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Special Topic II In recent years the foreign exchange authorities have firmly implemented the requirement put forward at the 17th National Party Congress to “institutionally give better play to the fundamental role of the market in resource allocation” and have accelerated the construction and development of China’s foreign exchange market; consequently, there have been increasing varieties of trade in the foreign exchange market , the group of trade participants has expanded continuously, the trading mechanism has improved, and the foundation and capability of the foreign exchange market to serve the real economy and allocate financial resources have been further improved. Increasing the varieties of trade to meet the diversified demands of market players to hedge against exchange-rate risks. Currency swap transactions were introduced to the inter-bank foreign exchange market and the bank-to-client market in August 2007 and March 2011, respectively, and foreign exchange options trading was introduced to the inter-bank foreign exchange market and the bank-to-client market in April 2011. By that time, China ’s foreign exchange market system already covered the basic products in the international foreign exchange market. Furthermore, in order to reduce currency conversion costs for cross-border trade and investment and to enhance the banks’ risk management capabilities, since 2010 trading of the RMB against the Malaysian Ringgit, Russian Ruble, Australian Dollar, and Canadian Dollar has been gradually introduced and there are now nine tradable currencies from the developed economies and the new emerging market economies. Expanding market entities and building a multi-tiered market structure. While the group of bank market players continuously expanded, qualified non-bank financial institutions and non-financial enterprises were permitted to participate in trade in the inter-bank foreign exchange market to increase the diversity of foreign exchange supply and demand. At present, there are twenty-six finance companies of enterprise groups participating in inter-bank spot trade, and Shanghai Automotive Group Finance Co., Ltd. is the first company to carry out inter-bank forward trade. This plays an active role in supporting the enterprises to “Go Out” and reduces foreign exchange conversion costs. Perfecting market operational mechanisms and increasing the autonomy and flexibility of transactions. In order to give full play to the important role of the market in the selection of market makers and to adapt to the new situation whereby trade product categories on the inter-bank foreign exchange market are increasing and commercial banks’ market positioning is becoming more segmented, the market-maker system was further improved in August 2010; a trial market-maker business was introduced to the inter-bank foreign exchange market, and the access threshold for non-market-makers to engage in market-making competition was lowered. 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, was improved. The appraisal mechanism for selecting superior market-makers and eliminating inferior market-makers has been perfected and the initiative of market-makers in participating in market-making has been enhanced. In accordance with voluntary and merit-based principles, as of the end of 2011, 26 spot market-makers and 20 forward swap market-makers had been approved, 8 commercial banks had been approved as spot market-makers, and 10 commercial banks had been approved as forward swap market-makers. As the foreign exchange market developed, in order to further improve its liquidity and trading efficiency, in October 2008 currency brokerage companies were regulated and encouraged to carry out foreign exchange brokerage business in the inter-bank foreign exchange market to save the market participants’ time spent on inquiries, to facilitate anonymous quotes and to introduce new trading means, and to form a favorable supplementary and interactive mechanism among market participants, the China Foreign Exchange Trading System, and the currency brokerage companies. As of the end of 2011, Shanghai CFETS-ICAP International Money Broking Co., Ltd., Tullett Prebon SITICO ( China ) Ltd., and Ping An Tradition International Money Broking Company Ltd provided brokerage services for RMB-against-foreign exchange derivatives trade. Improving market infrastructure and guaranteeing sound development of the foreign exchange market. First, improving the foreign exchange trading system. In accordance with the objective needs for the development of China’s foreign exchange market, and on the basis of the utilization of advanced international experience, in 2007 the foreign exchange authorities provided the China Foreign Exchange Trading System with guidance on research and development and on online operations of a new generation of the foreign exchange trading system which reached then advanced level of mainstream international trading platforms. Second, improving capability to guard against risks. The foreign exchange authorities conformed to the needs for the development of the RMB-against-foreign exchange derivatives market, and in August 2007 promulgated China’s Master Agreement on RMB-against-Foreign Exchange OTC Derivatives, the first in China to put forward innovations such as the single agreement principle, netting settlement, and bilateral agreements, effectively reduced the credit risk of derivatives trading, provided trade participants with an effective guarantee on their market activities to guard against exchange-rate risks, and laid a foundation for the development and promulgation of the China Inter-bank Market Financial Derivative Transactions Master Agreement. Third, improving the foreign exchange trading settlement system. In order to adapt to the demands of the foreign exchange market for a more efficient and safer settlement arrangement, in June 2009 net settlement business was introduced to spot inquiry trade in the inter-bank foreign exchange market, and the domestic foreign exchange market began to implement a central counter-party system that is based on multilateral net settlement, which is beneficial to reduce credit risks and settlement risks of foreign exchange trade, to improve the capability to guard against systematic risks, and to promote the long-term development of the foreign exchange market, in particular, the derivatives market. Fourth, cultivating an honest and energetic environment for the development of the foreign exchange market. Since 2008, the foreign exchange authorities have been providing the China Foreign Exchange Trading System with guidance on selecting excellent market-makers in the inter-bank foreign exchange market, focusing on guiding the market-makers to improve their market-making services and cultivating an honest and energetic market environment. As of the end of 2011, 319 designated foreign exchange banks provide enterprises and individuals with domestic and foreign currency exchange business and 318 financial institutions participate in trade in the inter-bank foreign exchange market. From 2007 to 2011, the volume of trade on China’s foreign exchange market increased annually 40.3 percent, reaching USD 14.2 trillion (with the volume of daily trading at USD 58.1 billion), a fourfold increase from 2006. In 2012, the foreign exchange authorities will deeply implement the spirit of the Central Economic Work Conference and the National Financial Work Conference, grasp well the general emphasis on the work of “Steady Development,” continue to steadily promote the construction and development of the domestic foreign exchange market, and promote the steady and rapid development of the economy. 2012-03-26/en/2012/0326/1038.html
