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Since the July 2005 reform of the mechanism for setting the Renminbi exchange rate in July 2005, there have been increasing varieties of trading products on the Chinese foreign exchange market. The country has witnessed steady development of Renminbi-against-forex forwards and foreign exchange swaps on the market where banks provide services to their clients and on the inter-bank foreign exchange market. In August 2007, Renminbi-against-forex currency swaps were introduced into the inter-bank foreign exchange market. In order to further satisfy the requirements of market entities for hedging exchange-rate risks and to promote the development of the foreign exchange market, the State Administration of Foreign Exchange recently promulgated the Circular on Issues Concerning Foreign Exchange Administration for Renminbi-Against-Forex Currency Swaps Provided by Designated Foreign Exchange Banks to Their Clients (hereinafter referred to as the Circular), indicating the introduction of Renminbi-against-forex currency swaps into the market where banks provide services to their clients. The Circular will enter into force as of March 1, 2011. The Circular mainly covers three issues: (1) simplifying administration of market admittance. Banks that have acquired one-year qualifications for handling Renminbi-against-forex swaps for clients are allowed to provide currency swaps to their clients without having to receive approval from the SAFE; (2) facilitating market transactions. Transaction elements such as currencies and terms in the currency swaps provided by the banks to their clients will be determined at the discretion of the banks; (3) interest rates in currency swaps will be determined by both parties to the contract through negotiations, and shall comply with the regulations of the Peoples Bank of China on the administration of deposit and lending rates. Promulgation of the Circular will provide more opportunities for enterprises to select instruments to hedge risks caused by exchange rates and interest rates, and will play a positive role in promoting the development of Chinas foreign exchange market and enhancing the risk-hedging awareness and capability of enterprises. 2011-01-30/en/2011/0130/981.html
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In order to regulate foreign exchange receipts and payments associated with cross-border trade of environmental equities such as CO2 emissions reductions, the State Administration of Foreign Exchange recently promulgated the Circular of the General Affairs Department of the State Administration of Foreign Exchange on the Handling of Foreign Exchange Business Associated with the Trade of Environmental Equities Such as Carbon Dioxide Emissions Reductions (Hui Zong Fa [2010] No. 151), hereinafter referred to as the Circular). The Circular will come into force as of the date of promulgation. The Circular mainly covers three areas: (1) When handling the procedures for receipts from cross-border trade of environmental equities, such as carbon dioxide emissions reductions, banks may handle the settlement of foreign exchange for domestic institutions or open a capital account foreign exchange account for the trade of environmental equities to preserve the relevant categories of foreign exchange earnings after examining the materials proving the authenticity of the relevant business according to the regulations and based on the needs of domestic institutions; (2) Domestic institutions such as environmental exchanges, emissions rights exchanges, and forest ownership exchanges may, upon approval of the State Administration of Foreign Exchange, open a foreign exchange account for the collateral of special tradefor deposits of collateral, to-be-paid commissions, and taxes by intended transferees, foreign exchange margins that should be refunded to intended transferees in cases of failure of payment, and collateral transferred to sellers and commissions and taxes deducted by the exchanges after conclusion of the relevant transactions; (3) The relevant requirements for the examination of materials, submission of information, registration of basic information, declaration of BOP statistics, and so forth are specified. Promulgation of the Circular will play an active role in facilitating cross-border trade of environmental interests such as CO2 emissions reductions as well as in promoting the healthy development of a low carbon economy. 2010-12-31/en/2010/1231/976.html
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In order to further direct and standardize the verification of indirect declarations of statistics on the balance of payments which is conducted by the foreign exchange authorities at all levels, the State Administration of Foreign Exchange recently issued the newly-revised System for the Verification of the Indirect Declaration of Statistics on the Balance of Payments (hereinafter referred to as the Verification System), which will come into force as of February 1, 2011. The revision mainly covers the following five issues: (1) improvements to the 2003 version of the Verification System and based on the existing system for indirect declarations of statistics on the balance of payments and the functions of its application system, the previous verification system was nullified; (2) the key