reference. Q1: How did Chinas foreign exchange reserve assets come into existence? Can these assets be allocated for free? A: Foreign exchange is bought and sold by businesses and individuals through the commercial banks. If such foreign exchange is sold by commercial banks on the interbank market and bought by the Peoples Bank of China (PBOC), it becomes part of the foreign exchange reserves. When the PBOC buys foreign exchange, it pays the equivalent amount in RMB to the holder of the foreign exchange. There are three main channels from which foreign exchange flows: The first is businesses. When companies provide goods or services to foreign customers or accept foreign investment, they are paid in foreign exchange, which can then be converted into RMB in commercial banks before it is used in China. During the exchange settlement, the companies sell the foreign exchange to the commercial banks in exchange for an equivalent amount of RMB, thereby converting their foreign currency assets into RMB assets at the current exchange rate. The second channel is individuals, who sell their foreign exchange to the commercial banks in exchange for an equivalent amount of RMB. The third is commercial banks. After buying foreign exchange from businesses and individuals, the commercial banks, as required according to the foreign exchange asset liability allocation, will resell the foreign exchange to businesses and individuals in various business outlets and will sell the remaining foreign exchange to the PBOC in exchange for an equivalent amount of RMB. Taken as a whole, during the formation of the foreign exchange reserves, businesses, individuals, and banks are not handing over their foreign exchange to the state without compensation; instead, they are selling their foreign exchange to the state in exchange for an equivalent amount of RMB. This is completely different from taxation and fiscal revenue. It should be emphasized that all these transactions are conducted in an equivalent and voluntary manner. The economic interests of the banks, businesses, and individuals are realized when their foreign exchange is converted into RMB and the PBOC acquires this foreign exchange by paying the corresponding amount in RMB. The formation of foreign exchange assets comes with a cost; therefore, they cannot be allocated for free. Q2: How can foreign exchange reserves support the development of the domestic economy? A: Foreign exchange reserves play an important role in the development of Chinas domestic economy because, first of all, an abundant amount of foreign exchange reserves is conducive to safeguarding Chinas economic and financial security. In recent years, we have witnessed the benefits of keeping a large amount of foreign exchange reserves, in terms of maintaining the capacity for international payments, guarding against financial risks, upholding national economic and financial security, and robustly supporting the healthy and stable development of our national economy. After the outbreak of the recent international financial crisis, foreign exchange reserves played a prominent role in cushioning the blow of the external disturbances. Second, sufficient foreign exchange reserves can facilitate foreign-related economic activities of businesses. Only when there are sufficient foreign exchange reserves can enterprise demands for the use and purchase foreign exchange be fulfilled. If a company wants to invest in a foreign country, as long as the company is economically viable it can make the investment after purchasing foreign exchange with RMB. In this sense, the foreign exchange reserves can guarantee abundant funding for the going global initiatives of Chinese enterprises. Similarly, companies are given guarantees and support when they have to pay for foreign goods or debts. Third, the operating profits from foreign exchange reserves can increase expenditures for the peoples livelihood. The responsibility of the foreign exchange management departments is to ensure, in addition to risk management, maintenance of the value of the assets and an increment in the foreign exchange reserves. The operating profits of foreign exchange reserves are incorporated into the overall account of the PBOC, as part of the net profits of the central bank that will be fully turned over to the state treasury. This will increase the availability of funds used to improve the peoples livelihood, which in effect will constitute a boost to national welfare. In discussions of how foreign exchange reserves can support the development of the domestic economy, two issues need to be clarified. First, foreign exchange reserves cannot be used without compensation. Unlike fiscal funds, foreign exchange reserves are created when the PBOC purchases foreign exchange with RMB on the domestic or international foreign exchange markets and the reserves are closely related to the currency issuances and RMB liabilities of the PBOC. If foreign exchange reserves were to be allocated for free use, the balance sheet of the PBOC would be affected, generating inflationary pressures and threatening economic and financial stability. The second issue is that foreign exchange reserves consist of foreign exchange, which is mainly used for foreign payments. For the foreign exchange reserves to be used domestically, they have to be reconverted into RMB, which will require that more currency is issued, thus aggravating the surplus of domestic liquidity. Q3: What is the appropriate scale for Chinas foreign exchange reserves? A: Too much foreign exchange reserves can be bad. We are not seeking to build up large volume of foreign exchange reserves nor a long-term surplus in our international balance of payments. Chinas current account and capital account have maintained a multi-year surplus, and the growth of our foreign exchange reserves is the objective result of the twin surplusin the international balance of payments, reflecting the long-term stable growth of the Chinese economy. In fact, this is determined by the current stage and characteristics of Chinas economic development. Our abundant foreign exchange reserves can ensure a stable financial environment. As a large developing country, we need to maintain a certain scale of foreign exchange reserves, even for what has traditionally been considered moderate. In addition, maintaining sufficient foreign exchange reserves can also boost our confidence. As has been amply proved during the recent international financial crisis, a sufficient amount of foreign exchange reserves can put us in a better position to effectively fend off future crises. In terms of aggregate foreign exchange assets, in a broad sense, at year-end 2009, China held USD 3.46 trillion in foreign financial assets, far lower than the developed countries in North America and Europe. The main problem at present is that most of Chinas foreign exchange assets are controlled by the government, leaving only a small proportion in private hands. Specifically, foreign exchange reserves held by the Chinese government account for two-thirds of all foreign assets in China, compared with only one-sixth in Japan. Therefore, we encourage businesses and individuals to hold and invest in foreign exchange so as to diversify the mix and to distribute foreign exchange within the private sector. This, of course, takes time. With the development of our national economy and the increase in income, enterprises and individuals will have greater demands for diversification of asset allocations. If more foreign exchange investment channels and products are provided for the public to reap concrete benefits from the foreign exchange, then the foreign exchange pressures on the government will be greatly relieved. Q4: What currencies are included in Chinas foreign exchange reserves? How are they structured? A: Chinas foreign exchange reserves include the major currencies, for instance the US dollar, the euro, and the Japanese yen, as well as the currencies of some emerging economies. This is a generally loose composition of currency. The currency composition of the foreign exchange reserves is designed to facilitate Chinas foreign-related economic activities. It takes into consideration Chinas foreign payment structure that encompasses foreign trade, foreign debt, and direct investment, as well as the currency structure of global foreign exchange reserves, so that the risks can be diversified against dynamic developments of various currencies and so that demands for foreign payments and asset allocations can be better fulfilled. The currency composition does not remain static. It is dynamically adjusted and optimized to respond to market volume, liquidity, the risk-return characteristics and development trends of the currencies, and changes in the economies and markets, as well as in response to investment demands. Q5: In the operation and management of the foreign exchange reserves, how can we ensure the openness and transparency of market information and compliance with investment and operations rules?? A: At present, the foreign exchange reserves of China follow the information disclosure requirements of the IMFs General Data Dissemination System (GDDS), which is the common practice in most countries. In recent years, efforts have been made to enhance the transparency of information on the foreign exchange reserves. For example, the Overview of Chinas Foreign Exchange Administration was issued in 2009, in which one entire chapter is devoted to presenting a relatively