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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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11. We have noticed some recent media reports saying that China's foreign exchange reserves have exceeded a reasonable level.Has the USD3 trillion in foreign exchange reserves exceeded a rational scale or actual needs? Answer: By the end of June 2011, China's foreign exchange reserves reached USD3.197491 trillion. The increase in foreign exchange reserves is an objective result of the twin surplus in the balance of payments during this stage of economic development. We are not pursuing large-scale foreign exchange reserves, nor are we pursuing a long-term surplus in the balance of payments. There is no unified international or domestic standard for a reasonable scale of foreign exchange reserves to be held by a country. Various factors need to be taken into consideration, including the countrys macro-economic conditions, its degree of economic openness, the capability to utilize foreign capital and international financing, and the degree of maturity of its economic and financial systems. Since China is a large developing country, maintaining sufficient foreign exchange reserves is of great significance to ensure international liquidity, enhance capability to respond to risks, and safeguard the economic and financial security of the nation. During the 12th Five-Year Plan period, the main focus of Chinas scientific development in all economic and social fields is to accelerate the transformation of the mode of economic development. We shall take comprehensive measures, promote economic restructuring, and transform the mode of economic development, so as to fundamentally alleviate the pressures caused by the inflows of foreign exchange funds and to achieve a basic equilibrium in the balance of payments. 12. Some people believe that the current inflation in China is due primarily to the increase in foreign exchange reserves. What is the SAFE's view about this? Answer: The current rise in price levels in China is affected by a variety of factors, including the rise in prices of major international commodities, significant growth in expectations of global inflation, and greater pressures from imported inflation. In addition, the demands for domestic investment and the growing costs of energy resources, the labor force, and land have also pushed up the price levels. As a result of the increase in foreign exchange reserves, more RMB will be placed on the market, leading to growth in the monetary base. But we also have to note that on several occasions in recent years, the PBOC has conducted sterilization operations by raising the deposit reserve ratio and issuing central bank bills to soak up the liquidity caused by outstanding funds for foreign exchange reserves. The increase in foreign exchange reserves is not an immediate nor a major cause of inflation. 13. Some people believe that the system of mandatory exchange settlement and sales has led to a continuous increase in foreign exchange reserves. Is China still enforcing such a system? Answer: At present, the so-called system of mandatory exchange settlement and sales is already a historical concept. As for the foreign exchange proceeds from current account transactions through exports or other means, enterprises can keep them or sell them to banks depending on their own business needs. Established in 1994, the system of mandatory foreign exchange settlement and sales was a product of the period when there was a shortage of foreign exchange. At that time, except for those enterprises approved by the state that were allowed to keep foreign exchange in foreign exchange accounts, all enterprises were required to sell the remainder of their foreign exchange proceeds from current account transactions to designated foreign exchange banks. Thereafter, the SAFE continuously relaxed the constraints on opening foreign exchange accounts under the current account and raised the ceiling on such accounts. In 2002, these constraints on opening foreign exchange accounts were eliminated, and thereafter all enterprises were authorized to conduct foreign trade or to open foreign exchange accounts under the current account with foreign exchange proceeds upon the approval of the SAFE. In 2006, prior approval to open such accounts was no longer required. In 2007, enterprises could keep the foreign exchange proceeds from current account transactions according to their own business needs. In 2008, the revised version of the Regulations on Foreign Exchange Administration specifically provided that the foreign exchange proceeds from current account transactions could be either retained by the enterprises themselves or sold to the banks. Beginning on January 1, 2011, enterprise export proceeds can be deposited overseas and do not have to be repatriated. Therefore, our country has put an end to the system of mandatory foreign exchange settlement and sales. The increase in foreign exchange reserves has nothing to do with that system. 