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Mr. Deng Xianhong, Deputy Administrator of the SAFE, was recently interviewed by Rui Chenggang, reporter from the Finance and Economics Channel of CCTV. Rui Chenggang (hereinafter referred to as Rui): First, I would like to express my thanks to you for accepting this interview. Can we start from the term? Deng Xianhong (hereinafter referred to as Deng): OK. Rui: How do you define hot money? Deng: To date, there is no uniform definition of hot money. From my point of view, hot money should be categorized differently in countries allowing free capital flows and countries imposing foreign exchange controls. In China, all illegal capital flows without authentic transactional backgrounds (either in trade or investment) and in violation of the foreign exchange administration regulations are considered hot money and are the target of our attack. One of the goals of our macro-economic regulatory policy is to lessen interest-oriented pursuit of the market featured by excessive speculation. And we will take strong administrative measures to combat hot money,which is in breach of both the laws and regulations. Rui: As for hot money statistics, we have many approaches in the media. How do you calculate the amount of hot money? Deng: In the context of partially imposed capital controls, hot money flows into a country in the guise of being legal. In other words, it is impossible for hot money to get across the border if it is identified as illegal. Therefore, only by inspections and examinations can we know the amount of hot money. Hot money is somewhat like disbanded soldiers who hide themselves in the thick forest. Only by searching the forest can we get to know the actual number of disbanded troops. Certainly some funds may escape from capture. But I can definitely say that in China, there are no massive inflows of hot money and hot money is only dispersed in small amounts. Rui: You disagree with the comment that the inflow of hot money is accelerating. Why is this comment being spread throughout the society? Deng: Analysis shows that there is a considerable amount of net inflows and surplus. However, we cannot equate such inflows and surplus with hot money. Our analysis indicates that a large amount of the net inflows and surplus results from the allocation of assets and liabilities of enterprises based on their expectations of market interest rates and exchange rates. Serious analysis shows that the settlement of foreign exchange contributes slightly to the increase in net inflows and surplus. However, when it comes to foreign exchange purchases and payments, a large amount of the transactions (imports) are carried out in the form of trade financing, deferred payments, external loans with internal guarantees, overseas agent-based payments, and overseas financing as a substitute for foreign exchange payments. Thus, it appears that the outflow of foreign exchange is relatively small. Rui: It is true that in the wake of the global financial crisis, the country is facing increasing inflows of capital or liquidity and that may not necessarily be hot money.Is this the reality? Deng: It is the reality. To combat the financial crisis, some developed countries adopted quantitative easy monetary policies which gave rise to an overwhelming liquidity of funds. Amidst the financial crisis, China took the lead in restoring its economy and achieving a rapid increase in foreign trade. That led to the formation of a gap that led to some expectations about interest margins and exchange margins. The country will see a considerable amount of net inflows of funds, and the inflows will trigger an increase in a favorable balance. Though this has created some pressure for us, we cannot equate the net inflows and surplus with hot money. As mentioned previously, all capital flows with verifiable transactional backgrounds are the results of normal economic activities. Rui: What are the major motivations for the inflow of hot money in pursuit of arbitrage by illicit means? Deng: The expectation of an RMB appreciation, the expectation of a rising stock market, and the expectation of a rise in the real estate market. The hot money is generally driven by such expectations, which in turn serve as the target for hot money inflows. Rui: In addition to their basic functions, what are the major roles of commercial banks in preventing the inflow of hot money? Deng: Inspections show that some banks have failed to perform their verification duty, that is to say, some banks have failed to comply completely with the policy requirements for foreign exchange administration, which has given rise to the inflow of hot money.Generally, our inspections during the past few years show that banks have strengthened their regulatory compliance. The banks compliance with the relevant regulations plays an important role in preventing hot money because complete compliance by one bank will mean effective administration of thousands of market entities. Rui: It is really hard to impose effective regulation on the underground money shops. What are the SAFEs effective approaches for combating against such underground money shops? Deng: During recent years we have come up with some effective methods for cracking down on underground money shops. For example, we established close collaboration with the public security organs to jointly combat the underground money shops and we have encouraged social forces to become involved. Since the beginning of 2010, we have discovered 13 large-scale money shops. Instead of combating the shops separately, we are now cracking down on them en masse. Rui: The last question: Are there any foreign investors who have different opinions about the intensified efforts for combating hot money? I mean, they may worry that these efforts may affect their investments? Is this a double-edged sword to a certain degree? Deng: A good question. It is true that we need to pay special attention to law-based administration when combating hot money. We should take effective measures to combat the illegal inflow of funds. Meanwhile, we need to ensure that the crackdown is carried out according to the law. It should not affect the legal operations of market entities. In a word, we need to achieve a trade-off between cracking down on hot money and implementing the reform of foreign exchange administration. Rui: Thank you so much. 2010-11-10/en/2010/1110/967.html