comprehensive introduction to the operations and management of the foreign exchange reserves. In addition, when the 2009 Balance of Payments Statement was formulated and published, the statistical method for the foreign exchange reserve assets was further improved to increase transparency. This being said, the increase in information transparency on the foreign exchange reserves should be carried out in a prudent and measured manner. As the large scale of Chinas foreign exchange reserves lends significant weight to Chinas position in international financial markets, any information disclosed about investments might give rise to market turbulence and cripple our investment activities. Most countries choose to be very careful when disclosing information related to foreign exchange reserves. Specific transactions are generally not disclosed to the public and are not required to be disclosed by the data dissemination standards of the relevant international organizations. To ensure the safety, liquidity, value maintenance, and increment in our foreign exchange reserves, we have established a comprehensive set of investment decision-making processes and various risk management and internal control systems, which have been developed to guarantee appropriate and effective progress in reserve operations and management. Reserve operations are regularly subject to audits by the relevant departments. Furthermore, any comments and suggestions from different sectors are highly valued, investigated in a timely and in-depth manner, and kept as reference for the operation and management of the foreign exchange reserves. (To be continued) 2010-07-02/en/2010/0702/936.html
An Interview with the Responsible Person from the SAFE on Issues Concerning Policy Improvements for External Guarantees Provided by Domestic Institutions
The State Administration of Foreign Exchange (SAFE) recently promulgated the Circular of the State Administration of Foreign Exchange on the Administration of External Guarantees Provided by Domestic Institutions (hereinafter referred to as the "Circular"). An interview was conducted with a relevant official of the SAFE regarding issues related to the Circular. Q: What is the background to this promulgation? A: According to the relevant stipulations on the administration of external guarantees currently in effect, with the exception of financing external guarantees provided by domestic banks for overseas investment enterprises were subject to annual balance management, the other types of external guarantees were mainly subject to case-by-case approvals. With Chinas increasing integration into the global economy, external investments of domestic institutions have been on a constant rise. Overseas investment enterprises are increasingly demanding credit support from domestic institutions, resulting in an urgent demand to improve and reform current policies for the administration of external guarantees. The policies currently in effect have some limitations: (i) the balance management is only applicable to certain types of institutions and is not applicable to non-bank financial institutions and enterprises; the balance management for external guarantees provided by banks is only applicable to financing guarantees in which the debtor is an overseas institutions; (ii) currently banks assign quotas for the balance of the external guarantees mainly based on the foreign exchange capital funds and the working capital of the debtor, which has led to decreasing rationality in the quota assignment; (iii) the policies currently in effect have higher qualifying standards for the guarantor and the debtor, that is, higher standards are imposed on the net asset proportions of both the guarantor and the debtor, the profits and losses of the debtor, and so on, which to some extent has hindered the development of the business of external guarantees. This situation necessitates early amendment to the policies concerning administration of external guarantees provided by domestic institutions. Q: What are the major aims and principles behind the adjustments to the administration of external guarantees by domestic institutions? A: Within the present fundamental policy framework for external guarantees, the reform aims to substantially streamline and straighten out the existing administration policies, and to clarify the technical and operational issues that need to be further clarified in the practice of the administration of guarantees, thereby further promoting the facilitation of trade and further pushing forward the reform of the mode of foreign exchange administration for external guarantees. The policy adjustment mainly complies with the principle of streamlining formalities, ensuring high efficiency of business operations, and keeping risks controllable. By streamlining the formalities for administrative approval and increasing the efficiency of administration, the SAFE will be able to provide greater support to the going-globalactivities of domestic institutions. Meanwhile, the SAFE must prevent possible negative impacts from the conversion of contingent external debts into actual debts or claims. Overall, the reform simultaneously will serve to promote development and to keep risks controllable. Q: What changes has the adjustment entailed in the mode of administration of external guarantees provided by domestic banks? A: The changes can be summed up in seven respects: (i) the scope for implementing balance management for financing external guarantees was expanded. The adjustment allows financing guarantees to be provided to institutions both at home and abroad instead of only to overseas institutions. That is to say, the banks provision of financing external guarantees to domestic institutions is no longer subject to deal-by-deal application and approval; (ii) adjustments have been made to the criterion for assignment of the balance quotas to the banks. The assignment of quotas is no longer subject to foreign exchange capital funds or working capital. Rather, the foreign exchange authorities are allowed to assign quotas to banks based on the paid-in capital in both RMB and foreign currency, or the foreign exchange net assets of the bank. In other words, the quota for a single bank shall not exceed 50% of its paid-in capital or working capital in both RMB and foreign currency, nor exceed the net asset value of its foreign exchange; (iii) the conditions for the debtorsqualifications for bank provision of financing external guarantees have been lifted, that is, the debtor shall not be subject to such conditions as its equity relationship with domestic institutions, net asset proportions, and profits and losses; (iv) the mode for the administration of the banksprovision of non-financing external guarantees has been clarified. The debtor shall not be subject to net asset proportions, profits and losses, and ex-ante approval to obtain non-financing L/G from banks; meanwhile, to ensure adequate caution, it is required that at least one of either the debtor and beneficiary shall be a domestic institution, or shall be an overseas institution in which a domestic institution directly or indirectly holds shares; (v) it is clarified that the ex-ante approval formalities shall be lifted for the banksprovision of external guarantees; (vi) it has been clarified that the registration of the external guarantees under the banksquota management shall be subject to regular filing; (vii) the relevant statements for the regular filing of the banksprovision of external guarantees have been re-designed to facilitate the filing and submission of the data. Q: What changes have been made in the mode of administration of external guarantees provided by domestic non-bank financial institutions and enterprises after the policy adjustment? A: The changes can be summed up in five respects: (i) an administration mode based on deal-by-deal approval supplemented by administration of the balance has been formed. Domestic non-bank financial institutions and enterprises (including wholly foreign-funded enterprises) with large numbers of external guarantee deals and high standardization of internal management that provide financing and non-financing external guarantees can apply to the SAFE for assignment of balance quotas and can provide external guarantees within the assigned quotas, without having to apply to the SAFE for deal-by-deal approval. However, the balance quota assigned by the SAFE and/or the balance of deal-by-deal external guarantees approved by the SAFE shall not exceed 50% of the net assets of the enterprise; (ii) the proportion of net assets owned by the corporate guarantor is uniformly adjusted to 15%, to replace the previously implemented separate rates for trade enterprises and non-trade enterprises; (iii) the scope of the debtor has been expanded. If the guarantor is an enterprise, the debtor shall be an institution formed within or outside China in which the guarantor directly or indirectly holds shares, replacing the pre-adjustment provision that the debtor shall be a first-layer subsidiary of domestic enterprises that are formed within or outside China. If the guarantor is a non-bank financial institution, the debtor shall be an institution within China, or an institution formed by a domestic institution or an institution in which a domestic institution directly or indirectly holds shares according to the relevant provisions; (iv) it has been clarified that in the event that non-bank financial institutions and enterprises