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In order to support foreign trade and to boost growth, the SAFE, the General Administration of Customs, and the State Administration of Taxation since August 1, 2012 have implemented a reform of the foreign exchange administration system for trade in goods throughout the country. Preliminary results were achieved within one month of implementation. In the early 1990s, China implemented an administration system whereby the flows of imported and exported goods and the flows of capital matched each other on a case-by-case basis and an on-site verification and writing-off system was applied. For a long period, this system was consistent with China ’s macro-economic and foreign trade situations, and it played an active role in supervising and encouraging enterprises to collect the full amount of foreign exchange in a timely manner, to guard against cheating on tax rebates from exports, and to crack down on foreign exchange evasion. However, as the scale of China’s foreign trade rapidly increased, it was difficult to adapt this administrative method of verification and writing-off on a case-by-case basis for the receipts and payments of foreign exchange from imports and exports to the current trade mode requirements and to the participant diversification. Therefore, in order to introduce a reform of the verification and writing-off system of foreign exchange payments for imports, as of August 1, 2012 the SAFE implemented a reform of the foreign exchange administration system for trade in goods throughout the country. The main content of the reform includes: First, simplifying the business handling formalities and procedures for foreign exchange receipts and payments for trade in imports and exports. The foreign exchange authorities cancelled the verification and writing-off system for receipts and payments of foreign exchange from imports and exports, with enterprises no longer required to handle the verification and writing-off procedures on a case-by-case basis with the foreign exchange authorities; cancelled the Online Inspection of Foreign Exchange Collections and Settlements from Exports, with the foreign exchange collections and settlements from exports of the complying enterprises no longer subject to limits; cancelled the ex-ante management of the ratio of trade credits, such as the advance receipts by and the deferred payments of foreign exchange by enterprises, and instead implemented ex-post dynamic monitoring; simplified the documents required for foreign exchange purchases and payments for imports, with the complying enterprises able to purchase foreign exchange in advance from the banks on the basis of their true and lawful needs for foreign exchange payments for imports, and able to handle the foreign exchange payment procedures with the banks upon the strength of the import customs declaration, contract, invoice, or any other document that proves the authenticity of the transactions. Second, adjusting the export custom declaration procedures, and simplifying the export rebate vouchers. Enterprises are no longer required to provide a verification form for the handling of the export custom declarations and for declaring export rebates. Third, improving regulatory means through aggregate verifications, dynamic monitoring, and classified management. The foreign exchange authorities carry out off-site aggregate comparisons between the flows of imported and exported goods and the enterprises’ flows of capital, conduct classified management and dynamic monitoring of the enterprises, and effectively guard against the risks of foreign exchange receipts and payments. Fourth, strengthening joint supervision by the authorities. The foreign exchange, customs, and tax authorities further strengthened cooperation, improving the coordination mechanism, realizing data sharing, creating synergy, and rigorously cracking down on irregular cross-border capital flows and activities in violation of the relevant laws, such as smuggling and tax fraud. In promoting the reform, the foreign exchange authorities actively transformed government functions, significantly reduced the administrative examination and approval items, with the number of administrative licensing items related to foreign exchange administration for trade in goods reduced from 19 to 4, and repealed 116 normative documents related to foreign exchange administration for trade. Furthermore, the foreign exchange authorities established and improved the operational rules and other standards and regulations, improved the internal control system, and enhanced administrative efficiency. Since the reform of the foreign exchange administration system for trade in goods was implemented one month ago, the positive effects of the reform in terms of facilitating trade activities and serving the real economy have already become apparent. This is embodied specifically in the significant improvement in the banks’ efficiency with respect to foreign exchange receipts and payments for trade, with the bank counters’ average processing time for foreign exchange collection and settlements reduced from 26 minutes per transaction to 9 minutes per transaction, and that for foreign exchange sales and payments reduced from 23 to 6 minutes. This is also embodied in the significant shortening of the time required for the enterprises’ receipts and payments of foreign exchange for foreign trade, and in the notable decrease in the “travel time cost” for the round-trip between the foreign exchange authorities and the banks, with the amount of human resources invested in trade receipts and payments reduced by one-third, the average cost of wages saved by each enterprise reaching RMB70,000, and that saved by each large-scale enterprise in the eastern developed regions even reaching RMB200,000, thereby reducing the enterprises’ operating costs for imports and exports and improving foreign trade competitiveness. While the reform promotes trade facilitation, it also strengthens the prevention and control of the risks of unusual cross-border capital flows. Since the reform, the complying enterprises, accounting for more than 95 percent of all enterprises, fully enjoy the benefits brought about by the policy on foreign exchange receipts and payments for trade in goods; the foreign exchange authorities can take advantage of information technology to screen those enterprises with unusual circumstances, and through dynamic monitoring, on-site verifications, and classified management, can strictly supervise the few enterprises with suspicious or irregular activities and can implement precise crackdowns. According to the statistics, the average daily traffic on the Foreign Exchange Monitoring System for Trade in Goods exceeds 200,000 person-times. As of the end of August 2012, more than 1,500 “empty-shell enterprises” were de-registered from the list, with banks no longer handling foreign exchange receipts and payments in trade for these enterprises; and the foreign exchange receipts and payments in trade of nearly 700 enterprises with unusual circumstances or suspected of being involved in activities in violation of the laws and regulations, such as evasion or illegal purchases of foreign exchange, to a certain degree have been restricted. 2012-09-03/en/2012/0903/1066.html