tasks for verification of large-amount transactions and major transaction items were incorporated into the Verification System, with the previous provisions on the relevant verification incorporated into the Verification System, and the previous verification system for large-amount transactions is nullified; (3) the relevant quantitative indices involved in the verification are adjusted based on current circumstances; (4) the process for on-site verifications and the key tasks for the verifications of large-amount transactions are standardized; (5) the measures taken by the Departments of the Balance of Payments of the SAFE to impose penalties on acts in breach of the regulations on the declaration of statistics on the balance of payments and the operational procedures for transferring relevant cases to the authorities for foreign exchange inspections are specified. The revision of the Verification System will better reflect operations of the existing declaration of statistics on the balance of payments and its supporting system. Furthermore, the revision will improve the standards for verification of data declaration and clarify the operational procedures for the verification, which will play an active role in standardizing the law-based administration of statistics on the balance of payments, increasing the efficiency of the verification and improving the quality of the data declaration. 2011-01-20/en/2011/0120/979.html
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On April 1, 2011, RMB-against-foreign exchange trading was officially introduced into Chinas inter-bank foreign exchange market. On the first day of trading, the system operated smoothly in parallel with brisk quotations and enquiries by banks. The quotation covered all 13 standard terms. A total of 10 RMB-against-USD options trading were concluded on the first day, with trading terms ranging from 1 to 6 months. The nominal principal amounted to a total of USD49 million. Since Chinas reform of the mechanism for setting up RMB exchange rates in July 2005, the foreign exchange market has witnessed accelerated development and increased varieties of trading products. A broad array of RMB-against-foreign exchange derivatives, such as forward exchange transactions, foreign exchange swaps, and currency swaps, were successively introduced into the market where banks provide services to their clients and the inter-bank foreign exchange market. The introduction of RMB-against-foreign exchange options trading signals the initial formation of a complete system for the trading of fundamental exchange rate derivatives on the foreign exchange market, which will provide a solid foundation for innovation-oriented development of the foreign exchange market in the future. The SAFE will continue to promote the progressive development of the foreign exchange market by taking into account circumstances in market operations and market conditions and by complying with the principle of maintaining the initiative, controllability, and progression of development. 2011-04-06/en/2011/0406/990.html
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In order to properly direct the flow of cross-border funds, to prevent the inflow of illegal funds, and to maintain the security of the foreign-related economy and finance, the State Administration of Foreign Exchange recently promulgated the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning Further Strengthening the Administration of Foreign Exchange Business (Hui Fa [2011] No.11, hereinafter referred to as the Circular). The Circular mainly covers four areas: (1) further strengthening administration of the bankscomprehensive positions for foreign exchange settlement and sales and reducing the lower limit of the negative positions of the bankssettlement and sales of foreign exchange on a cash basis based on the various circumstances; (2) strengthening administration of foreign exchange for transit trade, and incorporating the proceeds from transit trade into the administration of the to-be-verified accounts; (3) appropriately reducing the basic proportions of enterprise quotas for foreign exchange receipts and payments in terms of advances on sales under trade in goods and deferred payments for a term of over 90 days; (4) further reducing the aggregate quota for short-term external debts of domestic financial institutions, and appropriately reducing the quotas for the outstanding short-term external debts of banks with relatively large amounts of inter-bank deposits and lending. Promulgation of the Circular will play an active role in further regulating cross-border fund flows as well as checking the inflows and exchange settlement of illegal funds. 2011-03-30/en/2011/0330/988.html
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Q: The international credit rating agency Standard & Poors yesterday warned that it will revise downward its outlook on the U.S. sovereign credit rating. Since China is a big holder of U.S. Treasury bonds, is there any concern about the safety of its investments? A: We have noticed that the S&P has revised its outlook on the U.S. sovereign credit rating from stable to negative. As a major target of institutional investors in the U.S and throughout the world, Treasury bonds reflect the credibility of the U.S. government. We hope that the U.S government will take responsible measures to guarantee the interests of its investors. 2011-04-20/en/2011/0420/992.html