14. Why is specific information about the operations and management of foreign exchange reserves not allowed to be disclosed to the public? Will the SAFE further improve transparency in this regard? Answer: Information about Chinas foreign exchange reserves is disclosed in accordance with the General Data Dissemination System (GDDS) of the International Monetary Fund (IMF), which is consistent with practices in most countries. As a responsible professional investor, the SAFE has been disclosing information about the operation and management of its foreign exchange reserves in a timely manner to international financial organizations, market regulatory bodies, and so forth through the corresponding channels and in accord with domestic and overseas common practices. Because of the large-scale and strong market influence, investors and speculators in international financial markets have been keeping a close eye on Chinas foreign exchange reserves and trends in their investment and operations in the hopes of discovering and exploiting profit-making opportunities. Participants in international financial markets are all playing the same game of trying to obtain maximum information about their competitors and at the same time refraining from exposing as much as possible. To safeguard the security and interests of Chinas foreign exchange reserves, we shall adopt a serious and cautious attitude in terms of information disclosure and gradually improve transparency in an active and steady manner. Over the past few years, as society has been paying more attention to the operation and management of foreign exchange reserves, we have actively disclosed information to the public about basic conditions in the operation and management of our foreign exchange reserves and we have provided answers to hot issues of public concern in various ways, including press conferences, media briefings, forums of experts, and the SAFE portal. We will continue to do a good job in maintaining interaction and communications with the public and we welcome suggestions and opinions from all members of society.. 15. There are only several hundred members on the SAFE management team for foreign exchange reserves, so is there a problem that the scale of asset management per capita is too large? How do you control operational risks of the foreign exchange reserves? Answer: Talent is a basic guarantee for fulfilling various tasks. The SAFE has always attached great importance to building a team to be responsible for the operation and management of our foreign exchange reserves, and has recruited and cultivated talented investment personnel from China and abroad. Aimed at standardization, specialization and internationalization, the SAFE has established an operation and management team with a reasonable age structure and knowledge and a balanced mix of professional and management work. Meanwhile, the SAFE has constructed a complete global platform for reserve operations. During different stages of the economic cycle, the team has achieved the goal of ensuring security and liquidity, and maintaining and increasing the value of the foreign exchange reserve assets. Considering the different personnel requirements of various investment products, in the future the SAFE will make orderly adjustments to the structure and scale of foreign exchange reserve personnel to better adapt to the needs of large-scale operations. Under the current economic and financial situations both at home and abroad, in order to control risks in reserve operations, we shall, first, continue with diversified asset allocation and constantly optimize asset allocation based on market conditions in compliance with the principle of security, liquidity, and increasing value; second, we shall reasonably define the currency, assets, terms as well as the structure and proportion of product distribution, and strengthen risk management and internal control; third, we shall continue to improve the multilevel investment decision-making system, and ensure the objective, scientific, and professional level of the various investment decisions; and fourth, we shall constantly improve the platform for basic operations and expand and improve the channels for global operations. 16. Since developed countries are currently implementing quantitative easing monetary policies, there have been large net inflows of foreign exchange funds and a relatively rapid increase in foreign exchange reserves, and investments and operations have become increasingly difficult. What comprehensive countermeasures can be taken to deal with these problems? Answer: It is a systematic project to cope with the quantitative easing monetary policies of the developed countries and to promote Chinas basic equilibrium in the balance of payments, which requires the joint efforts of domestic macro-economic policies. In particular, in the current complex economic situations both at home and abroad, it is imperative to implement a policy package of expanding domestic demand, making structural adjustments, reducing the surplus, and promoting a balance. Expansion of domestic demand means that we shall especially expand consumption demand and fully exploit its huge potential. Making structural adjustments means that we shall promote the transition of the economic growth pattern to make it driven by consumption, investments, and exports. Reducing the surplus means that we shall attach equal importance to imports and exports, and give full play to the critical