perform external guarantees, they must file an application with the foreign exchange administration authority in their locality for deal-by-deal approval, and the purchase of foreign exchange is allowed when they provide the external guarantees; (v) it has been clarified that wholly foreign-funded enterprises shall handle the case-by-case approval, registration, and other formalities for their external guarantees with reference to the principles for the administration of general enterprises. Q: What adjustments have been made to the qualifications of the debtor? A: The policy adjustment has lowered the standards for the debtorsqualifications. The major adjustments can be summed up in three respects: (i) the scope of the debtor has been expanded to various degrees based on the institutional type of the guarantor. For a financing external guarantee provided by a bank, the debtor is not subject to any qualifications, and the bank has discretion over the provision of external guarantees based on its business development needs and its ability to keep internal risks under control. For a non-financing external guarantee provided by a bank, only one of the debtor or the beneficiary shall be a domestic institution or an overseas institution in which a domestic institution directly or indirectly holds shares. In an external guarantee provided by non-bank financial institutions, the debtor has been adjusted to be domestic institutions, or overseas investment enterprises owned by domestic institutions. In an external guarantee provided by an enterprise, the scope of the debtor is expanded to encompass enterprises that were established within or outside China in which the guarantor directly or indirectly holds shares; (ii) the financial index restrictions on the debtor have been unified and simplified: the requirement on the net asset proportion of the debtor is uniformly adjusted to the net asset value of the debtor shall be positive, and the profit requirement has been adjusted to the debtor shall have made profits in at least one of the past three years, replacing the previous the debtor shall not have any losses (for long-term projects such as resources exploration projects, the aforementioned three years can be extended to five years); (iii) the requirement that If the debtor is a joint venture within or outside China, the guarantees shall only be provided according to the proportions of the capital contributions of both partieshas been lifted. Q: What is the significance of the policy adjustment? A: The reform of the mode of administration of external guarantees is a critical step in further refining foreign exchange administration to achieve the goal of administration with the provision of better services. It will provide greater momentum for domestic institutions to implement the national strategy of going global on a wider scale and at a higher level, with greater involvement in international competition and collaboration. It will help domestic institutions take advantage of markets and resources both at home and aboard, promote the facilitation of trade and investment, and increase the efficiency of resource utilization. By stimulating financial innovation and business expansion in the financial industry and keeping potential risks under control, the adjustment will also play a positive role in sharpening the international competitive edge of Chinas financial industry. Q: How does the SAFE intend to control risks during the post-adjustment period? A: During implementation of the policy adjustment, we have taken into full consideration the practices in the administration of external guarantees provided by domestic institutions and have carried out classified administration of external guarantees based on the different risk-bearing and management capabilities of the institutions. This has enhanced risk control from an institutional perspective. The ex-post examination mechanism was strengthened. Thus, we have kept relevant risks controllable. Specifically: first, administration practices during recent years show that the performance of external guarantees provided by domestic institutions has remained at a low level; and the credit risks of the various categories of entities under external guarantees have been kept under effective control; second, given the varied risk management capabilities of banks, non-bank financial institutions, and non-financial enterprises owing to their different stages of development, we have established a mode for implementing classified administration; and while lowering the standards for the qualifications of the relevant entities, we have enhanced risk control by improving system design; third, we have conducted pressure tests for the policy adjustment. The results of the computations show that overall the risks are controllable. We will constantly improve the approaches for statistical monitoring of the external guarantees and the mechanisms for ex-post examination and will strengthen statistical monitoring, analysis, and early warning for external guarantees, so as to keep potential risks under control. 2010-07-30/en/2010/0730/945.html
FAQs on Foreign Exchange Management Policies (2)
Q6: How can the operation and management of foreign exchange reserves follow the principles of safety, liquidity, and value increment? A: Safety, the primary principle, can be broken down into three key elements: diversification, long-term perspectives, and strategic considerations. As the saying goes, dont put all your eggs in one basket; in other words, when one door shuts, another door opens, hence the need to diversify. There are continued worries that we are taking too much of this asset or too much of that currency, but in fact this risk is under control, due to our sustained efforts in recent years to diversify investment. As for a long-term perspective, when we are determining the asset structure we should comprehensively consider the long-term factors, such as the risk-returns of various assets and market development trends. As a responsible long-term investor in the international market, we must not be a super retail-investor. With regard to strategic considerations,when we are determining the currency composition, we need to comprehensively consider the macro strategic factors, such as Chinas international balance of payments structure, foreign payment demands, and the developmental trends in the international monetary and financial systems, because the stability of macro elements can ensure the safety of our foreign exchange reserve investments. The liquidityprinciple should be understood in the context of Chinas national circumstances. The renminbi is not an international currency, so the liquidity requirements of the foreign exchange reserves should not be generally confined to foreign payments, such as for imports. Instead, we need to take into consideration the national economic development strategy and make sure that the foreign exchange reserves can be used as a magic weaponin a timely and effective manner if a reversal in capital flows threatens to trigger a monetary crisis or even a financial crisis. The principle of value incrementrequires maintenance of the long-term stable profitability of the reserve assets during the management of the foreign exchange reserves. This is in line with the above two safety and liquidity principles. As a result, the profits from the foreign exchange reserves might not be the highest in a given year, but we are confident that in the long run, there will be stable and substantial returns. Q7: Did Chinas foreign exchange reserve investments suffer huge losses during the recent international financial crisis? A: It is safe to say that this international financial crisis was the most devastating crisis in decades. Against this backdrop, it is inevitable that various investments suffered certain impacts and influences. However, we are proud to report that Chinas foreign exchange reserves withstood the test of this severe financial crisis and the overall safety of our assets has been maintained. In 2008 and 2009, the hardest-hit years, we managed to earn decent profits on the basis of breaking even. Our most important management method is to properly allocate assets and diversify investments. In terms of allocation of asset types, we make a point of spreading risks among investment products, such as those from governments, institutions, and international organizations, as well as corporate assets and funds. In terms of currencies, we have built a loose composition that encompasses the major traditional currencies, such the US dollar, the euro and the Japanese yen, as well as the currencies of the emerging economies. Such a diversified allocation can help hedge against risks and ensure adequate leeway for asset management. In addition, risk prevention and management has always been an important part of our investment work. Investments of Chinas foreign exchange reserves emerged from the recent financial crisis fairly unscathed due to the fact that we do not have risky products such as sub-prime mortgages. Q8: Recently, Fannie Mae and Freddie Mac de-listed their shares from the New York Stock Exchange. Have Chinas foreign exchange reserve investments in Fannie Mae and Freddie Mac suffered losses? A: Fannie Mae and Freddie Mac, both government-sponsored institutions chartered by the US Congress to help fund home mortgages, hold under their name 50 percent of the real estate loans in the US residential real estate market and are critical to