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TA national foreign exchange administration work conference was recently held in Beijing. The conference conveyed the spirit of the Sixth Plenary Session of the Seventeenth CPC Central Committee, the Central Economic Work Conference, and the Fourth National Financial Work Conference, providing an overall summary of work related to foreign exchange administration in 2011 and, based on an in-depth analysis of the current situation with respect to the economy, finance, and the balance of payments, setting forth the tasks for foreign exchange administration in 2012. At the conference Yi Gang, Vice President of the People’s Bank of China and Administrator of the State Administration of Foreign Exchange, delivered a report on foreign exchange administration work. Deputy Administrators Deng Xianhong, Fang Shangpu, Wang Xiaoyi, and Li Chao, Discipline Inspection Group Leader Yang Guozhong, and relevant responsible comrades in the branches (offices), divisions, and overseas offices of the SAFE attended the conference. It was pointed out at the conference that in 2011 the foreign exchange authorities did a relatively good job in accomplishing the main work objectives and tasks set forth at the beginning of the year, in accordance with the overall arrangements of the CPC Central Committee and the State Council, deeply implementing the scientific outlook on development and accelerating transformation of the concepts and methods of foreign exchange administration, while promoting the facilitation of trade and investment, effectively attaching more priority to slowing down the excessively rapid increase in the surplus of foreign exchange settlement and sales by banks, actively guarding against and cracking down on irregular inflows of hot money, steadily promoting the reform of the verification and writing-off system, and improving the operation and management of foreign exchange reserves. It was stressed that 2012 would be an important year as a connecting link between the 11th and 12th Five-Year Plans. Facing newly emerging situations, features, opportunities, and challenges in the economy both at home and abroad, the foreign exchange authorities should comprehensively implement the spirit of the 17th National Party Congress, the 3rd, 4th, 5th, and 6th Plenary Sessions of the 17th CPC Central Committee, the Central Economic Work Conference, and the 4th National Financial Work Conference, follow the guidance of Deng Xiaoping Theory and the important thought of the Three Represents, and deeply implement the scientific outlook on development; in accordance with the uniform arrangements of the CPC Central Committee and the State Council, they should accelerate the “Five Kinds of Transformations” of the concepts and methods of foreign exchange administration, strengthen the monitoring and management of cross-border capital flows, deepen the reform in key areas, and promote the steady and rapid development of the domestic economy. The conference set forth the key tasks for foreign exchange administration in 2012: first, sticking to the risk limits and constructing a system and mechanism for protection against the impact of cross-border capital flows; second, accelerating promotion of the reform in key areas of foreign exchange administration, doing a solid job in the work related to the pilot reform of the verification and writing-off for imports and exports and in the promotion of the said reform, gradually promoting convertibility under capital account, and accelerating the development of the foreign exchange market; third, further transforming the management methods and promoting the facilitation of trade and investment; fourth, improving the management system and mechanisms, and realizing the security, flow, and maintenance and appreciation of value in foreign exchange reserve assets; fifth, improving the regulatory system and the balance of payments statistical system, strictly adhering to law-based administration, and promoting the basic work of foreign exchange administration to a new level; sixth, further strengthening work related to Party building, clean government, cadre teams, and internal management. 2012-03-26/en/2012/0326/1035.html
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Yi Gang, administrator of the State Administration of Foreign Exchange (SAFE), and his group recently visited Hubei for investigation and research on the pilot reform on the foreign exchange administration system for trade in goods. During the investigation and research, Administrator Yi Gang listened to the work report of the Hubei branch, visited and conveyed greetings to the first-line staff of the branch, conducted a field study on the integration of the foreign exchange business system portal at the bank end, held informal discussions with representatives of some banks and enterprises, and heard comments and suggestions on the pilot reform on the foreign exchange administration system for trade in goods. The comrades participating at the meeting unanimously confirmed that the reform of the foreign exchange administration system for trade in goods simplified business handling procedures, significantly reduced operation costs, enhanced the banks’ sense of responsibility to conduct examinations on the authenticity and awareness of enterprises to strengthen internal management, and established a new administrative mode combining trade facilitation and risk management. Administrator Yi Gang pointed out that the reform of the foreign exchange administration system for trade in goods is a major move on the part of the foreign exchange authorities to proactively adapt to developments and changes in the situation, to accelerate the transformation of foreign exchange administration concepts and methods, and to timely adjust management methods, and it is an important embodiment of the implementation of the concept of putting people first and running government for the people. The branches carrying out the pilot reform should earnestly study and solve the problems and suggestions put forward by the enterprises and banks in order to lay a foundation for comprehensively promoting the reform of the foreign exchange administration system for trade in goods. The foreign exchange administration should serve the market players, such as the financial institutions and the enterprises and safeguard the financial security of China . The foreign exchange authorities should further accelerate the transformation of administration methods, gradually transfer from focusing on ex-ante supervision to emphasizing ex-post management and from supervision based on trading activities and the nature of the business to management based on the individual economic entity, in order to effectively guard against the impact of cross-border capital flows and to realize the organic unity of serving the development of the foreign economy and improving supervisory efficiency, while also facilitating to the utmost foreign trade and overseas investments by the market players. 2012-02-15/en/2012/0215/1031.html