role of imports in the macro-economic equilibrium and structural adjustments. Promoting a balance means that we shall, within the framework of balanced management, fully utilize economic levers and market-based means to strengthen the management of capital inflows, open up channels for capital outflows, and promote the convertibility of the capital account in a steady and orderly manner. Only in this way will we be able to effectively cope with the quantitative easing monetary policies of the developed countries, comprehensively tackle the problems of a disequilibrium in the balance of payments and of a rapid increase in foreign exchange reserves, and implement the requirement of maintaining a basic equilibrium in the balance of paymentsas stipulated in implementation of the Scientific Outlook on Development of the 12th Five-Year Plan. 2011-07-28/en/2011/0728/1008.html
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Editor's Note: The FAQs on Foreign Exchange Administration Policies released by the State Administration of Foreign Exchange (SAFE) in July 2010 helped the general public learn about foreign exchange administration and received positive feedback. Recently, the media, experts, scholars, and the public have attached great importance to issues related to the foreign exchange reserves and offered many valuable opinions and suggestions, thereby giving us an important impetus to improve our work. In order to promote communication and interaction with people from all walks of life, we have compiled the FAQs on Foreign Exchange Reserves with respect to the recent hot topics. These FAQs will be published in three installments for your discussion and reference. 1. Recently, the SAFE issued a public statement that an appreciation of the RMB will not lead to any loss of foreign exchange reservesand explained this view from the perspective of book-value gains. Nevertheless, some people still believe that an RMB appreciation will gradually dissipate our wealthforeign exchange reservesjust like a cooked duck flying away.So, will an appreciation of the RMB really lead to actual losses of foreign exchange reserves and even social welfare? Answer: An appreciation of the RMB will not directly causes losses of Chinas foreign exchange reserves. Foreign exchange reserves are essentially assets in foreign exchange, which use the USD as the recording currency. Variations in the RMB/USD exchange rate will result in a change in the book value of the RMB that is converted from the foreign exchange reserves, which is not the actually realized gains or losses. The variations only mean some differences in the book value when using different reporting currencies, be it RMB or USD, and thus will not have a direct impact on the effective purchasing power of the foreign exchange reserves. Changes in foreign exchange will only occur when the foreign exchange reserves are repatriated from overseas countries (regions) and converted into RMB. At present, China has no need to repatriate its foreign exchange reserves on a large scale. We can give a counter example: if an RMB appreciation should lead to losses in Chinas foreign exchange reserves, then a depreciation of the RMB would bring about gains in our foreign exchange reserves. According to this logic, we could increase the returns on our foreign exchange reserves and even our social wealth by continually depreciating the RMB, which, in fact, is impossible. We should adopt a comprehensive and objective view of the impact of an increase in foreign exchange reserves from the overall situation in Chinas development and reform. By the end of June 2011, Chinas foreign exchange reserves reached USD3.197491 trillion. Such increase in foreign exchange reserves is of great significance to improve Chinas external payment ability, promote its reform and opening-up, and raise its international status. However, the excessively rapid increase and large scale of the foreign exchange reserves pose certain challenges to their operation and management. Therefore, it is imperative that we accelerate the transformation of the economic development mode, follow the concept of expanding domestic demand, adjusting the structure, reducing surpluses, and promoting a balance,expedite the reform of the RMB exchange-rate formation mechanism, give full play to the fundamental role of the market in the allocation of resources, and promote the balance of payments so as to achieve a basic equilibrium. 2. According to a report by the U.S. Department of the Treasury, China is the largest holder of U.S. Treasury bonds. Lately, credit rating agencies, including Standard & Poors, Moodys, and Fitch, have repeatedly issued warnings about the U.S. debt problem. In the case of a USD depreciation and a future rise in inflation in the U.S., is it a growing risk to hold such a large sum of U.S. Treasury bonds? Will this sum be reduced in the future? Answer: U.S. Treasury bonds are both a reflection of the credibility of the U.S. government and a critical variety of investment for U.S. and international institutional investors. To buy U.S. Treasury bonds with foreign exchange reserves is market investment behavior, and it will be dynamically adjusted according to market conditions. Any increase or decrease in the holding of U.S. Treasury bonds is a normal investment operation. We have noted the latest views expressed by Standard & Poors and other rating companies regarding the credit rating of the U.S. sovereign debt, and we expect that the U.S. government will take responsible policy measures to boost the confidence of the international financial market and respect and guarantee the interests of its investors. 