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The branches and foreign exchange administrative departments of the State Administration of Foreign Exchange (SAFE) in all provinces, autonomous regions, and municipalities directly under the Central Government; the branches in Shenzhen, Dalian , Qingdao , Xiamen , and Ningbo ; and all designated Chinese-funded foreign exchange banks: In order to prevent financial risks caused by cross-border flows of capital, issues related to the strengthening of the administration of foreign exchange operations are hereby notified as follows: 1. Strengthen administration of the banks comprehensive positions in the settlement and sales of foreign exchange. Implement a minimum level of management of the banks balance of positions calculated on a cash basis based on the current management of the comprehensive position limits for foreign exchange settlement and sales. The lower limit of the position shall be the position of the day on a cash basisas presented in the Daily Statement of the Comprehensive Position of Foreign Exchange Settlement and Sales issued by each bank on November 8, 2010. 2. Tighten administration of online inspections of foreign exchange collections and settlement for exports. Abrogate the provision that In the event that the enterprise has an insufficient balance of foreign exchange receivables due to a delay in the transmission of data on exports, the banks may, on the strength of the letter of commitment submitted by the enterprise, settle or transfer the funds in the accounts to be verified.The banks shall, in light of the limits on the balance of foreign exchange receivables, settle or transfer the funds in the accounts to be verified. The proportion of foreign exchange collection from the processing of imported materials shall be uniformly reduced from 30 percent to 20 percent. In the event that the proportion of the actual collection of foreign exchange for customs declaration for a single batch of exported goods under trade for the processing of imported materials exceeds 20 percent, the banks shall handle the relevant business in accordance with the existing regulations on foreign exchange collection for the processing of imported materials with the proportion of exchange collected in excess of the prescribed limit. 3. Strengthen administration of the quotas on short-term external debts and the balance of external guarantees of financial institutions. In the event that banks conduct agency payments abroad for the business subsequent to the issuance of L/Cs to their customers and the total time limit of both payments exceeds 90 days, the amount under the agency payment abroad shall be incorporated into the quota control of the short-term external debt. The foreign exchange authorities shall monitor and provide early warnings about the circumstances, such as the banksborrowing of short-term external debt and the provision of external guarantees for financing in violation of the regulations, and shall impose tight restrictions on bank operations in excess of the quotas. 4. Strengthen administration of capital contributions by overseas investors of foreign-funded enterprises. In the event that the actual payer is inconsistent with the overseas investor of a foreign-funded enterprise, the foreign-funded enterprise shall submit a notarized certification of the proxy contribution when entrusting an accounting firm to consult the foreign exchange authorities for capital verification. 5. Strengthen examination of the authenticity of the settlement of funds repatriated as capital raised from overseas listings in accordance with the requirements for foreign exchange settlements for payments. The materials certifying authenticity shall be examined in accordance with the relevant regulations on foreign exchange administration for the settlement of capital funds in foreign exchange for foreign-funded enterprises. The foreign exchange settlement shall be conducted in compliance with the purposes specified in the prospectus; for any amount that exceeds the planned limit on fund raising or goes beyond the purposes stated in the prospectus, a board resolution concerning the purposes of the foreign exchange settlement shall be submitted. The foreign exchange that is to be settled and paid to the other party in the transaction shall not be settled and deposited in the Renminbi account of the enterprise. 6. Strengthen administration of overseas incorporations of companies with special purposes by domestic institutions and individuals, and impose penalties on enterprises and individuals operating in violation of the regulations. 7. Impose penalties on banks operating in violation of the regulations by complying strictly with the law. Banks shall strengthen verification and examination of the authenticity of transactions by their customers and the consistency of foreign exchange receipts and payments. For those bank operations in violation of the foreign exchange regulations that result in illegal inflows of funds, the foreign exchange authorities shall impose penalties in the form of fines, termination of relevant operations, circulation of notices of criticism, and so forth, and shall investigate the responsibilities of the senior management staff who are directly liable for the violations. This Circular shall come into effect as of the date of promulgation. All the branches and administrative departments of the SAFE shall, after receipt of this Circular, forward it as soon as possible to the central sub-branches, sub-branches, and banks within their jurisdictions. All Chinese-funded designated foreign exchange banks shall, after receipt of this Circular, forward it to their branches and sub-branches as soon as possible. If any problems arise in the implementation of this Circular, please report them to the SAFE in a timely manner. Tel.: 010-68402295, 68402450, 68402366 2010-11-09/en/2010/1109/966.html
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To bring into better play the vital role of the market in selecting the best market makers and to respond to the increasing varieties of trading products on the inter-bank foreign exchange market as well as the increasingly segmented market positioning of commercial banks, in August 2010 the State Administration of Foreign Exchange issued the Circular on the Printing and Distribution of Guidelines for Market Makers on the Inter-Bank Foreign Exchange Market (Hui Fa [2010] No.46), in which a trial market-making business was introduced into the inter-bank foreign exchange market, with more accessibility granted to non-market-makers to become involved in market-making competition. According to the Circular, a system for the grading of market makers was established, and the liquidity and trading efficiency of derivative markets, including the forward-swap market, were increased. The appraisal mechanism for selecting the superior market makers and eliminating the inferior market makers was perfected, and the initiative for market makers to participate in market making was enhanced. The Circular represents another important move on the part of the SAFE to speed up the development of the foreign exchange market as well as to gradually improve the market mechanism since the introduction of the market-maker system into the inter-bank foreign exchange market in January 2006. So far, by adhering to the principles of willingness and selecting the best, the SAFE has given the go-ahead to 26 spot market markers and 18 forward-swap market makers. Qualifications for a trial spot market marker and a trial forward-swap market maker were granted to 7 and 12 commercial banks respectively. For details thereof, please refer to the Namelist of Inter-bank Foreign Exchange Market Makers. FILE: Guidelines for Inter-bank Foreign Exchange Market Makers 2010-12-30/en/2010/1230/974.html