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The State Administration of Foreign Exchange recently convened a conference to summarize the comprehensive work of foreign exchange administration in 2011 and to set forth the tasks for the comprehensive work of foreign exchange administration in 2012. The conference pointed out that in 2011 cadres and staff in the comprehensive work system of foreign exchange administration deeply implemented the scientific outlook on development, and in accordance with the requirements of the “Five Kinds of Transformation” of the concepts and methods of foreign exchange administration, focusing on the central tasks and serving the overall situation, continuously improved the level of policy research, strictly promoted law-based administration, reinforced publicity work, did a good job in internal management, and achieved new progress in all work. The conference concluded that in 2012, in confronting the face of the complicated and volatile economic and financial situations both at home and abroad, in terms of the comprehensive work of foreign exchange administration, the foreign exchange authorities should conscientiously implement the spirit of the Central Economic Work Conference and the National Financial Work Conference, and in accordance with the overall arrangements decided upon at in the National Foreign Exchange Administration Work Conference of 2012, adhere to the essential requirements of finance to serve the real economy and continuously deepen the reform of foreign exchange administration. The foreign exchange authorities should maintain the risk limits, keep a close eye on unusual cross-border capital flows, establish a system and mechanism guarding against the impact of bilateral flows of cross-border capital, actively promote work to realize the “Five Kinds of Transformation” of the concepts and methods of foreign exchange administration, further change the work style, improve the capability of the foreign exchange authorities in terms of comprehensive coordination, provide services and advice regarding the comprehensive work, and continuously improve the effectiveness of foreign exchange administration. The conference set the tasks for the comprehensive work of foreign exchange administration in 2012: first, the foreign exchange authorities should further strengthen forward-looking and relevant research on foreign exchange administration policies; second, the foreign exchange authorities should unswervingly deepen work on law-based administration and on putting the regulations in order; third, the foreign exchange authorities should continuously improve the transparency of foreign exchange administration policies, and; fourth, the foreign exchange authorities should effectively do a good job in all aspects of the basic work. 2012-04-16/en/2012/0416/1043.html
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Since the State Administration of Foreign Exchange (SAFE) expanded the pilot of the domestic and foreign currency exchange franchise business for individuals in November 2009, the number of franchise operation institutions (hereinafter referred to as “Franchised Institutions”) has steadily increased, the exchange service level has improved continuously, and the pilot work has achieved good results. In order to further regulate the continuous and sound development of the domestic and foreign currency exchange franchise business for individuals, the SAFE recently printed and distributed the Measures for the Administration of the Pilot on the Domestic and Foreign Currency Exchange Franchise Business for Individuals (HuiFa No.27 [2012], hereinafter referred to as the “Pilot Measures”) which came into effect as of May 1, 2012. The main contents of the pilot measures include: first, simplifying market access management, expanding the scope of the franchise business, improving the flexibility of the excess reserve adjustment, further reducing the operating costs of the Franchised Institutions, and increasing the capital earnings; second, encouraging chain businesses of Franchised Institutions to achieve economies of scale, and meanwhile, increasing the minimum registered capital requirement for Franchised Institutions operating within a single region to RMB 5 million, and for those Franchised Institutions operating nationwide to RMB 30 million; third, emphasizing risk control. The pilot measures further regulate over-the-counter business and excess reserve management of the franchised institutions, and establish a system to retain relevant data and vouchers for future reference. The pilot measures strengthen the regular monitoring system for capital operations of Franchised Institutions and the regular inspection system for business activities of Franchised Institutions, to supervise and encourage the Franchised Institutions to comply with regulatory operations. Implementation of the pilot measures facilitates market access and the day-to-day business of the Franchised Institutions under controllable risks, and provides them with space for future development. Furthermore, implementation of the pilot measures emphasizes ex-post data monitoring, increases efforts for ex-post regular on-site and off-site supervision, and promotes the sustainable development of the Franchised Institutions. 2012-05-15/en/2012/0515/1048.html
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In order to further promote the development of the domestic and international options market and to satisfy the requirements of economic entities to hedge against exchange-rate risks, the State Administration of Foreign Exchange recently issued the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning the Banks’ Handling of Renminbi-Against-Forex Options Portfolio Business (Hui Fa No. 43 [2011], hereinafter referred to as the “Circular”). The Circular will come into effect as of December 1, 2011. The main contents of the Circular include: First, introducing the foreign exchange put and risk-reversal options portfolio business and the foreign exchange call and risk- reversal options portfolio business; Second, providing that banks will comply with the regulatory requirements such as trading on the basis of actual needs and integral management when handling the options portfolio business for their clients; Third, allowing banks that qualify for Renminbi-against-Forex options trading on the inter-bank foreign exchange market and that qualify to operate the Renminbi-against-Forex options business for clients to directly engage in the options portfolio business for their clients. The issuance of the Circular is beneficial to improve instruments for enterprises to avoid exchange-rate risks, to improve the banks’ means of risk management, to continuously promote the development of the domestic foreign exchange market, and to give full play to the market’s basic role in the allocation of resources. 2012-01-18/en/2012/0118/1022.html
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Liu Wei, director-general of the General Affairs Department of the State Administration of Foreign Exchange, in an interview with Century Weekly, recently responded to questions concerning hot money? The interview, published in Century Weekly (no. 2, 2011) and on www.caing.com, is presented as follows. The Cure for Hot Money? Hot money has become a hot topic in the emerging economies. At the upcoming meeting to be convened by central banks from Southeast Asia to talk about regulation of cross-border capital flows, the prevention of hot money is bound to come up as a key issue. This is the first time after the outbreak of the 1997 Asian financial crisis that East Asian nations have once again put priority on this topic. The background for this latest development involves loose monetary policies and a series of economic stimulus measures taken by the major developed economies, such as the U.S., Japan, and Europe, in an effort to combat the 2008 international financial crisis, resulting in tremendous liquidity in the market. As for the emerging markets, due to their steady economic growth, interest rate spreads between the home currency and foreign currencies, and expectations for an RMB appreciation, China