Americas housing market and economic development. Because of the large-scale and high liquidity of their debt securities, Fannie Mae and Freddie Mac received a lot of investments from the foreign exchange reserves of many central banks around the world. During the financial crisis, this pair of mortgage giants was supported by a government bailout and therefore remained solid. Presently, the US government holds about 80 percent of their shares and is their biggest shareholder. Their being de-listed from the NYSE has not had any negative impacts on their debt securities. Chinas foreign exchange reserves were not invested in Fannie Mae and Freddie Mac shares. As for debt securities, repayment of the principal and interest is being maintained and prices are stable. We will continue to closely follow the latest Fannie Mae and Freddie Mac developments to ensure the asset safety of our foreign exchange reserves. Q9: Under Europes current sovereign-debt crisis, will the SAFE adjust its investment strategy for foreign exchange reserves in the European market or reassess the euro assets that it holds? A: Generally, although the bailout measures have been rolled out and implemented to help high-debt countries such as Greece prevent debt defaults and restructuring, we should continue to pay close attention to any new developments in the crisis. We have always firmly supported the EU integration process and have also supported the package of financial stability measures that the EU and the International Monetary Fund have adopted. We believe that, under the joint efforts of the international community, all of Europe will definitely overcome the current difficulties and maintain the stability and healthy development of the financial markets. As a responsible long-term investor, in terms of our foreign exchange reserves China has always adhered to the principle of diversified investment and the European market was, is, and will remain one of the major investment markets for our foreign exchange reserves. Q10: If there is a sharp depreciation in the US dollar, will China's foreign exchange reserves suffer a heavy loss? A: To address this issue, a comprehensive analysis will be required. First, we must take into account the currency composition of Chinas foreign exchange reserves and the trends in the exchange rates of other currencies against the RMB. A number of currencies constitute the foreign exchange reserve assets. Even if the US dollar were to depreciate, the euro and other currencies might appreciate, thus to a certain extent cancelling out one another. Therefore, in order to understand the impact of a depreciation of the US dollar on Chinas foreign exchange reserves, we need to conduct a specific analysis of the composition of China's foreign currency basket. Second, an actual gain or loss in Chinas foreign exchange reserve assets will only occur when they are exchanged for RMB. Foreign exchange reserves mainly exist in the form of foreign currency assets and are used to ensure the countrys international liquidity, including payments for imports, international financing, debt payments, as well as maintenance of the stability of the currency and financial systems. Unless there are special circumstances such as a war or a crisis, the People's Bank of China will never convert its foreign currency reserve assets into RMB on a large scale. Therefore, due to the above reasons, a depreciation of the US dollar against the RMB will not cause an actual loss in Chinas foreign exchange reserves. Third, the value of China's foreign exchange reserve assets is decided by its real purchasing power. Foreign exchange reserves are mainly for external payments, so whether there is a loss in foreign exchange reserves mainly depends on a decrease in their purchasing power. If there is inflation in the United States, the real purchasing power of the foreign exchange reserve assets will be affected, which means the same amount of US dollars will buy less than before. Yet, the reality is that China's foreign exchange reserves have been maintaining stable income after many years of operations and their return on assets (ROA) is higher than the US inflation rate. In recent years, the US consumer price index (CPI) has been generally low, therefore the ROA of China's foreign exchange reserves insures a steady increase in their purchasing power. Fourth, the book loss in Chinas foreign exchange reserves caused by an appreciation of the RMB is far less than the book surplus of Chinas financial assets. As of March 2010, China's foreign exchange reserves amounted to USD2.42 trillion. During the same period, if calculated by the exchange rate at the end of March 2010, the total assets in China's banking sector were approximately RMB84.3 trillion, equivalent to approximately USD12.3 trillion and 5.1 times that of China's foreign exchange reserve assets. This means that when the RMB appreciates, the book gain in RMB assets is roughly equivalent to 5.1 times of the book loss of the foreign exchange reserve assets. If we take into account other financial assets such as stocks and bonds held by residents as well as real estate assets, the book gain in RMB assets will be even greater. It is worth emphasizing that the above-mentioned loss or gain only means a change in book value, which would only occur if there is an actual conversion between the RMB and the other currencies. 2010-07-06/en/2010/0706/938.html
Further Transforming the Concepts and Methods for Foreign Exchange Administration, Promoting Reform in the Major Areas of Foreign Exchange Administration in a Progressive Manner
A recent symposium attended by the director-generals of the branches of the State Administration of Foreign Exchange (SAFE) was held in Hohhot, capital of the Inner Mongolia Autonomous Region. The participants earnestly carried out the decisions and planning of the Party Central Committee and the State Council on the current economic situation and the economic work for the latter half of this year, reviewed and summarized foreign exchange administration work from the beginning of 2010, conducted in-depth analyses of the current economic, financial, and foreign exchange situations both at home and abroad, and studied and mapped out the major tasks for foreign exchange administration during the next stage. Mr. Yi Gang, deputy governor of the Peoples Bank of China and administrator of the SAFE, delivered a work report. Deputy director-generals, chief economists, and chief accountants of the SAFE were also present at the meeting. It was pointed out at the meeting that since the beginning of 2010, the foreign exchange administration departments have earnestly carried out the scientific outlook on development, transformed conscientiously the concepts and methods of foreign exchange administration, promoted progressively reform in major areas and in key aspects of foreign exchange administration, and implemented various tasks according to the established plans. The progress can be encapsulated in the following seven points: (1) Constantly promoting trade facilitation, carrying out pilot reforms of verification and writing-off systems for imports, realizing the transformation from deal-by-deal verification to aggregate inspection, from on-site verification to off-site verification, as well as from behavioral supervision to entity supervision; (2) Launching special intensive campaigns intensively to crack down on the inflow of hot money,by which 3.47 million deals of cross-border transactions involving an accumulated amount of over USD440 billion were examined. So far, 197 cases of suspected regulation violations have been ascertained, among which 150 cases have been filed and 42 have been settled. As to other cases, efforts are being made to determine the nature of the relevant illegal acts in an orderly manner and to impose corresponding penalties; (3) Further improving the transparency of foreign exchange administration, intensifying efforts to integrate and sort out foreign exchange administration laws and regulations, making great efforts to publicize and disseminate basic knowledge about foreign exchange administration, interpreting foreign exchange administration policies, and responding actively to social concerns; (4) Further facilitating foreign exchange receipts and payments and transactions of market entities, streamlining administrative procedures for the examination and approval of foreign exchange businesses under the capital account, carrying out pilot operations of exchange settlements and sales for individuals via e-banking, and providing the Green Channel as a preferential policy for combating earthquakes, carrying out relief work, and ensuring the success of the World Expo 2010 Shanghai; (5) Strengthening the statistics and monitoring of cross-border fund flows, standardizing foreign exchange administration for overseas direct investments by domestic banks, and completing implementation of systems for assessments of bank compliance with the regulations of foreign exchange administration on a nationwide scale; (6) Perfecting the operation and management of foreign exchange reserves, strengthening risk management and internal controls, and constantly enhancing the level of operations and management of foreign exchange reserves; (7) Strengthening the construction of an honest and clean party work style and government, and enhancing internal management and construction of personnel internal control systems. It was pointed out at the meeting that under the