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With the rapid development of Chinas foreign-related economy and the increasing cross-border interactions by individuals, bank cards, as a safe and convenient mode of payment, have gained growing popularity for cross-border consumption. In order to improve the management of foreign currency bank cards and to familiarize the public with the relevant management policies, the State Administration of Foreign Exchange (SAFE) recently promulgated the Circular on Regulating the Administration of Foreign Currency Bank Cards (Huifa No.53 [2010], hereafter referred to as the Circular). The Circular will come into force as of November 1, 2010. According to the Circular, the four original laws and regulations on foreign exchange administration with regard to foreign exchange bank cards have been integrated into one set of laws. Meanwhile, the fundamental principle for the management of bank card-related foreign exchange businesses is specified in three respects: (1) insistence on the convertibility of the current account; both residents and non-residents are allowed to use their bank cards for cross-border consumption for tourism, services, etc; (2) the use of domestic bank cards outside of China shall be subject to the management rules of the merchant category codes; cash withdrawals outside of China shall be conducted within the prescribed amounts, and shall be handled by the card-issuing financial institutions or the bank card organizations in charge of the transfer; (3) the relevant authorities shall keep records on bank card transactions, monitor and track abnormal transactions efficiently, and investigate and deal with illegal acts and non-compliance with the regulations in a timely manner. With reference to the working practices in recent years, the Circular has made adjustments to the limit of withdrawals of RMB in cash at ATM by foreign cards within China, viz. each transaction shall not exceed RMB3000. The Circular will play an active role in enhancing the transparency of the laws and regulations on the administration of foreign exchange, enabling the public and the banks to better understand and carry out the relevant regulations on foreign exchange administration so as to facilitate the use of bank cards by the public for cross-border interactions. As a result, larger amounts of foreign-related transactions will be conducted within the bank system and greater transparency of the foreign-related economy will be achieved. 2010-10-11/en/2010/1011/955.html
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To deepen the reform of the foreign exchange administration system, boost the sustainable development of the foreign-related economy, and further promote the facilitation of trade, the SAFE recently promulgated the Circular on Issues Concerning Implementation of the Reform of the Verification and Writing-off System for Foreign Exchange Payments for Imports (hereinafter referred to as the Circular). It has been decided that the reform will be carried out as of December 1, 2010. The reform covers four areas: first, enterprises will no longer be subject to on-site verification procedures for the operation of routine business, greatly facilitating external payments for trade; second, the on-line verification procedures processed by the banks for foreign exchange payments by enterprises for imports have been lifted, lessening the burden on the banks and facilitating the routine business operations of the banks; third, the SAFE will make use of the directory for the administration of enterprises; the directory of enterprises that have a need for foreign exchange payments for imports will be shared nationwide, and foreign exchange remittances by enterprises in different regions will no longer be subject to recording in advance with the foreign exchange authorities; fourth, the SAFE will carry out off-site inspections, monitoring, and early warnings on enterprises via the Verification System for the Collection and Payment of Foreign Exchange under Trade, implement on-site verification of abnormal trading entities, identify the categories for the classified evaluation of enterprises, and implement classified administration. The reform of the verification and writing-off system for foreign exchange payments for imports represents a fundamental change to the current model of verification administration, and a constructive innovation in the foreign exchange administration system and trade mechanism. Implementation will: first, promote conceptual and practical innovation in foreign exchange administration, thereby realizing the transformation from case-by-case verification to aggregate verification, from on-site verification to off-site verification, and from behavioral supervision to subject supervision; second, lubricate the process of trade, streamline the procedures for foreign exchange payments for imports, reduce costs for enterprises, facilitate enterprise operations, and promote the smooth implementation of business activities by legitimate enterprises; third, play a positive role in guarding against risks; when there are any changes in the foreign exchange circumstances or any misbehavior by the trading entities, the foreign exchange authorities will be able to take effective measures to enhance on-site inspections of Class-B and Class-C enterprises, carry out strict measures for classified supervision, and impose penalties on enterprises that do not comply. 2010-10-27/en/2010/1027/961.html
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In order to improve administration of the bankssynthetic positions in foreign exchange settlement and sales and to facilitate the conduct of the relevant business by banks, the State Administration of Foreign Exchange (SAFE) recently promulgated the Circular on Relevant Issues concerning the Administration of the BanksSynthetic Positions in Foreign Exchange Settlement and Sales (Huifa No. 56 [2010]) (hereinafter referred to as the Circular). The circular shall come into force as of the date of promulgation. This Circular collates and integrates the 7 normative documents pertaining to the administration of bankssynthetic positions in foreign exchange settlement and saleshereinafter referred to as the positions . In the Circular, the principles for the administration of the positions are defined, including unified ratification of legal persons, limited management, management on an accrual basis, examination and regulation on a daily basis, and regular reconciliation against the accounting subjects; specific management requirements for the positions have also been further clarified concerning the position application, adjustment, and ratification, as well as the submission of the relevant data on the positions; moreover, the management requirements have been integrated with regard to application of balance controls in the special RMB accounts for foreign exchange settlement and sales to foreign-funded banks which have not opened RMB business, and in the centralized management of the positions of the branches of foreign banks. As of the date of issuance, the limits of the banks existing position remain unchanged. The Circular will play an active role in improving the transparency of laws and regulations on the administration of foreign exchange and simplifying management processes, thus enabling banks to better understand and implement the relevant regulations. As a result, the foreign exchange settlement and sales business and the relevant business activities will be carried out in an orderly manner. 2010-10-20/en/2010/1020/958.html