has become a magnet for international capital. According to the State Administration of Foreign Exchange (hereafter referred to as the SAFE), the banks foreign exchange settlements and sales have recovered to their highest level, with USD2.12 trillion for the first eleven months of 2010, 4% higher than that at the 2008 peak level during the same period; the surplus of the banks foreign exchange settlements and sales for that same period stood at USD351.5 billion, registering year-on-year growth of 48%. This shows that people prefer to have their capital held in RMB instead of foreign currencies, and this directly results in a further surge in China's foreign exchange reserves. As of the end of September 2010, the balance of China's foreign exchange reserves amounted to USD2.65 trillion, an increase of USD249.1 billion from year-end 2009. This amount is more than twice that of the runner-up, Japan, which had USD1 trillion in its foreign exchange pool. However, to the unprofessional eye, the inflow of Hot money to China is as complicated in nature as it is difficult to understand. As Liu Wei, director-general of the SAFE General Affairs Department, answered questions concerning hot money in an interview with our journalist, she offered insights into the categorization, inflow channels, regulation targets, and policy measures for hot money, as well as provided an up-close introduction to its high-voltage crackdown. Results of Quantitative Easing Caing-Century Weekly: What can China expect this year in terms of cross-border capital flows? Why? Liu Wei: Since 2010, the combination of the slow recovery of the global economy and the strong momentum on the domestic front has exerted more pressure on the net inflows of foreign exchange into China. This is mainly because: first, a new round of quantitative easing policies adopted by the major developed countries added to the rise of global liquidity, resulting in the emerging economies facing the impacts of currency revaluations and capital flows. Second, China's good economic fundamentals continued to attract inflows of foreign capital. Third, affected by changes in the domestic and international macroeconomic environments, Chinese market entities, including businesses and individuals, were more willing to settle accounts in foreign currencies but less inclined to buy foreign exchange. Domestic market entities actively adjusted their asset-liability structures in domestic and foreign currencies, for example by taking large USD loans to replace foreign exchange purchases. Banks also avoided overseas capital maneuvers as much as possible, and instead be brought the capital back to the home market, which also indirectly led to more net inflows of foreign exchange. Moreover, there is the possibility that arbitrage capital infiltrated through legal channels or instruments. Caing-Century Weekly: How do you interpret the impacts of the quantitative easing policies adopted by the Federal Reserve? Liu Wei: In the short term, America's QE policies might weaken the dollar, keep its interest rate down, and to a certain extent stimulate the U.S. economy. But in the medium and long term, this policy might fuel inflation and asset bubbles around the world, and making a global economic recovery more uncertain. First, it might aggravate the deteriorating economies of some European economies. Second, emerging markets will have to deal with more inflows of speculative funds, leading to appreciation pressures and aggravation by the already high inflation level. Third, global expectations of a USD depreciation will grow, forcing some countries to adopt measures to slow their currency appreciation, or even to devalue their currency, which will likely result in another round of global protectionism. Fourth, the large supplies of US dollars will trigger asset bubbles in sectors such as commodities, stocks, and the real estate markets. Fifth, as an international reserve currency, an increased supply of dollars might contribute to the export of America's inflation to other parts of the world. In a word, the QE policies of the U.S. are accompanied by complicated and profound implications that we should closely follow, carefully evaluate, and cope with promptly. Caing-Century Weekly: You mentioned America's QE policies have aggravated inflation and capital inflow pressures in the emerging markets. Do you think the surge in Chinese banks? foreign exchange settlements and sales is a sign of the influx of Hot money? Liu Wei: I feel the need to clarify two matters: first, a massive foreign exchange net inflow does not mean there is a large inflow of foreign exchange. Generally, the differences of banks foreign exchange settlements and sales can be used to gauge the cross-border flows of foreign currencies. A foreign exchange net inflow means there is a surplus in the banks foreign exchange settlements and sales, created either by an increase in the sale of foreign exchange or by a decrease in the purchase of foreign exchange, or by a combination of both. China's increased surplus in foreign exchange this year can mainly be attributed to the weakened inclination of market entities to purchase foreign exchange. Market entities prefer to raise capital in foreign currencies or settle payments in RMB, thereby substantially lowering the amount of the banks foreign exchange settlements and sales. Second, not all incoming capital falls into the category of hot money. While continuously trying to facilitate trade and investment, China still keeps an eye on capital controls and has put in place a series of policy measures to curb the inflow of short-term speculative arbitrage funds. Therefore, there is no room for legal inflows of hot money in China. Addressing the Root Cause Caing-Century Weekly: What on earth is hot money Given the many current arguments, what do you think is a more reasonable way to assess the scale of hot money inflows? Liu Wei: Indeed, no consensus has yet been reached on a definition of hot money.? In reality, long-term capital and short-term capital are interchangeable, and it is difficult to draw a line between investment and speculation. In economies with free flows of capital, Hot money generally refers to capital moving rapidly in and out of the country for the purpose of short-term speculative profits. Due to China's capital account management, short-term capital is not allowed free entry or exit; therefore, the key to determining whether some capital is Hot money is to find out whether the capital flows are for real and legitimate trade or investment purposes. A popular way in China to assess the amount of Hot money is newly added funds outstanding for foreign exchange trade surplus actually utilized foreign capital = hot money. Personally, I do not think that this is a recommended method because it fails to reflect the reality of the cross-border capital flows. First, this formula omits important trading items. Aside from trade and actually utilized foreign capital, there are other trading items that generate cross-border capital flows, such as services, profits, current transfers, securities investments, and other investments. According to this method, all other international payments are labeled hot money, and this obviously is unreasonable. In addition, some hot money flows in the guise of trade and investment, so this method runs the risk of either overestimating or underestimating the amount of hot money. Second, this method of evaluation brings together the two different concepts of funds outstanding for foreign exchange and international trade without explaining