macro-economic circumstances both at home and abroad, the first half of 2010 saw relatively brisk foreign exchange receipt and payment activities. On the whole, compared to expectations the appreciation of the Renminbi has been slackening. It is estimated that during the latter half of 2010, the country will still confront a complex situation for foreign exchange receipts and payments, combined with a certain degree of uncertainty. For this reason, efforts shall be made to closely monitor the situation, to carry out in-depth assessments of the risks, as well as to formulate effective programs and measures to cope with the situation. It was proposed at the meeting that during the next stage foreign exchange administration departments at all levels should speed up the transformation of the concepts and methods for the administration of foreign exchange, and make great efforts to promote reform in the major areas of foreign exchange administration. Efforts should be made in the following eight areas: (1) Implementing on a wider scale the reform of the verification and writing-off for imports and exports, earnestly summarizing experiences from the pilot reforms of verification and writing-off of foreign exchange imports, which shall be implemented on a nationwide scale when the essential requirements are satisfied; initiating reform of verification and writing-off of foreign exchange collection from exports with the appropriate timing, and continuing to promote trade facilitation; (2) Continuing to fulfill duties to ascertain and impose penalties on cases ferreted out by the special campaigns to crack down on the inflow of hot money, and maintaining the seriousness of combating hot money; (3) Promoting the integration of data and systems and enhancing the level of comprehensive utilization, monitoring, and analysis of the relevant data, so as to meet the requirements for statistical monitoring, analysis, and early warning, management, inspections, and so forth; (4) Promoting the reform of the capital account with a special focus on selected items required to keep risks under control; (5) Actively promoting the development of the foreign exchange market in coordination with the reform of the RMB exchange rate formation mechanism, studying the addition of transaction instruments that meet the requirements of the market, and strengthening supervision and guidance over market makers; (6) Further improving the transparency of foreign exchange administration and continuing to promote the integration and sorting out of the laws and regulations, so as to perfect the overall legal framework; further enhancing communication with the media and the general public on popular issues of social concern; (7) Strengthening the operation and management of foreign exchange reserves, further expanding and perfecting investment channels and platform construction, and optimizing the currency and capital structure; (8) Implementing the gist of the National Talent Work Conference, continuing to enhance construction of honest and clean party work styles, government, cadre ranks, and control systems. 2010-08-04/en/2010/0804/946.html
Sorting Out and Standardizing Administrative Licensing to Further Promote Law-based Foreign Exchange Administration
To further enhance law-based foreign exchange administration and to increase the transparency and convenience of foreign exchange administration, the State Administration of Foreign Exchange (SAFE) recently promulgated a newly-modified List of Administrative Licensing Items of the State Administration of Foreign Exchange (hereinafter referred to as List of Administrative Licensing Items). The List of Administrative Licensing Items shall come into effect as of the date of promulgation. During recent years, the SAFE has made great efforts to carry out the work of constructing the administrative licensing system. A standardized legal framework for administrative licensing was established. Efforts were also made to further standardize the procedures for handling administrative licensing, to streamline administration, to delegate power to lower levels, and to sort out the administrative licensing items. Since 2002, the SAFE straightened out and cancelled 45 administrative approval items in six batches, with the approval authority of more than 20 licensing items delegated to the branches and sub-branches of the SAFE. The List of Administrative Licensing Items issued herein is the latest amendment to the 2005 version based on the progress in straightening out the administrative licensing items during recent years. The number of administrative licensing items has been reduced from 39 to 25. The newly-modified List of Administrative Licensing Items provides a comprehensive and accurate picture of the administrative licensing items currently implemented by the SAFE, as well as the key factors in the relevant procedures. With a clearer presentation, more succinct content, and simplified application materials, the List of Administrative Licensing Items will play an active role in further standardizing the procedures for exchange-related administrative licensing and will increase the transparency of foreign exchange administration. It is explicitly required by the SAFE that all branches and sub-branches of the SAFE shall enhance their sense of responsibility, sense of mission, and sense of urgency in performing their duties regarding the law-based administrative licensing of foreign exchange administration in compliance with the requirements of the new circumstances. They shall enhance awareness of complying with the system, and carry out law-based administration and administrative licensing in a conscientious manner and in strict compliance with the provisions of the Administrative Licensing Law of the PRC, the relevant laws and regulations, and the rules related to foreign exchange administration in an effort to deliver better services to the public. To deepen the reform of the foreign exchange administration system, to increase capital efficiency in domestic enterprises, and to facilitate the trade process, the State Administration of Foreign Exchange recently promulgated the Circular on Launching a Pilot Policy Program for Overseas Deposits of Export Proceeds in Some Regions, to launch a pilot policy program for overseas deposits of export proceeds (hereafter referred to as pilot program) in Beijing, Guangdong (including Shenzhen), Shandong (including Qingdao), and Jiangsu from October 1, 2010. The duration of the pilot program will be one year. The policy involved in the pilot program mainly covers the following: first, the foreign exchange authority shall strictly examine the qualifications of enterprises before granting approval to domestic enterprises to open accounts overseas. The accounts opened overseas shall be used for the deposit of the export proceeds of domestic enterprises from truthful and legitimate transactions, for external payments in goods trade and some services trade, and for external payments under the capital account approved by or registered with the foreign exchange authority; second, the foreign exchange authority will manage the scale of the total capital deposited overseas by domestic enterprises; third, the foreign exchange authority will simplify the formalities for import and export write-offs and online inspections, and implement an ex post facto reporting system for enterprises and banks; fourth, the foreign exchange authority will conduct off-site monitoring of the receipt and payment activities of the domestic enterprisesoverseas accounts and on-site inspections of any abnormalities in the monitoring process. The pilot program for overseas deposits of export proceeds is a productive attempt to complete the existing system for the administration of foreign exchange trade receipts and payments: on the one hand, it diversifies the means of adjusting the balance of payments; on the other, it paves the way for capital operations by domestic enterprises; for enterprises frequently involved in the balance of trade, it helps lower expenses and exchange settlement costs for cross-border transfers of capital in foreign exchange; for enterprises mainly competing in the international market and strong in group management, it helps improve the capital efficiency, lower overseas financing costs, and thus strengthen their competitiveness in the international market. 2010-08-27/en/2010/0827/950.html
Improve the Administration of External Guarantees, Encourage Domestic Institutions to Go Global