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To effectively control the cross-border flow of funds, to crack down on the inflow of hot moneyin violation of the relevant regulations, and to maintain the security of the foreign-related economy and finance, the State Administration of Foreign Exchange (SAFE) recently promulgated the Circular on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Operations (Hui Fa [2010] No. 59) (hereinafter referred to as the Circular). The Circular deals with seven issues: (i) strengthening administration of the banks comprehensive positions in the settlement and sales of foreign exchange, and implementing a minimum level of management of the banks balance of positions calculated on a cash basis; (ii) making adjustments to the policies on the administration of online inspections of foreign exchange collections and settlement for exports, reducing the proportion of foreign exchange collection from the processing of imported materials for the online inspections of foreign exchange collections and settlement for export, and strictly handling the procedures for the settlement or transfer of foreign exchange funds in accounts to be verified; (iii) strengthening administration of the quotas on the short-term external debts and the balance of external guarantees of financial institutions, and imposing tight restrictions on banks operations in excess of the quotas; (iv) strengthening administration of capital contributions by foreign-funded enterprises in overseas countries and regions, and further clarifying the requirements for the examination and verification of foreign exchange under circumstances when the actual payer is inconsistent with the overseas investor; (v) strengthening examination of the authenticity of the settlement of funds which are repatriated as capital raised from overseas listings in accordance with the requirements for tightening foreign exchange settlement for payments; (vi) regularizing administration of overseas incorporation of companies with special purposes by domestic institutions and individuals, and imposing penalties on enterprises and individuals operating in violation of the regulations in accordance with the law; (vii) increasing penalties on banks operating in violation of the regulations in the form of imposing fines, terminating relevant operations, circulating notices of criticism, and so forth, and investigating the responsibilities of the senior management staff who are directly liable for the violations. The promulgation of the Circular will further regularize cross-border flows of funds through such channels as trade, foreign direct investment, round-tripping investment, overseas listings, and so on, particularly administration of the bankscomprehensive positions for foreign exchange settlement and sales and short-term external debts. Promulgation of the Circular will strengthen the banks obligation to carry out examinations of authenticity in the handling of foreign exchange business, which will be conducive to further cracking down on the inflow and settlement of foreign exchange funds in violation of the laws and regulations, preventing financial risks caused by cross-border inflows of hot money,and thereby promoting the healthy and orderly development of Chinas economy and finance. 2010-11-09/en/2010/1109/965.html
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A symposium of branch directors of the State Administration of Foreign Exchange (SAFE) was recently held in Shenyang, Liaoning province. The symposium discussed foreign exchange administration work since the beginning of 2009, analyzed the current foreign exchange situation, and studied and planned the next stage of foreign exchange administration work. Yi Gang, administrator of the SAFE, and Deng Xianhong, deputy administrator of the SAFE, each delivered speeches at the symposium. The symposium pointed out that since the beginning of this year, under the firm leadership of the Central Committee of the CPC and the State Council and the direct guidance of the Party Committee of the Peoples Bank of China, the foreign exchange administration departments have been earnestly carrying out and putting into practice the scientific outlook on development, and have made new achievements with consolidated conviction and concerted effort, which have played an active role in coping with the global financial crisis and promoting the steady and rapid development of the national economy. First, normal foreign trade activities of enterprises have been further facilitated so as to mitigate the difficulties of export enterprises. The SAFE has earnestly put into practice the policy measures of the State Council on promoting economic development with financial levers and stabilizing external demand, improved on-line inspection and management for the collection and settlement of foreign exchange for exports, and has taken measures to encourage banks to carry out trade financing. These measures are conducive to accelerating foreign exchange collection and settlement for exports and capital turnovers as well as for stabilizing the foreign trade activities of enterprises. Second, energetic support has been given to the go-global strategy and trade facilitation has been promoted. The SAFE issued the Circular on Related Issues Regarding Foreign Exchange Administration of Overseas Loans Granted by Domestic Enterprises and the Regulations on Foreign Exchange Administration of Overseas Direct Investment of Domestic Institutions, which further expanded the scope of lenders and sources of funds for overseas loans, streamlined the ratification and exchange procedures for overseas loans, and improved the relevant statistical monitoring and risk prevention mechanism. The examination and verification measures of foreign exchange fund sources for overseas direct investment have been altered from ex ante examination to ex post registration. The administration system for outward remittances of funds has been adjusted from a ratification system to a registration system. Currently, the overseas direct investment of domestic institutions is basically free from exchange procedure restrictions, which, to a great extent, has further facilitated the relevant procedures. Third, the statistics and monitoring of the balance of payments have been improved, and balanced administration and risk prevention of cross-border fund flows have been strengthened. The SAFE improved the foreign exchange administration and monitoring system for direct investment, revised the measures for the statistics of foreign exchange assets and liabilities of Chinese-funded financial institutions, standardized the opening, use, and other activities of domestic foreign exchange accounts of overseas institutions, and improved the supervision of cross-border fund flows. The SAFE also improved the working mechanism of the Global Financial Crisis Response Team, completed the appraisal of commercial banksimplementation of the foreign exchange administration regulations, and revised and issued the Measures for Appraisal of Banks Implementation of Foreign Exchange Administration Regulations. Fourth, construction of the foreign exchange market has been promoted and efforts by enterprises to avoid exchange rate risks have been supported. Since the beginning of this year, the SAFE has approved three currency brokerage companies to enter the foreign exchange brokerage business, three financial companies to have access to the inter-bank foreign exchange market, and seven finance companies of enterprise groups to engage in spot settlement and sales of foreign exchange, in order to activate transactions on the foreign exchange market and facilitate the use of foreign exchange by transnational enterprise groups. The SAFE actively carried out the netting clearing business of inquiry trading on the inter-bank foreign exchange market in order to lower market operation risks and to increase