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Yi Gang, deputy governor of the People's Bank of China (PBOC) and administrator of the State Administration of Foreign Exchange (SAFE), recently accepted an interview with Hu Shuli, executive editor-in-chief of China Reform. The interview, published in issue no. 8 (2010) of China Reform and appearing on www.caing.com, is presented here as follows. The Best Choice for the RMB Exchange Rate Regime Ultimate Goal and Timetable Hu Shuli (hereinafter referred to as Hu): On June 19, 2010, the Peoples Bank of China announced the decision to further the reform of the RMB exchange rate formation mechanism on the basis of the 2005 reform. Why now? What do you think of the achievements that the exchange rate reform has made so far? Yi Gang (hereinafter referred to as Yi): Chinas exchange rate regime is a floating one, which is based on market supply and demand and subject to adjustment and management against a basket of currencies. In fact, this is the best choice at present for the Chinese socialist market economy. How have we arrived at this conclusion? The reform of the exchange rate regime began in 1994, when exchange rates were unified on January 1 and the foreign exchange market was established soon thereafter. From 1994 to 1996, the RMB fluctuated in both directions and appreciated by about 5 percent, from 1: 8.71 to 1: 8.28 against the USD. Then, after the outbreak of the Asian financial crisis, as the Thai Baht and the Korean Won experienced huge depreciations, China refused to devalue the RMB, resulting in a stable 1: 8.28 from 1997 to 2005. We still believed in the benefits of the exchange rate reform and that a managed floating currency is the right exchange rate mechanism for China, but the existence of inertia or path dependencemade reform very difficult. Then, on July 21, 2005, the reform started again and we had three years of fluctuations up until 2008. During this period, the RMB was in fact subject to two-way fluctuations and followed the direction of the currency basket. But in 2008, a series of events occurred, including the outbreak of the sub-prime mortgage crisis.Soon thereafter Bear Stearns went under, and Lehman Brothers declared bankruptcy on September 15, 2008, pushing the financial crisis to a climax. From then on, the RMB remained near the level of RMB 6.83 against the USD, with minor fluctuations, until June 19 of this year, when we again launched the RMB exchange rate reform. Looking back on history, it is clear that we have never lost sight of this mechanism; we were just interrupted by the outbreak of the crisis and other factors. Nevertheless, this is the best choice for China, a choice that we should uphold. Hu: What is the ultimate goal? Yi: Our ultimate goal is to make the RMB a convertible currency. This is the goal that was made in the fall of 1993, at the Third Plenary Session of the 14th CPC Central Committee. Hu: What is the relationship between a convertible RMB and its exchange rate? Is its free convertibility based on free floating? Or is the RMB freely convertible under a managed floating exchange rate mechanism? Yi: This question can be very theoretical. Usually a convertible currency has a freely floating exchange rate. At the Bretton Woods Conference, it was agreed that the major currencies would be pegged to the U.S. dollar, which in turn was pegged to gold at US$35 per ounce. This in fact was a fixed exchange rate system. But when the Bretton Woods system collapsed in the 1970s, the peg to gold was abandoned along with the fixed exchange rate system. In theory, convertible currencies should have a floating exchange rate because the mechanism for a floating exchange rate can act as a stabilizer for the convertible currency. In other words, the float ensures its convertibility. If the USD is always pegged to gold, it is impossible to achieve convertibility between the two. In contrast, if the USD is floating, sustainable convertibility can be achieved. Another extreme example lies in the Currency Board system practiced in Hong Kong and other regions. It is a special arrangement that gives the Currency Board no power to effect monetary policy. It can only be implemented in a small and fully open economy, and should be considered an exception that proves the rule. Generally, a convertible currency should have a very flexible exchange rate mechanism. A relatively developed country, or a mature emerging economy, should eventually choose to exercise monetary policies independently and to ensure the free flow of capital. To do so, it has to eliminate the fixed exchange rate. That is the case in the U.S. and in the Euro Zone, where the USD and the Euro are allowed to fluctuate widely according to the market situation. Hu: When can the RMB become convertible? Is there a timetable? Yi: We dont have an official timetable for RMB convertibility in China. But according to an IMF study, for an average country, it takes about 7 to 10 years to transition to capital account convertibility from current account convertibility, which China achieved in 1996. Now, 15 years later, China still hasnt achieved capital account convertibility, and we do not have a timetable. People can make their own judgments based on international