In order to encourage domestic institutions to go global, to satisfy the demand for policies concerning domestic credit support for overseas investment enterprises, and to further facilitate the process of trade and investment, the State Administration of Foreign Exchange has recently issued the Circular on Issues Concerning the Administration of External Guarantees Provided by Domestic Institutions (hereinafter referred to as the Circular), and the Circular shall come into force as of the date of its promulgation. The Circular mainly covers the following issues: first, relaxing the qualification requirements for the guaranteed party and expanding the business scope of the external guarantees. The banks shall provide external guarantees for the financing, and the guaranteed parties are free from limiting factors such as stock equities, a proportion of the net assets, and the profitability of domestic institutions. Where external guarantees are provided by non-bank financial institutions, the guaranteed parties shall be either corporate bodies legitimately registered within China or enterprises that are domestic institutions, pursuant to the procedures for overseas investments, incorporations, or the holding of shares, either directly or indirectly, overseas. Where external guarantees are provided by the enterprises, the guaranteed party may be an enterprise which the guarantor, pursuant to the prescribed procedures, incorporates, or holds shares of, either directly or indirectly, at home or overseas. Second, lessening the requirements for financial indexes of the guarantor as well as the profitability of the guaranteed party. If external guarantees are provided by the enterprises, the proportion of net assets to the total assets thereof uniformly shall be no less than 15 percent; the amount of the guaranteed partys net assets shall be positive, and the requirements for profitability will be changed from no losses permitted to profits within one of the past three years. (For long-term projects like resource development, profits achieved in at least one of the past five years may be allowed.) Third, making adjustments to the scope of administration and the method for verification of the balance quotas for external guarantees. All external guarantees for financing purposes provided by banks for domestic and overseas institutions shall be incorporated in the administration of the balance quotas. Upon arrival, the administration of the balance quotas may be carried out on the external guarantees for financing or non-financing purposes of non-bank financial institutions and enterprises. Theoretically, the balance quotas for external guarantees provided by the banks shall not exceed 50 percent of the bankspaid-in capital combined with RMB and foreign currencies or working capital, or shall not exceed the amount of their net assets in foreign currency; such provisions also apply to non-bank financial institutions. The balance quotas for external guarantees and/or the balance for external guarantees that are approved by the Foreign Exchange Administration on a case-by-case basis shall not exceed 50 per cent of their net assets respectively. Fourth, clarifying the administrative method for non-financing guarantees provided by banks. When furnishing non-financing external guarantees, the banks are not subject to the provisions on the proportion of net assets and the profitability of the guaranteed party, but either the guaranteed party or the beneficiary shall be the domestic institution or the overseas institution in which the domestic institution holds shares, directly or indirectly. Finally, abolishing the approval procedures for the banks external guarantee performance and clarifying procedures for the external guarantee performance for other entities. Banks may apply for external guarantee performances at their own discretion. Non-bank financial institutions and enterprises shall apply with the local Foreign Exchange Administrations for approval of external guarantee performances on a case-by-case basis, and such institutions and enterprises may purchase foreign currencies during the application process. With the streamlined administrative procedures for external guarantees and clarified administrative requirements, the Circular makes it more convenient for domestic institutions to go globaland delivers more efficient domestic credit support to overseas investment companies, thus enabling domestic financial institutions to better control risks. In the meantime, the Circular refines the risk-prevention mechanisms related to the external guarantees and optimizes the regularly-recorded external guarantee statements, thus paving the way for efficient statistical monitoring, risk warnings, as well as a risk-control system for the balance of payments. 2010-07-30/en/2010/0730/944.html
Conscientiously Sort Out the Laws and Regulations and Improve the Transparency of Foreign Exchange Administration Policies
In recent years, the State Administration of Foreign Exchange (SAFE) has made great efforts to sort out the existing laws and regulations and in six batches has nullified 275 laws and regulations. Based on these achievements, the SAFE recently issued the Catalogue of the Major Currently Valid Laws and Regulations on Foreign Exchange Administration (as of the end of June 2010) (hereinafter referred to as the Catalogue). The Catalogue incorporates a total of 496 foreign exchange administration policies and regulations, including 5 administrative laws and regulations, 19 departmental rules, and 472 normative documents. The laws and regulations incorporated in the Catalogue are all in effect, wholly or mostly, including the administrative circulars and replies that the SAFE issued independently or in conjunction with other relevant authorities, relevant foreign exchange policies issued by the Peoples Bank of China, and judicial interpretations of the Supreme Peoples Court on foreign exchange administration. The Catalogue consists of nine major items, including general foreign exchange business, foreign exchange business under the current account, foreign exchange business under the capital account, foreign exchange business of financial institutions, the RMB exchange rate and the foreign exchange market, and the balance of payments statistics, which, in order to facilitate public inquiries, are further divided into some sub-items based on the specific types of business. The SAFE will further deepen the sorting out of existing laws and regulations, review and update the Catalogue, and constantly improve the transparency of related policies in a bid to facilitate the understanding and use of the foreign exchange laws and regulations by banks, enterprises, and individuals. 2010-07-13/en/2010/0713/940.html
FAQs on Foreign Exchange Administrative Policies(3)
Q11: Will China use its foreign exchange reserves as a trump card or as an atomic weapon? A: We have always emphasized our role as a responsible long-term investor. During the investment and operations of our foreign exchange reserves, we will strictly follow the rules of the market and the laws and regulations of the country concerned. Meanwhile, we will use the reserves as a financial investor and will not seek control over those investments. The investment and operations of foreign exchange reserves must be mutually beneficial; therefore, we let things run their natural course, so to speak, which means we will actively cooperate with those countries that welcome our investment. But if any country is doubtful, we will slow down and try to reach agreement through communications. As has been proven by the facts, the above concerns and worries are completely ungrounded. Q12: We know that the US fiscal deficit is surging, but what does that mean for the US dollar? A: Any prediction on trends for the US dollar must be based on the economic situation not only in the US, but also that in other countries. In the wake of the financial crisis, the US launched massive financial bailout initiatives, resulting in a mounting fiscal deficit and worries about a further depreciation of the dollar. However, we must bear in mind that the weakening of the dollar is also related to the currencies of other countries and regions, which have their own problems. Countries in Europe, for example, are deep in debt. As can be seen from recent developments, the US dollar is strengthening against some currencies, including the euro. From the end of 2009 to May 2010, for instance, the US dollar rose 20 percent against the euro. Going forward, whether the dollar will go up or down will depend on the prospects for an economic recovery in the US and the entire world, as well as on the economic policies of the major economies including those of the US. We hope that major global issuers of currency, the US in particular, will adopt responsible policy measures, fully take into account fiscal deficit pressures and threats of inflation, appropriately arrange an exit mechanism for the loose monetary policies, reduce reliance on debt expansionary policies, shoulder the responsibility and obligation to maintain currency stability, and protect the interests of investors. Q13: Will more or less of Chinas foreign exchange reserves go into US treasuries? A: The US treasury market is the largest of its kind in the world. Given its safety, liquidity, large market volume, and comparatively low transaction costs, for a long time it has been favored not by only domestic investors (over 50 percent of government debt is bought within the US), but also by international investors, including the major central banks throughout the world. As Chinas management of its foreign exchange reserves emphasizes safety, liquidity, as well as maintenance and added value, based on our needs and judgments, we tend to diversify our allocation of assets on international financial markets and the US treasury market is an important market. For a long time, there has been speculation whether China will buy more or less US treasuries with her foreign exchange reserves. It has even been stated that Chinas massive holdings of US dollar assets constitute a threat to the US. The truth is that using foreign exchange reserves to buy American treasury bonds is an investment behavior on the market, and the same is true for an increase or decrease in holdings. Fluctuations in economic cycles and changes in supply and demand, among other factors, can lead to ups and downs in treasury debt prices, and changes in other