the mechanism for the formation of funds outstanding for foreign exchange or identifying its components. This involves a gross overgeneralization and fails to consider the time lag between goods flows and capital flows. We need to fully reflect the reality when evaluating the true volume of hot money. Since hot money is usually disguised as legal capital inflows, a simple formulaic calculation can hardly reveal the full extent of hot money. In contrast, daily supervision and investigation of hot money can offer some evidence of the scale of the hot money inflows. For example, starting from February 2010, the SAFE has been carrying out a hot money crackdown campaign, and by the end of October 2010, it had exposed 197 cases of foreign-exchange violations involving a total of USD7.34 billion. Caing-Century Weekly: Has the SAFE observed more inflows of hot money? Liu Wei: In this year's hot money crackdown campaign, we have not seen a massive organized cross-border inflow of hot money into China. Violators of hot money regulations mainly include Chinese-foreign equity joint financial institutions, Chinese-funded enterprises, foreign-funded enterprises, and entities that receive foreign exchange from overseas ties and commercial transactions. As for large multinational financial agencies, given the legal risks they face under the capital controls, they are seldom found to be involved in illegal hot money operations. In addition, as the market awareness of businesses and individuals is strengthened, they become more sensitive to the changes in price signals, such as interest rates and foreign exchange rates. In order to avoid risks and maximize profits, some market entities have adjusted their domestic and overseas asset arrangements and financial management. In international trade settlements, if companies advance or delay their payments to take advantage of foreign exchange fluctuations, they will intensify the volatility of cross-border capital flows and will need to be regulated, though the capital involved cannot be categorized as hot money. Taken together, the cross-border capital inflows this year are mostly the result of real trade and investment. We cannot rule out the possibility of arbitrage purposes, but those are not the mainstream. We should not overestimate or exaggerate the scope of hot money. Caing-Century Weekly: Since China maintains an appropriate level of capital controls, in principle there should be no way for hot money to flow in. Then, from the perspective of the SAFE, what channels are responsible for the inflows of Hot money? Liu Wei: The hot money that manages to enter China for speculative purposes and without a real trade or investment background usually takes advantage of the highly open and channels with minimal procedures, such as cargo trade, service trade, and direct investment. The violators cover up their illegal purposes with seemingly legal transactions, breaking or sidestepping the regulations in their chameleon ways. Typical practices include: trade processing companies directing into China more funds than they need or earlier than is necessary in order to make profits from the sale of foreign exchange; some foreign exchange funds being disguised as foreign direct investment, but after falsifying the capital settlement, they flow into the property or stock markets or are used for other investment purposes; some speculative funds are split into smaller amounts and remitted into China by individuals who want to avoid the annual quota management for the settlement and sale of foreign exchange. It is especially important to note that when dealing with the settlement and sale of foreign exchange, some designated banks fail to strictly check whether some foreign exchange settlement applications are for real trade purposes, thus allowing the inflow of hot money. Some banks even dodge foreign exchange management regulations by promoting arbitrage-oriented trade financing products. On the surface, they might achieve a win-win? solution for both the bank and the business, but in fact they increase the pressures on foreign exchange net inflows and affect the balance of international payments by avoiding or delaying purchases of foreign exchange. Therefore, the hot money in China shares the following common features: First, it comes in under disguise. Because hot money is not allowed to flow freely, its entry and exit is usually achieved by violating or bypassing the laws and regulations under the pretense of legal trade or investment or other available means of disguise. Second, it is very complicated. Some aim to gain the differences between domestic and foreign interest rates or exchange rates in the short term, whereas others are more interested in the short-to-medium term profits from asset price increases. Third, it comes in diverse forms, making it difficult to determine the true nature of the underlying transactions. But the movements of hot money leave behind traces that can be used as clues to track down its whereabouts and to reveal its disguise. High-Voltage Crackdown Caing-Century Weekly: Since there are traces left by the hot money, has the Chinese government discovered any clues about the inflows of hot money? Have any countermeasures been adopted? Liu Wei: The massive inflows of cross-border capital have many detrimental effects in China, such as inflation pressures, asset bubbles, as well as increased pressures on monetary policy operations and foreign exchange reserve management. As a result, since 2010, the Chinese government has employed various policy instruments to control the inflows of hot money. First of all, we have strengthened the management of cross-border capital flows. Since February 2010, we have launched hot money crackdown campaigns in provinces and municipalities with large volumes of foreign exchange. In a series of five announcements, the names of the banks, businesses, and individuals violating the foreign exchange regulations have been released to the public. Our continuous high-voltage crackdown has effectively deterred further increases in the inflows of hot money. Recently, the SAFE developed and strengthened foreign exchange management measures and guided cross-border capital flows by introducing temporary policy adjustments with respect to the banks positions in foreign exchange settlements and sales, collection of payments and settlement of exchange for exports, short-term external debts, foreign direct investments, overseas listings, return investments, and penalties for violations of foreign exchange regulations. Since the launch of these policies, initial progress has been made, producing positive regulatory effects on the cross-border capital inflows during certain periods and in certain areas. Second, we have reinforced interdepartmental coordination and stepped up joint regulation. In 2010, for example, the SAFE joined the Ministry of Housing and Urban-Rural Development in issuing a document to reiterate that individuals overseas can only purchase one house in China for their own residence, and overseas agencies can only purchase non-residential housing in the city of registration to be used as offices. These principles help curb the influx of foreign capital into China's property market. Third, we have made full use of monetary policy measures and intensified macro prudential regulations. We do this mainly by allowing price mechanisms such as foreign exchange rates and interest rates to act as guidance, comprehensively using quantity-based hedging instruments such as the reserve requirement ratio and central bank bills, and