practices. The main reason is China is too big and our development is too uneven, which makes the problem very complicated and it is difficult to achieve a consensus. Hu: In terms of currency appreciation, we all know that there are both external pressures and domestic needs. Comprehensively, what are the reasons that the RMB still cannot have a floating exchange rate? Yi: What really makes a currencys exchange rate float is the real effective exchange rate, which can be altered in two ways. The first is to adjust the nominal exchange rate, and the other is to increase domestic prices. In face of appreciation pressures, we do not have to adjust the nominal exchange rate because inflation can change the real effective exchange rate. Both methods have been used by China in the past decade, with adjustments in both the nominal exchange rates and prices. The surge in the housing prices is a good example. Hu: Now after several rounds of exchange rate reform, peoples expectations of a RMB appreciation should be pretty low now. Do we still need to continue the adjustment via inflation? Yi: It is safe to say that the pressure has weakened. In the recent decade, housing prices have gone through the roof in Beijing and Shanghai. In fact, commodity prices as a whole have greatly increased. These price hikes are actually adjustments against imbalances. Ten years ago, if you converted USD into RMB and bought property in China, you could make a lot of money, but now it is no longer a very lucrative deal. The same is true for other assets. All these indicate that, compared with ten years ago, the RMB exchange rate is now much closer to an equilibrium level. Now, the exchange rate is not likely to fluctuate sharply and we are in a position to maintain a flexible exchange rate regime and to keep the exchange rate stable at a reasonable level of equilibrium. Every coin has two sides. The constant increase in labor productivity in China has determined the overall trend in currency value. Under such a trend, appreciation can curb inflation; a bit more appreciation would mean a bit less inflation. So if the nominal exchange rate remains the same, the result will be more inflation. Some might argue that the Chinese people do not need imported goods, so a RMB appreciation will result in no benefits. This is wrong. Take soya beans as an example. Over half of the soya beans consumed in China are imported, and bean products are in high demand. Even soya bean pulp is needed to breed pigs, which means soya beans are somehow related to pork prices. If the RMB does not appreciate, then the prices of soya beans, bean oil, and bean pulp will be at least 20 percent higher than they are now. At present, these soya products are becoming very expensive on the international market, but the price increase is not that apparent in China. Why? Because the RMB has gone up and soya prices are mostly calculated in USD. It is the same for crude oil and iron ore, which, believe it or not, are also closely related to every household. So a currency appreciation can control imported inflation. In addition, many Chinese people travel abroad or send their children to study overseas. They are also the beneficiaries, but they are the silent majority.The small number of people who do not gain from the RMB appreciation mainly work in the export industry. They are the ones who complain loudly that they will lose their jobs and their lives will become miserable. Before the exchange rate reform in 2005, the relevant department made an that the cost was RMB 8.11 for state-owned enterprises and RMB 8.07 for private enterprises. If the cost is higher than the exchange rate, then the enterprises will suffer losses. If that were the case, when the RMB exchange rate jumped to RMB 8.11 on the first day of the launch of the foreign exchange reform in 2005, export enterprises would have had massive losses. But during the period from 2005 to 2008 since the reform, Chinas exports have been growing at an annual rate of over 20 percent. In other words, the adjustment of the foreign exchange rate did not hurt exports; on the contrary, during these years, exports witnessed substantial growth, along with industrial upgrading, technological progress, product upgrading, and the increase of added value of Chinese products. So we should view this question dynamically. The government is trying all methods to formulate sound policies and to create an enabling environment. For example, instruments for hedging and forward settlement and sales of foreign exchange are offered to help import and export enterprises to hedge against risks. Another misconception is that a RMB appreciation means losses in our foreign exchange reserves. In 2007, when the RMB was appreciating very rapidly, some observers said that the loss of foreign exchange reserves in one quarter would be worth one aircraft carrier. Now, we have 2.45 trillion USD in foreign exchange reserves (equivalent to more than RMB 16 trillion). With the RMB going up, the foreign exchange reserves, in RMB terms, would appear to be less in number, but that does not mean the money is gone. We would suffer some losses if we were to convert the foreign exchange reserves from USD to RMB, but we havent converted yet, so there is no such loss. Such a calculation is conversion on book value only. If such a calculation has to be