3. Recently, the prices of gold, petroleum, and other major international commodities have risen dramatically. Why do we not invest our foreign exchange reserves more in these commodities and in energy resources? Answer: Gold, silver, and other precious metals, as well as major international commodities like petroleum and iron ore, often experience great fluctuations in price, their market capacity is relatively limited, and their transaction, collection, and storage costs are high. Investment in these commodities is already included in the investment portfolio of our foreign exchange reserves; furthermore, there are special domestic institutions engaged in the collection and storage of major commodities and other related work, which serve as a supplement to the investment of our foreign exchange reserves so as to jointly safeguard Chinas overall interests. In addition, gold, petroleum, and so forth are consumed in huge quantities by residents and enterprises in China, so any large-scale investment of our foreign exchange reserves in such items will possibly raise their market prices, and in turn will hinder Chinas household consumption and economic development. 4. Some people believe that the scale of Chinas foreign exchange reserves is so large that we should not only pay attention to their security but also make efforts to increase the gains from our foreign exchange. What measures have been taken in this regard? Answer: Financial investment is a major part of the investment of our foreign exchange reserves. Because modern financial markets are highly efficient, more returns are usually accompanied by greater risks. During the current global financial crisis, a great number of financial institutions went bankrupt or were acquired, some of which in the past had been leaders in the industry with splendid achievements. However, due to their failure to maintain a balance between risks and returns, they could hardly carry on under the deteriorating market conditions, thereby providing us with a good lesson. The management of our foreign exchange reserves must emphasize scientific operations and sustainable development. The nature of Chinas foreign exchange reserves requires that their operation and management adhere to the principles of security, liquidity, and increases in value, among which security is the primary principle. In addition, the foreign exchange reserves should maintain sufficient liquidity to satisfy the general demand for external payments, and also to play an effective role in safeguarding the stability and security of the national economy and finance. Under the precondition of guaranteeing overall security and liquidity, the operation of our foreign exchange reserves shall strive for higher investment returns in an effort to help attain the goal of maintaining and increasing their value. 5. In the face of holding such a large scale of foreign exchange reserves, what can we do to better promote a diversification of our foreign exchange assets? Answer: Diversification is one of the main operating principles of our foreign exchange reserves. In order to better promote our diversification strategy, we should avoid several misunderstandings. First, a superficial diversification of investment products -- different investment products may possess very similar risk factors, so it will not be spreading risks if we allocate funds to these sorts of investment products. Second, a superficial diversification of investment industries and regions -- without considering the interconnections among industries and the degree of integration among regions, investments will not necessarily achieve the expected goal of diversification. Third, deciding the timing to implement diversification according to the short-term performance of the market and public opinion -- effective diversification is a way to allocate assets strategically, which requires prospective planning and implementation. Diversification based on the short-term performance of the market and public opinion is often irrational and unprofessional, and can easily degenerate into opportunistic practices. 2011-07-20/en/2011/0720/1005.html