stepping up prudential regulation over financial institutions. We have also provided banks with more guidance in terms of foreign exchange risks and have strengthened the banks awareness of legal operations. Caing-Century Weekly: The SAFE has repeatedly mentioned a high-voltage crackdown on hot money. How should we interpret the word high-voltage? Liu Wei: As China's foreign exchange resources shift from a shortage to a relative surplus, the major functions of foreign exchange management should go beyond merely ensuring the acquisition and administration of foreign exchange resources to also covering the balanced management of capital entry and exit, the prevention of abnormal risks in cross-border capital flows, and the security of the national economy and finance. Recent developments at home and abroad have resulted in potential increases in cross-border capital net inflows; therefore, combating hot money and preventing risks have become important measures to ensure steady and healthy economic development, thus they are part of our current priorities. As for the term high-voltage, I will offer the following interpretations: First, we should intensify the investigation and punishment of entities with illegal capital by identifying the key channels, links, targets for hot money inflows, dealing pinpointed blows, and increasing inspection efficiency, thereby effectively preventing and curbing the inflows of hot money. Second, we should further improve the relevant systems and standardize management by reinforcing system building, adopting effective control measures, and preventing market entities from taking advantage of legal loopholes. Third, we should strengthen cooperation with other regulatory authorities to achieve a synergy. Inbound movements of hot money involve many links and multiple entities, such as banks and enterprises, so the SAFE should cooperate with the relevant departments to carry out joint administration. Taking cross-border transactions as the starting point, the related authorities should assume responsibility for the corresponding businesses, identify suspicious conduct, and eliminate arbitrage behavior under the guise of legal facades. It is especially worth mentioning that the persistent high-voltage crackdown on hot money does not mean that we will control or restrain the legal foreign exchange transactions of banks, enterprises, and individuals. This campaign will be conducted without adding extra costs for market entities and we will take active measures to facilitate trade and investment. Caing-Century Weekly: From the end of October 2010 up until the present, the SAFE has issued a series of penalty announcements, making public the foreign exchange violations committed by commercial banks, enterprises, individuals, illegal private banks, and online entities. But given the RMB appreciation expectations and the increases in domestic asset prices, are these measures intended to deter future offenders really effective? Liu Wei: First, these public announcements are made in order to warn and educate the offenders, to urge the entities involved to strengthen internal management and carry out careful rectification. Second, in this way, we can reveal the typical channels and operational models o the hot money inflows, so that market entities can learn from these lessons and refrain from breaking the laws and regulations. Third, we can strengthen compliance awareness by market entities, urge them to assume their social responsibilities, and to strictly comply with the various policies for foreign exchange management. On the whole, these announcements have produced positive social effects, and have been conducive to pooling the strength of society in the fight against hot money, and to enhancing the effectiveness of the hot money crackdown campaign. The speculative nature of hot money determines that it is always in hot pursuit of profits, wherever they are, and to follow the extent of profits, the violation of the laws is only a small price to pay. The SAFE must strengthen investigation and regulation according to the law. For bank offenders, we should impose punishments such as fines, suspension of operations, public criticisms, and hold executives with direct responsibilities accountable. For enterprises and other market entities that have violated the relevant regulations, punishments will be followed by public announcements to deter future offenders. Caing-Century Weekly: You just mentioned the SAFE has adopted a series of measures to curb the inflows of hot money and these have has achieved initial results. Can you elaborate on that point? Liu Wei: On November 9, 2010, the Circular of the State Administration of Foreign Exchange on Issues Relevant to Strengthening the Administration of Foreign Exchange Businesses was issued to further standardize cross-border capital flows through channels such as trade, foreign direct investment, return investment, and overseas listings, and in particular to strengthen management of the banks positions in foreign exchange settlements and sales, and short-term external debts, and to reinforce the banks obligations to verify the authenticity when dealing with foreign exchange businesses. According to foreign exchange statistics since November 2010, due to the above-mentioned foreign exchange policies, net inflows of foreign exchange have dropped: the surplus of banks spot foreign exchange settlements and sales has been lowered, especially the surplus in the settlement of foreign exchange capital for foreign-funded companies and foreign exchange settlement and sales for individuals; banks are more cautious when providing forward foreign exchange settlement services, resulting in an obvious reduction in the volume of settlements; banks cash basis positions have increased after the launch of the relevant measures, demonstrating the initial effects of the measures to regulate the foreign exchange market. Meanwhile, expectations that the RMB will appreciate have weakened both at home and abroad. On December 29, 2010, the one-year forward exchange rates of RMB/USD in the home market and the overseas market were respectively 6.5807 and 6.4890, with the RMB appreciation expectation standing at 0.7% and 2.1%, down by 1.5 and 1.6 percentage points compared with the end of October. Of course, considering the complicated and uncertain prospects in the foreign exchange markets, we must remain vigilant, and closely watch and actively cope with the latest developments. Caing-Century Weekly: Going forward, what steps will the SAFE take to tackle hot money? Liu Wei: To prevent and combat hot money, we must adopt a two-pronged approach. While robustly promoting the facilitation of trade and investment, we must strengthen our monitoring and early-warning of capital flows, adopt measures to stop cross-border arbitrage activities, prevent the devastating impacts of fluctuations in domestic asset prices and the aggravated financial risks caused by the massive entry or exit of hot money. First, we will maintain our high-voltage stance toward the inflows of hot money and other illegal capital. We will focus on banks and other key channels, continue to carry out special inspections of hot money inflows, step up efforts for foreign exchange examination, and severely crack down on illegal private banks and other foreign exchange crimes. Second, we will improve the methods for foreign exchange regulation and will optimize management of cross-border capital inflows. We will strengthen trade-based foreign exchange administration, improve management of foreign exchange registration and capital settlement of foreign-invested enterprises, and explore follow-up examination and regulation of money after exchange settlement. We will also strengthen management of banks short-term external debts and reinforce the regulation of banks off-balance-sheet financing. Third, we will promote the process of opening up China's capital market and boost capital outflows. We will encourage the relevant companies to set up overseas operations, allow more types of institutions to engage in QDII businesses, and while ensuring risk controllability, accelerate the process of capital account convertibility selectively and in order of priority. Last and most importantly, we must bring into full play the basic functions of the market mechanisms, provide proper guidance by using price mechanisms such as foreign exchange rates and interest rates, eliminate arbitrage opportunities that are likely to be exploited by hot money, and take concrete measures to maintain an enabling foreign exchange policy environment for the sustainable development of foreign-related businesses. 2011-01-10/en/2011/0110/977.html