done, we might as well do the math by calculating how much we will have earned if all RMB assets are put into USD. Take the financial and housing assets in China as an example; the total value of those assets would be RMB 200 trillion (over ten times that of the foreign exchange reserves). If the RMB appreciates and these assets are marked in USD, we can gain at least ten aircraft carriers. But of course, the truth is we neither gain nor lose. Hu: Thats right. They did not take into account the RMB assets. In addition, Chinese peoples savings can increase in value as well. Yi: Right, so we have to look at the issue comprehensively. Right now, we have neither gained nor lost anything. It is the different reporting currencies that are creating the different impressions. Of course, inflation in the U.S. can lead to weakened purchasing power of Chinas foreign exchange reserves. That can be considered a loss, but over the years, the rate of return of foreign exchange reserves has always been higher than the rate of inflation in the U.S. Hu: The abnormality of the foreign exchange rate would exert pressures on resources and the environment. Can you elaborate on that? Yi: If the nominal exchange rate is distorted, there would be a series of consequences. The foreign exchange rate is a price, and its distortion would definitely lead to the distortion of resource allocations. We have always emphasized the importance of expanding domestic demand. If the foreign exchange rate is distorted, foreign demand would be more lucrative, and enterprises would not try to expand domestic demand. Therefore, the distortion of the foreign exchange rate hinders the expansion of consumption and growth of the services industry. Hu: In face of the inflationary pressures, it is suggested that we should increase the interest rate, but can it replace the leverage of the foreign exchange rate? Yi: The interest rate represents the price of capital, whereas the foreign exchange rate is the ratio of the price of one currency against other currencies. These two are interchangeable in very limited ways, and there is always the question of how far away they are from the point of equilibrium. This can trigger endless arguments, because no one knows exactly where the point of equilibrium is. In theory, it is determined by supply and demand. In the best-case scenario, both the interest rate and the foreign exchange rate are close to the point of equilibrium. If the interest rate is increased, the currency will be stronger. Recently, many currencies have increased interest rates, but the USD, the Euro, the Japanese Yen, and the Pound have not. Foreign exchange rates and interest rates have different roles to play, so it is better that they fulfill their respective functions. Hu: The long-term fixed exchange rate has caused a certain degree of distortion. Now the exchange rate is being changed to a floating rate. At present, aside from the mind-set problem, the greatest threat perhaps comes from speculative attacks? Yi: Yes. So, we should continue to decrease these risks. As the market plays a greater role, it will be less lucrative to speculate on the foreign exchange rate. By then, people will give up speculation. Hu: The foreign exchange reform has been interrupted repeatedly. Is the progress a bit too slow? Yi: China is a big developing country. In the past three decades, China has created an economic miracle in the history of mankind. In this sense, Chinas macroeconomic policies have changed track. There might be some criticism concerning the degree of marketization or the delay of reform, but from 1994 to the present, China has maintained a high growth rate. In addition, since the 1994 inflation, so far we have not experienced another big inflation. On the whole, Chinas macro-economic policies are almost optimal. Indeed, we have been interrupted many times, and some might even think that the foreign exchange reform is not occurring fast enough. This question is open to discussion and reflection, but it is fair to say that our macro policies are generally successful. Hu: Why did the government choose the present time to recover the elasticity of the foreign exchange rate? Is it because it is less risky now, or because there are greater external pressures? Yi: China has made this decision mainly based on domestic considerations. It is an independent decision. Like I said, during the global financial crisis, the exchange rate was stable for a while. In fact, the crisis is not yet completely over, as is evidenced by the European sovereign debt crisis this year, but the overall picture is much better than before. As the crisis is receding, our growth rate increased last year from 8.7 percent to 9.1 percent. For the U.S., Europe, and Japan, 2010 is also widely predicted to be a year of recovery. Given the domestic and international background, I think now is the ripe time to recover the elasticity. Hu: But how do we evaluate the role of the foreign exchange rate reform in the external imbalance? Yi: Foreign scholars use their own framework to analyze the issue, and they believe that the foreign exchange rate is an important factor for rebalancing. In fact, as history has shown, the foreign exchange rate is indeed important, but it is not a decisive variable, which is very clear if you look back at the history of Japan and Germany. The