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To maintain the economic and financial security of the state and to crack down strongly on cross-border flows of illegal and irregular funds, such as "hot money", the State Administration of Foreign Exchange (hereinafter referred to as the "SAFE") revealed two groups of cases involving some enterprises and individuals that had illegally conducted foreign exchange transactions and were subjected to penalties on November 1, 2010 and December 10, 2010 respectively. Now, a third group of such cases, based on the progress of the relevant inspections, is announced as follows: I. From January to March 2010, a total of 21 customs declarations of Guangzhou Couger Metal Material Ltd. failed to go through the registration procedures for the withdrawal of deferred foreign exchange payments for imports as per the relevant provisions, with the illegal amount amounting to USD1.2927 million. The above behavior was deemed to be in violation of the relevant provisions for the registration of external debt, and the SAFE thereby rendered a decision to impose a fine as an administrative penalty upon the said company pursuant to the Regulations of the People's Republic of China on Foreign Exchange Administration (hereinafter referred to as the "Regulations"). II. From January 2009 to June 2010, Shenzhen Mission Hills Golf Club Co., Ltd. directly collected a total of HKD21.3265 million in cash paid by customers for consumption, and then settled HKD16.0375 million in RMB in the name of company's staff. RMB13.9479 million was deposited into the account of the company. The above behavior was deemed to be in violation of the relevant provisions on the administration of collections and payments of foreign currency by domestic institutions and in violation of the legal handling of foreign exchange settlements. Hence, the SAFE rendered a decision to impose a fine as an administrative penalty upon the said company pursuant to the Regulations. III. From May to July 2009, Power-One Co., Ltd. in Shenzhen city, claiming business travel expenses, collected payment for sale of goods with an actual amount higher than the figure on the customs declarations form through four transactions totaling USD2.98 million. The above behavior with respect to the inward remittances of foreign exchange was in violation of the relevant provisions, and the SAFE thereby rendered a decision to impose a fine as an administrative penalty upon the said company pursuant to the Regulations. IV. During the period from April to November 2009, a person surnamed Zhang, a local citizen in Zhejiang province, in the name of 14 company employees, collected and settled USD799,800 from Hong Kong, and the settled RMB was transferred to Zhang's personal account. The above behavior constituted a split settlement of foreign exchange and was deemed to be in violation of the relevant provisions on the administration of personal foreign exchange. The SAFE thereby rendered a decision to impose a fine on Zhang as an administrative penalty pursuant to the Regulations. V. From November to December 2009, Lingguo Ecological Agriculture Co., Ltd. in Rugao city, Jiangsu province, by virtue of the equipment purchase contract signed with Haoli Trading Co., Ltd. in Qidong city, Jiangsu province, settled USD4.1 million of foreign exchange. However, it failed to utilize the settled RMB in the way for which it was applied, but it instead transferred the settled RMB14.9894 million to Haoli Trading Co., Ltd. under the current account. The above behavior constituted a change of purpose for settled foreign exchange and was deemed to be in violation of the relevant provisions on the administration of foreign exchange settlement. The SAFE thereby rendered a decision to impose a fine upon the said company an administrative penalty pursuant to the Regulations. VI. From June to September 2008, Jiangbo Century (Laiyang) Biotechnology Co., Ltd. in Shandong province settled USD27.7 million of foreign exchange for foreign investments through 3 transactions to pay for land purchases. In fact, the company did not acquire the corresponding land-use rights, and the settled capital of RMB185 million was transferred to Jiangbo Medicine Group in Yantai city and to Shandong Hilead Biotechnology Co., Ltd. for use through various channels. The above behavior was deemed to be in violation of the relevant provisions on the administration of settlement of foreign exchange, and the SAFE thereby rendered a decision to impose a fine upon the said company as an administrative penalty pursuant to the Regulations. VII. On June 30, 2008, after settling AUD3 million of foreign exchange from foreign investors, Aocheng Investment Consultant Co., Ltd. in Yantai city, Shandong province, on the next day transferred the settled capital of RMB19.7916 million to Baocheng Real Estate Co., Ltd. in Yantai city for an investment fund, which exceeded the normal production and business scope of the company. The above behavior was deemed to be in violation of the relevant provisions on the administration of foreign exchange settlement, and the SAFE thereby rendered a decision to impose a fine upon the said company as an administrative penalty pursuant to the Regulations. VIII. On March 4, 2009, Xinjiang Yumei Energy Co., Ltd. applied to settle HKD79.527 to pay for the transfer of initial mining rights to New Century Mining Co., Ltd., and on the same day it made such payment to the latter. Yet on the same day both parties suspended acquisition of the mining rights and abolished the Contract for the Transfer of Mining Rights and the Contract to Mortgage Assets. On March 5, 2009, New Century Mining Co., Ltd. transferred RMB70 million of the settled foreign exchange to the corporate account of Xinjiang Yumei Energy Co., Ltd. The latter then used the capital as entrusted loans to Chongqing Xuchuan Trading Co., Ltd. The above behavior was deemed to be in violation of the relevant provisions on the administration of foreign exchange settlement, and the