market activity. Fifth, administrative procedures for the examination and approval of foreign exchange business have been improved, and efforts to adjust the foreign exchange regulations have been strengthened. The SAFE delegated the examination and approval authority for ten foreign exchange businesses under the capital account from the headquarters to its branches so as to facilitate the handling of the business by enterprises. Efforts were strengthened to straighten out the existing foreign exchange administration regulations; 91 regulatory documents on foreign exchange administration were declared null and void, thus facilitating the efforts of enterprises and banks to grasp the relevant foreign exchange administration regulations. Sixth, foreign exchange fund flows in breach of the regulations have been actively investigated and punished so as to maintain good order on the foreign exchange market. The SAFE successively organized and implemented special examinations and investigations of foreign exchange business, and made concerted supervisory efforts in various departments to further improve the supervision of abnormal foreign exchange fund flows. The SAFE continued to carry forward the spirit of revitalizing business with integrity and credibility, to do a good job for the disclosure of illegal information about foreign exchange transactions, and to make major efforts by harshly cracking down on illegal acts and acts in breach of the regulations. Seventh, the safety of foreign exchange reserve assets has been guaranteed, and the operation and management of foreign exchange reserves have been improved. The SAFE persisted in prioritizing risk prevention, conducted deep analysis of market changes and economic trends, earnestly summarized the experiences and lessons in coping with the international financial crisis, and actively explored operation and management systems and mechanisms that are suited for implementation in China. Eighth, education on building clean government and construction of an internal control system have been strengthened. The campaign of the Caution and Education Month for Building Clean Government was carried out in the headquarters of the SAFE in April, and the year of 2009 has been designated as the Year of Standardized Administrative Enforcement of the SAFE. Vigorous efforts have been made to improve the internal management system. For key departments, businesses, and procedures involving administrative approval, self-examination activities have been conducted in line with the requirements of the Administrative Licensing Law and other relevant provisions. The functions of various positions in the administrative enforcement departments have been examined in an all-round manner, the enforcement procedures have been standardized, and an appraisal and assessment mechanism and responsibility investigation mechanism for administrative enforcement have been established. It was agreed at the symposium that Chinas economy has entered a critical period of stabilizing and recovery. Generally, the nations foreign exchange collection and payments on the whole so far this year have been stable, with a certain amount of net inflows and no massive outflows of capital. In the upcoming period, the balance of payments and foreign exchange collection and payments will still confront relatively great uncertainty and complexity. In this regard, the foreign exchange administration will continue to adhere to the policy orientation of preventing massive outflows of funds and warding off the sudden inflow of funds. Meanwhile, under the guidance of the scientific outlook on development, the various plans of the CPC Central Committee and the State Council shall be resolutely implemented. Continued efforts will be made to emancipate the mind, actively upgrade the concepts of foreign exchange administration, further strengthen service-oriented awareness in foreign exchange administration, and incorporate cost control and market-oriented awareness into foreign exchange administration, in order to constantly improve social transparency, service quality, and the management level of foreign exchange administration, to maintain the security of the national economy and finance, and to promote the sound and rapid development of the national economy. Priority will be given to the following areas: First, so as to facilitate foreign exchange collection and payments of various market entities, efforts will be made to further enhance service-oriented awareness in foreign exchange administration. The SAFE will step up the reform of the writing-off and verification system for exchange collection and payments for imports and exports, improve foreign exchange administration for trade in services, streamline procedures for submitting tax certificates for external payments in foreign exchange for trade in services, conduct research on the formulation of measures for the administration of overseas deposits of foreign exchange collections from exports, steadily promote product innovation on the foreign exchange market, and provide enterprises with more risk prevention instruments. Second, priority will continue to be placed on broadening capital outflow channels, and the reform of capital account administration will be steadily pushed forward. Research will be carried out on expanding the scope of centralized domestic operations of foreign exchange funds of enterprise groups so as to further facilitate the efforts of enterprise groups to raise the efficiency of fund use. The regulations on foreign exchange administration of QFII and DFII will be improved in order to provide domestic residents with more channels for investment. The SAFE will also team up with relevant departments to promote the development of the domestic capital market. Third, intensified efforts will be made for system integration, and the statistical monitoring system for cross-border funds will be improved. The SAFE will make major efforts to develop the foreign exchange account system and will continue to study the integration of data and the system in order to provide better services for cross-border fund flows and statistical monitoring and analysis of the balance of payments. Efforts will be made to perfect the statistical and declaration system of the balance of payments, improve the statistics of overseas assets, liabilities, profits, and losses of financial institutions, enhance the timeliness and transparency of statistics of the balance of payments, study the establishment and perfection of the statistical monitoring system for external claims and liabilities, and improve the system functions such as trade credit registration, direct investment, etc. Fourth, balanced management of cross-border funds will be strengthened, and the contingency mechanism for the balance of payments will be further improved. Efforts will be made to investigate the building of an overall claims and liabilities management system, to persist in and perfect the assessment system for the implementation of foreign exchange administration policies by banks, to consolidate the effects of such assessment, to reinforce the construction of an early warning risk system for the balance of payments, and to improve the multi-level dual-direction early warning framework for risks in the balance of payments. Intensified efforts will be made to investigate major and significant cases and to struggle against illegal acts or acts in breach of the