asset prices can also affect the comparative attractiveness of treasuries. Based on these observations, we have been closely following and analyzing various changes in the market and constantly making dynamic optimization and operational adjustments. This should not be interpreted politically. The outbreak of the recent financial crisis prompted the US to adopt monetary and fiscal stimulus policies, resulting in a sharp increase in the fiscal deficit and a greater share of outstanding national debt in GDP, hence producing worries about the safety of assets in the US. Chinas foreign exchange reserves are engaged in long-term diversified investment, with dynamic changes among different assets, in order to effectively control the overall risks, to allow sufficient liquidity, and to achieve overall stability of value. Meanwhile, China has been calling on the US to act as a responsible power by taking concrete measures to safeguard US and global economic sustainability, to protect the interests of investors, and to uphold their confidence. Q14: Are foreign exchange reserves mainly invested in relatively high-grade treasury bond assets? A: Foreign exchange reserves are mainly invested in financial products with relatively stable investment income and low risks, which mainly include assets related to governments, institutions, international organizations, and corporations in the developed and major developing countries, and mutual funds and various other products such as inflation-protected bonds and asset-backed securities. We need to take into consideration many factors in the allocation of our foreign exchange reserves and we do not merely buy products with high-grade investments. China now has more than two trillion dollars of foreign exchange reserves. With so much capital, many factors are taken into consideration when purchasing financial products, such as the market capacity of the invested products. If the treasury bonds of a nation enjoy high credibility and repayment capability, but are only several hundred million or several billion US dollars, and are traded mainly on the domestic market and are seldom available on the international financial market, then such products can hardly satisfy our investment demands. In addition, whether the assets risk-return characteristics and related functions can meet our portfolio investment needs and requirements for risk diversification, and efficiently withstand inflation are all important factors that need to be considered. Our foreign exchange reserves are a stable, responsible, and long-term investment in the international financial market and we never engage in speculation. Active speculators in the international financial market go after arbitrage opportunities, and some of them even take the initiative to create them. In contrast, foreign exchange reserves seek to maintain or increase the value of assets, putting the safety of the reserve assets at top of the agenda. All of these operational ideas are conducive to the stability of the international financial market. Q15: Are foreign exchange reserves invested in higher-risk financial products such as stocks and private equity? What is the size of such investments? A: We have strict investment standards and risk management procedures for the various assets that can be invested with foreign exchange reserves. When choosing varieties of investment, it is imperative to consider their safety, liquidity, long-term and short-term returns on investment, and other characteristics. Meanwhile, it is also necessary to take into account the correlations with other assets. Putting low correlated or negative correlated assets in the same portfolio can offset each other at different stages of the economic cycle, which is conducive to reducing the overall risk and to enhancing the flexibility of asset allocation and risk management. We do not rule out any investment products. But strict risk assessment and control are needed to decide upon which product we should invest in. In other words, according to the above-mentioned standards, it is necessary to determine whether the products are in line with the principles of safety, liquidity, and maintenance and increments of value of the foreign exchange reserves, and whether they can achieve the effect of risk diversification. As soon as they meet these standards, they will be included in our decision-making and risk management procedures. Q16: Is China considering further increasing its gold holdings? And when? A: Gold has many advantages, such as high international recognition, a good capability to maintain value, and an ability to make emergency payments. Meanwhile, investment in gold is subject to certain restrictions, which makes it impossible for gold to become our main channel for foreign exchange reserve investment. First, gold has a very limited market capacity. Annual global gold output is only 2,400 tons, and current demand and supply is basically balanced. If we buy gold on a large scale, the international price of gold will definitely be pushed up. When Chinese people go shopping malls to buy commodities like gold jewelry, they would be faced with rising prices, which would end up hurting the interests of our domestic consumers. Chinas gold price is generally in line with that of the world market. Second, gold prices fluctuate considerably. As the international price of gold is subject to the impact of the geopolitics of interest rates, supply-demand relations, and speculation, they often fluctuate sharply. In addition, gold does not bring interest income and bears the costs of storage, transportation insurance, and so forth. Based on the history of the past thirty years, the risk-return characteristics of gold are not that good. Gold is protected from inflation, but many other assets have this characteristic as well. Last, increasing gold holdings does not have a notable overall effect on the diversification of foreign exchange reserves. During the past several years, China has increased its holdings of gold reserves by over 400 tons, reaching total holdings of 1,054 tons. Even if this were to be doubled, it would only disperse thirty to forty billion US dollars of our foreign exchange reserves, raising the proportion of gold reserves by merely one to two percentage points. In general, we will take a prudent approach when considering whether to increase or decrease our gold reserves according to demand and the market. (To be continued) 2010-07-07/en/2010/0707/939.html
SAFE Spokesman Addresses Press Conference on Relevant Issues Concerning the Detailed Rules on Measures for the Administration of Individual Foreign Exchange
January 5, 2007 - In order to implement the Measures for the Administration of Individual Foreign Exchange and to standardize and facilitate the operation of foreign exchange business by banks and individuals, the State Administration of Foreign Exchange (SAFE) recently formulated the Detailed Rules on Measures for the Administration of Individual Foreign Exchange (hereinafter referred to as the Detailed Rules). A SAFE spokesperson answered questions from reporters on issues of concern in various circles: Q: What ideas of the Administration Department have been embodied in the formulation of the Detailed Rules? A: When formulating the Detailed Rules, the following features have been mainly taken into account: first, to encourage foreign exchange held by the common people,to support the reasonable and lawful holding and use of foreign exchange by individuals, to realize balanced management, and to actively promote an equilibrium in the balance of payments; second, to maintain the principles of keeping pace with the times and management innovation so as to constantly adapt to the developments and changes in the market and to facilitate the operations of banks and individuals; third, to abide by the principle of due consideration to both public and private interests, to steadily strengthen and improve management of individual foreign exchange receipts and payments, and to perfect supervision of cross-border capital flows and transactions; fourth, to observe the principle of paying equal attention to being flexible and strict, to exercise effective supervision by relying on modern measures, and to implement practical policy and supervision adjustments. Q: It is stipulated in the recently promulgated Measures for the Administration of Individual Foreign Exchange that management of an annual quota shall be applicable to individual foreign exchange sales and domestic individual foreign exchange purchases, and it is specified in the Detailed Rules that the respective annual quota shall be USD 50,000. What are the main policy considerations behind this requirement? A: Management of an annual quota is an important aspect of the adjustment in the individual foreign exchange administration policy. The related formalities and vouchers for foreign exchange sales and purchases within the quota will be drastically simplified and facilitated, and examination of the authenticity of transactions exceeding the quota shall be strengthened. The Detailed Rules specify that the annual quota for individual foreign exchange purchases be drastically raised from USD 20,000 to USD 50,000, which can better serve the demands of domestic individuals for foreign exchange and the holding of foreign exchange by the common people. At the same time, the application of management of an annual quota on sales of foreign exchange for both domestic and foreign individuals