appreciation of the Japanese Yen and the German Mark in the 1970s and 1980s did not lead to the immediate disappearance of the trade surplus in Japan or Germany. This might be true in China as well. But this question is very tricky because of a reverse question: If Chinas trade surplus cannot be adjusted even when the RMB appreciates, then is appreciation all good and no bad? Think about it, if the RMB appreciates, I can buy foreign goods very cheap; and if even then, my trade surplus cannot be cut, I have all the benefits, right? This is a tricky question. How to become a rule-maker? Hu: Can China become a rule maker? Yi: This is a huge question. We have always stressed the importance of taking part in the making of international rules. Who makes the rules for the so-called international monetary system? Apparently, major developed countries, especially the U.S. Then how did the U.S. become a rule maker? It was because the US dollar market is open, and it is the main theater for the global financial market. Naturally, whether for stocks or bonds, the rules shall be made by the authorities in charge of those markets, i.e., the U.S. and Europe. We are not yet a rule-maker, but as long as we open up the market and allow foreign players access to our turf, the Chinese monetary and regulatory authorities will then have every right to make our own rules. That is for sure. Hu: I recently interviewed Russia's first Deputy Prime Minister Igor Shuvalov. He said that sooner or later the RMB will become a reserve currency, whereas the Russian ruble will at most be a regional currency. What do you think? Yi: We cannot be too complacent. It will do us harm. China is still a developing country. We should bear in mind our limits. Hu: Then is it possible for the RMB to become a reserve currency? Does the world need it? Yi: This compliment is half flattery, half prediction. We should be modest and prudent, and keep a low profile. If the RMB is chosen by other countries to be a reserve currency, we will let it happen, because it is market demand. But we are not going to push it. I think the best way is to let things run their own course. We must not take the flattery too seriously; in fact, the RMB is still far from being a reserve currency. Hu: Are reserve currencies chosen naturally by the market? Or do we need governments to decide which should become a reserve currency? Or is it a bit of both? Yi: For a currency to become a reserve currency, the first most important factor is the economic strength of that country or confederation; the second is its cultural cohesion and influence; and the third is political and military power. Economic strength is the deciding factor. As to culture, it is important to have an influential culture, whose core values will be widely accepted by other countries and regions. A reserve currency must be backed by a powerful culture and influential value system. Do not underestimate the resilience of the US and Europe Hu: Two years ago, in the midst of the financial crisis, many people, including some Chinese, underestimated the USD and overestimated Euro. Now, the outbreak of the recent European debt crisis seems to prove that Europe cannot be overestimated either. In the past, investors ignored the problems of the U.S.; now, they have gone from one extreme to another. Yi: Let me just talk about Chinas foreign exchange reserve investments. We have always insisted upon the diversification of our foreign exchange reserves, on the two levels of currencies and assets. In terms of currencies, we diversify our investments across all major currencies, such as the USD, the Euro, the Japanese Yen, the Pound, and the currencies of the emerging economies. For each currency, we have to decide whether to buy bonds or other assets in order to achieve asset diversification. Back to your question, in fact, we have not underestimated the USD or the Euro. But the massive size of our reserves makes it impossible for adjustments to be made promptly. Diversification, as we have insisted upon, is in fact an asset allocation principle. Then how is the asset allocation principle determined? It is determined by Chinas real economy, to be specific, the proportion of trade, FDI, and account settlement in Chinas real economy. Hu: China seldom makes comments on specific investments of its foreign exchange reserves, but regarding the recent development of Fannie Mae and Freddie Mac, the authorities seem eager to make their attitudes known to the public. Why are Fannie Mae and Freddie Mac so important? Yi: They are important because of their vital role in Americas housing market and in the stability of the financial market. Shortly after the outbreak of the sub-prime mortgage crisis, the U.S. government still relied upon these two institutions to alleviate the crisis, but as the crisis deepened, these two organizations collapsed and were taken over by the U.S. government. Now the U.S. Treasury as their biggest shareholder owns about 80 percent of their shares. Recently, they were de-listed from the NYSE, but this does not constitute a negative impact on their securities. The recent announcements were made by the State Administration of Foreign Exchange to help the public understand that the foreign exchange reserve assets are safe and our management is effective. Hu: After the financial crisis, both Europe