regulations, such as the operation of underground money shops and network speculation in foreign exchange. Special inspections and investigations will be carried out to facilitate the operations of enterprises involved in exchange transactions in compliance with the relevant regulations. Fifth, efforts will be made to further improve the operation and administration of foreign exchange reserves. The SAFE will continue to improve the operation and management mechanism for foreign exchange reserves to meet the specific requirements of the Chinese economy, further intensify studies on the operation and development patterns of economic cycles and the financial market, and improve the long-term profitability of reserve assets based on maintaining asset security and liquidity. Sixth, efforts will be made to further increase the transparency of foreign exchange administration and promote the construction of the foreign exchange administration regulation system. Intensified efforts will be made to straighten out the regulations for a better understanding of the foreign exchange administration policies and regulations by market entities. Efforts will also be made to strengthen communications between the SAFE, the general public, and the relevant departments in order to create a sound external environment for foreign exchange administration. Seventh, the construction of clean government and of an internal management system will be further strengthened. Efforts will be made to strengthen supervision of leading cadres and to incorporate the building of clean government into the comprehensive responsibility target management of Party organizations and the administrative leadership teams at various levels. Party members and leading cadres at various levels should earnestly carry out the principle of dual responsibilities for one post, strengthen construction of the internal management system, and intensify training for cadres and education on the building of clean government. At the symposium it was required that the foreign exchange administrations at various levels shall thoroughly implement the scientific outlook on development under the guidance of Deng Xiaoping Theory and the important thought of the Three Represents, shall consolidate conviction, work steadfastly, and make great endeavors to achieve all the annual targets, so as to make greater contributions to the steady and rapid development of the national economy and to greet the 60th anniversary of the founding of New China with practical work and outstanding achievements. Participants at the symposium included the leaders, chief economists, chief accountants, chief leaders of all departments, the Party Committee, and all institutions of the SAFE, as well as the general deputy directors (deputy directors) responsible for foreign exchange work in all branches of the foreign exchange administrative departments. 2009-09-23/en/2009/0923/900.html
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1. Basic Information about the Qualified Foreign Institutional Investors System The Qualified Foreign Institutional Investors (QFII) system refers to an opening-up mode of the capital market whereby approved qualified foreign institutional investors are permitted to remit inwards foreign exchange funds and exchange them into local currencies, to invest in the local securities market with the exchanged funds via special accounts, and, with approval, to process outward remittances of their principal, capital gains, dividends, and so forth with the purchased foreign exchange. In November 2002, when the QFII system was formally implemented in China the China Securities Regulatory Commission and the Peoples Bank of China jointly promulgated the Provisional Regulations on the Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII). Since the first QFII was introduced in China in June 2003, QFII experiments have been steadily carried out. Implementation of the QFII system has played a positive role in introducing advanced investment theories, cultivating institutional investors, promoting market innovations, and so forth, and has facilitated the development of Chinas capital market. 2. Basic Information about the Qualified Domestic Institutional Investors System The Qualified Domestic Institutional Investors (QDII) system refers to an opening-up mode whereby qualified domestic institutional investors are permitted, within a certain quota approved by the regulatory authorities, to invest in overseas securities market via special accounts. In April 2006, the QDII system was approved and formally initiated. Currently, the QDII system includes three kinds of institutional businesses, i.e., overseas securities investment businesses such as overseas wealth management services on behalf of clients provided by commercial banks, overseas uses of insurance funds, and fund management companies. Implementation of the QDII system broadens the channels for overseas investment by domestic institutions and individuals and, in collaboration with the QFII system, jointly promotes regulation over the two-way flow of funds, thus facilitating an equilibrium in the balance of payments and improving the current setup in whereby official reserves dominate Chinas overseas financial assets. Up to the end of 2008, among Chinas overseas financial assets of USD 2 trillion, the share of foreign exchange reserves was about 75 percent, but during the corresponding period in Japan the ratio was only 20 percent. With implementation of the QDII system, the share of non-official overseas financial assets can be gradually increased. 3. What is the situation for investment quota approvals of QFIIs and QDIIs and for the inward/outward remittances of funds? By the end of August 2009, the SAFE had approved institutional investment quotas for 76 QFII, amounting to USD 15.32 billion, and they had remitted inwards a total of USD 13.846 billion. By the end of August 2009, the SAFE had approved overseas securities investment quotas for 56 QDII institutions, amounting to USD 55.951 billion, among which USD 33.565 billion was for 12 fund management companies and securities companies (hereinafter referred to as securities trading institutions), and the net outward remittance of QDII funds amounted to USD 28.711 billion, among which USD 14.495 billion was securities QDII funds. 4. How should the principles in the examination of the QFII investment quota be understood? The QFII system mainly aims at encouraging foreign medium- and long-term institutional investors to make securities investments in China, so during the quota examination, we give priority to prioritize applications from institutional investors such as pension funds, insurance funds, mutual funds, charity funds, donation funds, and government and currency administrative authorities. During the early stage of the QFII experiment, due to the relatively high requirements for approval, institutions that applied for QFII qualifications were usually large-sized institutions with a good reputation, so to some extent we favored their investment quota in order to guarantee the stability of the QFII funds. Later, examination of the QFII quota was conducted in a basically balanced manner, mainly in light of the QFII institutions asset size, asset allocations, investment management capability, past investment performance, and so forth. 