SAFE thereby rendered a decision to impose a fine upon the said company as an administrative penalty pursuant to the Regulations. IX. On December 27, 2007, Jianghe Water Affairs Co., Ltd. in Jiangxi province, based on an invalid contract for the transfer of state-owned land-use rights, settled USD5 million of foreign exchange from foreign investors. On the same day, the settled RMB36.5268 thereof was transferred back to the company through Fairy Lake New City Development Co., Ltd. in Xinyu city. From June 2008 to April 2009, the settled capital of RMB24 million was transferred by Jianghe Water Affairs Co., Ltd. to securities companies and then ended up on the stock market. The above behavior was deemed to be in violation of the relevant provisions on the administration of foreign exchange settlement, and the SAFE thereby rendered a decision to impose a fine upon the said company as an administrative penalty pursuant to the Regulations. X. During the period from January 2009 to February 2010, Feidike Beauty Equipment (Shanghai) Co., Ltd. in Shanghai, when exporting beauty equipment, neither applied for the verification and writing off forms for export proceeds in foreign exchange, nor underwent the customs declaration procedures, but rather exported the goods directly by an air express company. Upon collection of the foreign exchange, the company combined the export proceeds with nontrade revenue, such as R&D expenses and product freight, failed to distinguish the nature of the fund for each foreign exchange receipt, and falsely declared it as "freight", "consulting services fees", or "trade payments". The company collected a total USD7.9053 million through 22 transactions, which were declared as revenue from services trade, but as a matter of fact constituted revenue from the selling of goods. The above behavior was deemed to be in violation of the relevant provisions on the administration of the verification and writing-off of foreign exchange collections from exports as well as of the declaration of balance of payments statistics. The SAFE thereby rendered a decision to impose a fine upon the said company as an administrative penalty pursuant to the Regulations. All market entities shall conscientiously remain aware of their social responsibilities, and operate in a prudent and scientific manner and in strict compliance with the policies on foreign exchange administration. The penalized enterprises and individuals shall regard the penalties as warnings and henceforth always bear in mind the concept of legitimate operations. All other enterprises and individuals shall also draw lessons from the above-mentioned cases to strengthen their self-discipline and to operate their businesses in strict accordance with the law. The SAFE shall vigorously facilitate trade and investment and enhance a service-oriented awareness so as to meet the reasonable foreign exchange demands of enterprises and individuals. Furthermore, strengthened efforts shall be made to supervise and inspect the foreign exchange business of market entities with respect to compliance with the regulations and to crack down on the flow of "hot money", thus safeguarding the foreign-related economic and financial security of the state. 2011-07-11/en/2011/0711/1004.html
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Recently, the director-generals of the branches of the State Administration of Foreign Exchange (SAFE) attended a symposium in Nanchang, the capital of Jiangxi province. The participants earnestly studied and implemented the decisions and plans of the Party Central Committee and the State Council on economic work for the second half of this year, reviewed and summarized foreign exchange administration work in the first half of the year, conducted in-depth analyses of the current foreign exchange situation, and mapped out the management tasks for the latter half of the year. Mr. Yi Gang, administrator of the SAFE, delivered a work report. The deputy director-generals, chief economists, and chief accountants of the SAFE were also present at the meeting. It was pointed out at the meeting that during the first half of 2011, efforts were made by the foreign exchange authorities to accelerate the five transformations of the concepts and methods of foreign exchange administration, rigorously crack down on the inflows of hot moneyand other illegal and irregular funds, actively prevent the risks of cross-border capital flows, and constantly deepen the reform of the foreign exchange administration system so as to improve the operation and management of foreign exchange reserves and to make further progress in various tasks. Following the overall planning of the Party Central Committee and the State Council, and under the guidance of the Party Committee of the Peoples Bank of China (PBOC), such efforts focused on scientific development and the transformation of the mode of economic development. The progress can be demonstrated in the following eight respects: First, policy measures were introduced to strengthen the management of foreign exchange business and to curb irregular capital inflows. In 2011 efforts were made to reinforce administration of the position of the banks foreign exchange settlement and sales, foreign exchange collections from transit