changes the past administration mode of easy in and difficult out,and embodies the principle of balanced management of capital inflows and outflows. The annual quota of USD 50,000 for individual foreign exchange sales will basically satisfy the normal demands for individual foreign exchange sales and will contribute to controlling illegal capital inflows across the border through individual channels. To prevent acts of avoiding administration, such as repeated purchases of foreign exchange and foreign exchange sales in installments, and to ensure the effectiveness of the management of an annual quota, the SAFE has established a management information system connecting banks with the SAFE for individual sales and purchases of foreign exchange. Via this system, banks shall deal with the business of individual foreign exchange sales and purchases and verify the authenticity of the materials provided by individuals. In addition, this system provides a unified and standard operating platform for the banks to deal with such business, thus it is conducive to fair competition among banks, while individual foreign exchange sales and purchases will not be limited by regions or banks and the conduct of relevant business will become more convenient. Q: It is specified in the Detailed Rules that an individual engaging in foreign trade activities may open a foreign exchange settlement account. What additional conveniences will this policy bring to individual foreign trade? A: To embody the principle of giving full conveniences to business-based foreign exchange receipts and payments under the individual trade account, the Detailed Rules specify that individual trade businessmen and private businessmen may open foreign exchange settlement accounts, which shall be administrated as institutional accounts and may be used for foreign exchange sales and receipts and payments for imports and exports by direct trading or through agents. Unlike individual foreign exchange savings accounts and foreign exchange items under the capital account, the purchases and sales of foreign exchange under the foreign exchange settlement accounts are not subject to the limits of the annual quota, and the business shall be conducted with valid trading documents regardless of the amount. In addition, capital transfers for individual foreign exchange savings accounts shall only be conducted between accounts of the same nature held by the individual or his/her direct relatives, and any transfers of foreign exchange items under the capital account shall be subject to examination and verification. However, after opening a foreign exchange settlement account, private businessmen may carry out capital transfers with their entrusted agent enterprises which are not limited to the account openers. These regulations, while providing full support and conveniences to individual foreign trade, are beneficial to the statistics and monitoring of foreign exchange receipts and payments under individual trade and may promote the healthy and orderly development of individual trade activities. Q: While offering sufficient facilities to business-based foreign exchange activities under the current account, how is the concept of supervision reflected in the Detailed Rules for strengthening the authenticity of verification for non-business-based foreign exchange activities under the current account, such as individual donations and family maintenance remittances? A: Management of foreign exchange receipts and payments under individual current accounts according to their business-based and non-business-based nature is an important content of the adjustment in the individual foreign exchange administration policy at this time. The general principle in the administration of non-business-based foreign exchange receipts and payments under the individual current account is to exercise, on the basis of the convertibility of the items under the current account, management of an annual quota on purchases and sales of foreign exchange. Within the total annual quota, individuals can directly handle the formalities in the banks with their valid identity documents. There are specific requirements of authenticity and validity for foreign exchange receipts and payments beyond the quota for one-sided transfer items with concentrated foreign exchange inflows, such as individual donations, family maintenance remittances, and inheritances. Acceptance by individuals of overseas donations shall satisfy the relevant regulations of the State, and sales of foreign exchange shall be carried out only after notarized donation agreements or contracts are provided. Foreign exchange sales for family maintenance remittances can be carried out only after relevant certificates are provided, such as direct relative relationship certificates or notarized supporting relationship certificates, and relevant income certificates of the overseas payers such as bank deposit certificates and tax payment certificates for individual income. Foreign exchange sales for inheritances can be carried out only after presenting the relevant certificates such as legal documents or notarial deeds regarding the inheritance. Q: How do the Detailed Rules specifically regulate foreign exchange receipts and payments under the individual capital accounts? A: The following principles of administration on individual capital accounts are embodied in the Detailed Rules: first, in line with the overall requirement of the convertibility progress, the restrictions on foreign exchange transactions under individual capital accounts shall be lifted in an orderly, gradual, and in a controlled manner; second, an equilibrium in the balance of payments shall be promoted and individuals shall be supported to lawfully and reasonably participate in direct investments and investments in financial products such as securities, and current portfolio investments shall be dealt with through qualified domestic or foreign institutional investors; third, formalities shall be simplified, procedures standardized, transactions facilitated, and the transparency of supervision improved; fourth, transactions which have a substantial impact on the equilibrium in the balance of payments and the stability of the exchange rates shall be watched and the opening-up will be cautious to effectively guard against risks. Q: In the past, individual foreign exchange accounts were divided into note accounts and exchange accounts. It is now stipulated in the Detailed Rules that individuals may open foreign exchange savings accounts. Does this mean there will no longer be a distinction between note accounts and exchange accounts? A: This question can be understood in two ways. On the one hand, from the perspective of foreign exchange administration, individuals may open foreign exchange savings accounts in banks with valid identity documents for non-business-based individual foreign exchange receipts and payments, and there will not be any different foreign exchange administration policies for note accounts and exchange accounts, and unified supervision standards shall be applied for capital deposits, foreign exchange sales, outward remittances, domestic transfers, and cash withdrawals. On the other hand, from the perspective of bank operations, since the operational costs for foreign cash and spot exchange differ, the banks may differentiate depositors into cash depositors and exchange depositors, and adopt different charging standards or buying and selling rates for them; this pertains to the business operations of the banks themselves. Q: In various places in the Detailed Rules there are still many special supervisory requirements for the deposit, withdrawal, and remittance of foreign cash. What are the considerations behind these requirements? A: According to the related stipulations to oppose money laundering and the requirements to combat illegal foreign exchange transactions, the Detailed Rules further strengthen administration over the trading of foreign cash, which mainly includes: in cases where an individual deposits his/her foreign cash into his/her foreign exchange savings account, with a cumulative daily amount or equivalent exceeding USD 5,000, he/she shall handle it at a bank with relevant documents; in cases where an individual withdraws foreign cash with a cumulative daily amount or an equivalent exceeding USD 10,000, he/she shall file related documents in advance with the SAFE; in cases where an individual carries foreign cash abroad with a cumulative daily amount in excess of an amount equivalent to USD 10,000, he/she shall additionally provide relevant declaration forms signed and sealed by the customs or his/her bank forms for the withdrawal of the foreign cash from the original deposit bank. Because foreign currency pricing, settlement, and circulation are forbidden within the territory of the PRC, legitimate foreign cash resources and uses mainly include cross-border foreign exchange inward and outward remittances, domestic foreign currency transfers and withdrawals, as well as carrying foreign cash for persons entering and exiting the territory, which comply with the relevant provisions. From the perspective of international experience, the strengthening of administration of cash transactions is a principle commonly adopted by the supervision departments of the various countries, and it shall also be a key area of foreign exchange supervision in China . 2007-01-05/en/2007/0105/819.html

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