5. What is the main content of the Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII)? What are the improvements when compared with the 2002 Provisional Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII)? The Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) (hereinafter referred to as the Regulations) encompass 6 chapters and 27 articles, including mainly general provisions, investment quota administration, account administration, exchange management, statistics and administration, and supplementary provisions. Compared with the 2002 Provisional Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII), the Regulations exhibit the following improvements: first, the ceiling for the investment quota of a single QFII institution is raised from USD 800 million to USD 1 billion; second, QFII institutions are permitted to open fund accounts of different natures and types; third, the principal lock-up period for pension funds, donation funds, open-ended Chinese funds, and so forth for medium- and long-term investments is reduced to 3 months; fourth, the management principles for open-ended Chinese funds are specified, and many phases, such as the account opening, management of the lock-up period, exchange of funds, purchases and redemptions, are more convenient for the applicants. 6. What is the main content of the Circular of the State Administration of Foreign Exchange (SAFE) on Relevant Issues Concerning Foreign Exchange Administration of Overseas Securities Investments by Fund Management Companies and Securities Companies? The Circular of the State Administration of Foreign Exchange (SAFE) on Relevant Issues Concerning Foreign Exchange Administration of Overseas Securities Investments by Fund Management Companies and Securities Companies (hereinafter referred to as the Circular) encompasses 12 articles, including investment quota administration, foreign exchange account management, funds exchange management, statistics and monitoring, and so forth. On the one hand, the Circular simplifies the procedures and required materials necessary for securities trading institutions to apply for an overseas securities investment quota, thus shortening the procedure flow and improving efficiency. On the other hand, it specifies the principles for the balanced management of the overseas investment quota of securities trading institutions. Meanwhile, it also stipulates that securities trading institutions that are awarded an investment quota can invest in all kinds of overseas securities investment products approved by the regulatory authorities. Moreover, in order to avoid a situation whereby the securities trading institutions accept a quota but do not use it, the Circular stipulates that the SAFE has the right to reduce any investment quota that is not used effectively within 2 years. 7. How do the Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) apply to institutions that have been awarded a quota? Those QFII institutions that have been awarded a quota can file an application with the SAFE to open separate accounts so as to satisfy the requirements for differentiating the distinct sources of funds. Those QFII institutions that have transferred or resold their quota prior to promulgation of Regulations should report the relevant situation to the SAFE and end all such activities as of the date of promulgation. 8. What requirements are proposed for follow-up administration of QIIs by the Regulations on Foreign Exchange Administration of Domestic Securities Investments by Qualified Foreign Institutional Investors (QFII) and the Circular of State Administration of Foreign Exchange (SAFE) on Relevant Issues Concerning Foreign Exchange Administration of Overseas Securities Investment by Fund Management Companies and Securities Companies? The Regulations and the Circular further enhance statistics, monitoring, and follow-up administration, including mainly the following improvements: first, the relevant reporting system is improved and the contents of the reports are enriched; second, the responsibilities regarding reporting and filing for QIIs and their custodians are specified; third, the obligation of reporting the balance of payments by the QII and its custodian is stipulated; fourth, the relevant principles and basis for punishment are specified; fifth, the daily administrative responsibilities by the local branches of the Administrations of Foreign Exchange are noted. 2009-11-13/en/2009/1113/905.html
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Recently the State Administration of Foreign Exchange (SAFE) promulgated the Provisions on the Centralized Operations and Administration of Foreign Exchange Funds of Internal Members of Domestic Enterprises (hereinafter referred to as the Provisions), and a relevant responsible person of the SAFE was interviewed concerning the Provisions. Q: What is the background and significance of the promulgation of the Provisions? A: In the current context of gradual globalization and integration of the world economy and finance, domestic enterprises have greater requirements to optimize the allocation of foreign exchange resources and to improve the efficiency of the utilization of foreign exchange funds. In order to support and facilitate the utilization and operations of foreign exchange funds by domestic enterprises, as well as to conform to the requirements of adapting to the balanced management of the balance of payments, in recent years the SAFE in succession promulgated a series of policies and measures to reform and normalize the centralized operations and administration of the foreign exchange funds of enterprises. For example, the Circular of the SAFE Concerning Relevant Issues on the Internal Operation and Administration of Foreign Exchange Funds of Multinational Companies (Huifa [2004], No. 104) and the Circular of the SAFE Concerning Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68). In order to further lower the admittance threshold for centralized operations and administration of foreign exchange funds of domestic enterprises, to clarify the operation methods of foreign currency fund pool business in China, to normalize and improve the laws and regulations on the centralized operations and administration of foreign exchange funds, and to promote the putting in order and amending of laws and regulations on foreign exchange administration, the SAFE drafted the Provisions on the Centralized Operations and Administration of Foreign Exchange Funds of Internal Members of Domestic Enterprises, with comprehensive reference to the opinions of banks and enterprises. The Provisions were promulgated on October 13, 2009 and implemented on November 1, 2009. Implementation of the Provisions will further normalize and systematize the collective operations and administration of foreign exchange funds, thus conforming to the current state of economic development. And it will facilitate improvements in the efficiency of utilization of funds by domestic enterprises, reducing costs and enhancing competitiveness. Meanwhile, this implementation is also conducive to promoting cooperation between banks and enterprises as well as to business innovation, thus accelerating the linking of Chinas financial services industry and international operations. Q: What are the major reforms set forth in the Provisions? A: First, they relax the limits stipulated for the qualifications of business entities. Second, they clarify the operational methods for foreign currency fund pool business in China, normalize the relevant content concerning