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In order to increase the efficiency of the use of funds by domestic enterprises, to further promote the facilitation of trade, and to support the going globalmove of domestic enterprises, the State Administration of Foreign Exchange recently promulgated the Circular on the Implementation of Administration of Overseas Deposits of Export Proceeds (Hui Fa [2010] No.67, hereinafter referred to as the Circular) in accordance with the relevant provisions in the Regulations of the Peoples Republic of China on Foreign Exchange Administration, in which it is decided that as of January 1, 2011 the SAFE will implement on a nationwide scale the Interim Measures for the Administration of Overseas Deposits of Export Proceeds from Trade in Goods and the instructions for operations based on the results of a pilot operation. The Circular covers four principal areas: (1) implementing an account-opening registration system for overseas deposits of export proceeds by domestic enterprises. Domestic enterprises that meet the requirements regarding the sources of export proceeds, have a need for overseas payments, and have operated in compliance with the foreign exchange administration regulations over the past two years may apply to the local foreign exchange authorities to make overseas deposits of their export proceeds; (2) implementing scaled management of overseas deposits of export proceeds by domestic enterprises. The scale of export proceeds deposited overseas shall be submitted by the domestic enterprises to the local foreign exchange authorities based on their actual needs, and the latter shall register and put on file the relevant scales; (3) streamlining the procedures for export verification and writing-off, online inspections, and so forth, and implementing an ex post reporting system; (4) carrying out off-site monitoring of the receipts and payments in overseas accounts of domestic enterprises, and implementing on-site inspections of abnormal circumstances. The launch of the policy represents a significant move on the part of the SAFE to further satisfy needs for the development of a market-oriented economy, deepen the reform of the foreign exchange administration system, and promote the facilitation of trade. The policy will play an active role in balancing cross-border fund flows under trade, facilitating cross-border fund operations by domestic enterprises, and bolstering the going globalmove by domestic enterprises. The policy will play a positive role for enterprises with frequent receipts and payments from cross-border trade to reduce the costs of cross-border transfers of foreign exchange funds and the costs of currency conversion. The policy will also play a positive role for enterprises to have greater involvement in international competition and stronger ability for group management, to raise the efficiency of the use of funds, lower the costs of overseas fundraising, and further sharpen the competitive edge of enterprises on the international markets. 2010-12-31/en/2010/1231/975.html
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In order to facilitate individualshandling of foreign exchange settlement and sales and to promote banks business innovation, at the beginning of 2010 the State Administration of Foreign Exchange (hereinafter referred to as the SAFE) gave a green light successively to the Bank of China, China Merchants Bank, and the Industrial and Commercial Bank of China for pilot operations of foreign exchange settlement and sales for individuals through e-bank channels. Domestic individuals are allowed to handle foreign exchange settlement and sales on a self-service basis through the e-channels provided by the pilot banks. In view of the fact that the pilot operation has received widespread praise from the public, the SAFE recently promulgated the Interim Measures for the Administration of E-bank-based Foreign Exchange Settlement and Sales for Individuals (hereinafter referred to as the Interim Measures), which will come into force as of April 1, 2011. The Interim Measures mainly comprise four areas: (1) After being accepted by the SAFE, banks are allowed to connect their e-banking systems to the information system for the administration of foreign exchange settlement and sales for individuals, to handle e-banking-based foreign exchange settlement and sales for individuals, and to implement the national uniform regulations on the annual aggregate administration of foreign exchange settlement and sales for individuals; (2) Individuals both at home and abroad are allowed to use their own accounts to handle the purchase and settlement of foreign exchange within the annual aggregate and under the current account (exclusive of trade) via multiple e-banking channels such as online banking, self-service terminals, phone banking, and mobile banking; (3) Banks and individuals shall comply with the foreign exchange administration regulations for the handling of e-banking-based foreign exchange settlement and sales for individuals, and shall ensure that the data entered into the information system for the administration of foreign exchange settlement and sales for individuals are authentic, complete, and accurate; (4) The SAFE and the banks will keep a close eye on the e-banking-based foreign exchange settlement and sales for individuals, screen and identify illegal transactions and transactions in violation of the regulations, and place those individuals becoming involved in activities in violation of the regulations, such as splitting large sums of money into smaller parts, on a watch-list for intensified administration. The individuals on the watch-list shall be prohibited from foreign exchange purchases and settlement via e-banking for a certain period of time. By keeping up with the trend of e-banking development, the promulgation of the Interim Measures will further facilitate individuals handling of foreign exchange settlement and sales, lessen the burden on bank counters, and reduce the operational costs for banks. Placing individuals involved in activities in violation of the regulations on the watch-list and intensifying administration of those on the watch-list will be conducive to checking individualssettlement and sales of foreign exchange by splitting large sums of money into smaller parts and to preventing inflows and outflows of abnormal foreign exchange funds through e-banking channels. 2011-03-15/en/2011/0315/987.html