and the U.S. made some adjustments and changes. What do you think of their ability to recover? Yi: I think they have strong resilience and should not be underestimated. The U.S. financial regulatory reform bill, recently signed into law, marks another milestone after the Glass-Steagall Act of 1933, and the Financial Services Modernization Act of 1999 signed by former President Clinton represents a reflection of the past several decades, especially the recent round of the financial crisis. Aside from the U.S. bill, there is also a new roadmap for a financial regulatory framework drawn up by Britain, and a series of financial regulatory standards formulated by the Financial Stability Board under the G20, the IMF, the Basel Committee, and the Bank for International Settlements. All these have formed global financial regulatory standards and a framework for the coming decade or even longer. Under such a regulatory framework, their capacity to recover is relatively strong and the speed is relatively fast. Europe has made many contributions to the establishment of an international financial regulatory framework, but, of course, the U.S. is leading the way as it passed the regulatory reform bill. Hu: Recently, I interviewed Michael Evans, vice chairman of Goldman Sachs. He said that Goldman Sachs is prepared to adjust its strategy. In fact, Wall Street is still resistant to the U.S. financial regulatory reform bill, but Goldman Sachs will adjust its position and embrace the reform. It has set up the Business Standards Committee, which, after investigation and research, has come up with concrete measures to change its business behavior. When talking about the lawsuit against the U.S. Securities and Exchange Commission, he said that although the case has a political bias, we must admit that we made mistakes too. Judging from his attitude, there is a possibility of mediation, but he emphasized that mediation does not mean the end, and Goldman Sachs still needs to adjust its business behavior. But from another perspective, since the financial reform bill has been spoken so highly of, why is it so difficult to implement? Why is the Republican Party so vigorously opposed to the bill? Yi: The difficulties stem from conflicts of interests. The bill used to contain clauses that harm the interests of investment banks and commercial banks, but they have been watered down now and compromises have been made. On the whole, I think this bill is positive, and the prompt adoption of this bill is so much better than no action at all. Uncertainty would accumulate if no measure were taken. Now the launch of the bill ends the suspense, stabilizes market expectations, and can restore the market to normalcy. Be Realistic about Chinas Economic Growth Hu: I have a question about the macro economy. Do you think there is a big chance of a Double Dipin the world economy? Yi: The short answer to this question, as far as I see it, is no. But a precise explanation depends on the definition of Double Dip. This year, the U.S. economic growth rate hopefully will be 2.5 percent to 3.5 percent. In Japan, the growth rate will be above zero, probably even above 2 percent; as to Europe, possibly 0.5 percent to 1.5 percent. No one would call this a Double Dip,but there are still many uncertainties, considering the worrying situation in the U.S. housing and job markets. Hu: Chinas economic growth rate was 11.1 percent for the first half of 2010. Will it drop in the future? Yi: For the whole year, the growth rate could reach 9 percent, which is fairly high already. Perhaps we are a bit too obsessed about high growth rates. I hope to see a more moderate approach, which can help extend the long-term growth of the Chinese economy. China has now become the second largest economy in the world. As our economic base expands, growth rates will definitely slow down. In addition, the environmental constraints have reached a bottleneck, with a host of problems concerning underground water, air, and carbon emissions. There are also resource restrictions, including the import of energy. Based on the above reasons and the general rules of economic development, there is no doubt that there will be a slowdown in our economic growth. In the three decades after the launch of the reform and opening up, Chinas average GDP growth rate exceeded 9.5 percent. In the first decade of the new century, the rate was over 10 percent. For the second decade, I would say an average growth rate of 7 percent to 8 percent is good enough. The question is whether we can sustain such a growth rate. If in the third decade, we manage to grow at 5 percent to 6 percent, then we would have had 50 years of rapid growth, an unprecedented feat in human history. In fact, the problem of Chinas economy lies in the quality of its growth. That is why we have been restructuring and transforming patterns of growth; we are trying to improve the quality and effects of economic growth. We should adjust our mind-set; being too impatient doesnt help. 2010-07-30/en/2010/0730/943.html
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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
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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
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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