the foreign currency fund pool business in China, such as basic principles, business structure, examination procedures, and specify that entrusted banks (finance companies) that implement the plans shall be responsible for the application and relevant statistics and filing and reporting. Third, they further delegate relevant powers. Issues such as the examination of foreign exchange administration prescribed in the Provisions shall fall under the jurisdiction of the AFE branches (administrative departments), and the SAFE will no longer process the specific examinations and verifications of the applications. Fourth, they normalize and reinforce the laws and regulations on the centralized operations and administration of foreign exchange funds. The Circular Concerning Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68) incorporates and improves the framework of the Provisions, thus further promoting the putting in order and amending of the laws and regulations on foreign exchange administration. Meanwhile, they further simplify the relevant procedures for examination and approval of foreign exchange business. Issues related to the business of centralized operations and administration of foreign exchange funds, such as the opening of relevant accounts and domestic foreign exchange transfers, can be processed by entrusted banks (finance companies) on behalf of the enterprises with the approval documents for the business qualifications, and no approval from the AFE branches is required. Q: What is the main content included in the centralized operations and administration of foreign exchange funds of internal members of domestic enterprises? A: According to the Provisions and other relevant regulations on foreign exchange administration, the centralized operations and administration of foreign exchange funds of internal members of domestic enterprises include inter-company lending/borrowing of foreign exchange among internal members of domestic enterprises, implementation of administration of foreign currency fund pool business, and the business of spot purchases and sales of foreign exchange via internal finance companies. Q: Upon implementation of the above-mentioned measures, what are the anticipated risks in terms of the centralized operations and administration of foreign exchange funds? How can those risks be prevented? A: First, as foreign exchange funds used for inter-company lending/borrowing and the foreign currency fund pool business by internal members of domestic enterprises are from the discretionary foreign exchange funds in their foreign exchange capital accounts and foreign exchange current accounts, it may be possible that the settlement of foreign exchange capital will be carried out by way of the centralized operations of the foreign exchange funds, thus avoiding the current exchange settlement policies for foreign exchange capital. In order to prevent such a risk, it is specifically prescribed in the Provisions that entrusted loan funds of domestic enterprises shall not be used after exchange settlement, nor shall they be used as pledges for RMB loans. Should it be necessary that they be used after exchange settlement, the domestic enterprises shall transfer the entrusted loan funds from their foreign exchange capital account or current foreign exchange account back to the original accounts thereof, and then carry out the foreign exchange settlement in compliance with relevant regulations. Second, in the event of centralized operations of foreign exchange funds in the form of foreign currency fund pools, in order to avoid conflicts with the fact examination methods of the exporter shall be the party to collect the foreign exchange and the importer shall be the party to pay the foreign exchangeas prescribed in the current regulations on foreign exchange administration, in the plans for foreign exchange fund pools it is prescribed that: ones own foreign exchange funds for collection shall follow the principle of going through the relevant formalities before centralized operations and administration; the income/expenditure range of the accounts, such as special accounts for foreign exchange entrusted loans, and foreign exchange capital accounts and current foreign exchange accounts, is strictly limited; the principle of full-receipt, full-paymentshall be adhered to; and no net settlement is allowed on its own. In general, the risks existing from the centralized operations and administration of foreign exchange funds of domestic enterprises are limited, and are also controllable with the implementation of above-mentioned design scheme. Q: Do the Provisions apply to internal members of domestic enterprises controlled by overseas parent companies? A: Yes. Article 28 of the Provisions specifies that The Provisions shall apply to internal members of domestic enterprises controlled by the same overseas parent company. Q: Is approval from the AFE required when domestic enterprises carry out operations of foreign exchange funds business via internal finance companies in the form of collecting the internal membersforeign exchange deposits and granting foreign exchange loans to internal members? A: If domestic enterprises only conduct the business of foreign exchange funds operations via finance companies in the form of collecting internal members foreign exchange deposits and granting foreign exchange loans to the internal members, no approvals by the AFEs are required. The same case applies in the plan for issues such as the opening of foreign exchange fund accounts and domestic foreign exchange transfers. However, if foreign currency funds pools are realized within the legal framework of the entrusted loans, they shall be approved by the AFEs and processed in compliance with the Provisions. Q: Compared with the Circular of the SAFE Concerning Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Conducted by Finance Companies of Enterprise Groups, are there any changes in the Provisions concerning administration of the business of spot purchases and sales of foreign exchange conducted by domestic enterprises via finance companies? A: There are no changes in the principles, but the contents are more scientific and improved. For example, the Provisions further specify the relevant procedures for the business of purchase and sale of foreign exchange by finance companies, i.e., only after becoming members of the inter-bank spot foreign exchange market can finance companies conduct the business of spot purchases and sales of foreign exchange in compliance with the relevant regulations on the purchase and sale of foreign exchange. Q: How should we understand the relationship among the Provisions, the Circular of the SAFE Concerning the Relevant Issues on the Internal Operations and Administration of Foreign Exchange Funds of Multinational Companies (Huifa [2004], No. 104) and the Circular of the SAFE Concerning the Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68)? A: The Circular of the SAFE Concerning the Relevant Issues on the Internal Operations and Administration of Foreign Exchange Funds of Multinational Companies (Huifa [2004], No. 104) and the Circular of the SAFE Concerning the Relevant Issues on the Business of Spot Purchases and Sales of Foreign Exchange Carried Out by Finance Companies of Enterprise Groups (Huifa [2008], No. 68) shall be repealed simultaneously with the date that the Provisions enter into effect. 2009-11-30/en/2009/1130/908.html