trade, advances on sales and deferred payments, and to further downsize the total scale of the short-term external debt quota of domestic financial institutions; Second, the foreign exchange authorities stepped up efforts to crack down on hot money and other illegal and irregular capital inflows. Efforts were made to carry out special inspections of major market player, such as financial institutions and large-scale enterprises, as well as of items such as foreign exchange settlement of capital funds and short-term external debt, to investigate and deal with serious violations, and to severely punish underground money shops, speculation in foreign currency via the Internet, and other criminal activities. During the first half of 2011, 1,865 relevant cases were closed, involving a total amount of over USD16 billion; Third, the SAFE strengthened the monitoring and management of cross-border capital flows. Efforts were made to advance the reform of supervision and control of foreign exchange entities in a steady manner and to integrate and comprehensively utilize the related managerial system and data. Examinations and verifications of the authenticity of cross-border capital flows were intensified. Meanwhile, the system of checking up on the banks execution of the foreign exchange administrative provisions was refined so as to encourage compliance of bank operations; Fourth, reform of foreign exchange administration of trade in goods was steadily promoted. Efforts were made to promote the policy of overseas deposits of export proceeds throughout the country, to popularize the reform of the verification and writing-off system of foreign exchange payments for imports with a down-to-earth attitude, and to take an initiative to study the reform of the verification and writing-off system of exchange collected from exports; Fifth, efforts were made to further facilitate foreign exchange receipts and payments of market entities, to adjust and streamline the management policies for some items under the capital account, to perfect the administration of foreign exchange settlements and sales for individuals via e-banking, and to launch RMB-foreign currency option trading to further satisfy the market demand for hedging the exchange rate; Sixth, investment and risk management of foreign exchange reserve assets was strengthened. Efforts were made to closely follow and analyze market changes, maintain diversified investment strategies, optimize the allocation of medium- and long-term currencies and assets, and continuously improve risk management; Seventh, the transparency of foreign exchange administration was constantly enhanced by releasing for the first time a monitoring report on Chinas cross-border capital flows to the public and announcing data on the position of international investments on a quarterly basis to spread thorough knowledge among the general public about cross-border capital flows; and Eighth, the fundamental work for foreign exchange administration was consolidated, Striving for Excellencecampaigns were intensively launched, and Party construction of the foreign exchange authorities and the building of ranks of cadres and honest and clean government were reinforced. It was put forward at the meeting that during the second half of 2011 Chinas foreign exchange receipts and payments may face pressures due to large net inflows. Therefore, it is imperative to fully recognize the seriousness and complexity of the current foreign exchange situation, to keep close track of the development of the economic situation both at home and abroad, to carry out in-depth assessments of market risks, to grasp the latest trends and changes in a timely manner, and to formulate effective response plans and measures. It was proposed at the meeting that the key points of foreign exchange administration for the second half of 2011 will follow the unified arrangements of the Party Central Committee and State Council, adapt to the new changes in domestic and overseas conditions, attach greater importance to slowing down the excessively growing surplus of banks foreign exchange settlement and sales, expedite the preventing and cracking down on inflows of hot moneyand making steady progress in the reform of the import and export verification and writing-off system, and vigorously carry out the various tasks of foreign exchange administration so as to promote the stable and relatively rapid growth of the national economy. Efforts should be made in two major respects as follows: First, rigorously fighting against the inflows of hot moneyand other illegal and irregular funds as well as cross-border arbitrage funds. Further unifying thinking, strengthening macro-awareness about the overall concepts, continuing to maintain high pressure to crack down on hot money,and seriously punishing illegal foreign exchange collections and settlement. Meanwhile, adopting positive measures to encourage and facilitate foreign exchange purchases and payments, restraining market entities from arbitrage in cross-border asset management, slowing down the excessive growth of the surplus in foreign exchange settlement and sales, and continuing to implement policies for the convenience of legitimate foreign exchange fund flows. Second, steadily boosting the reform of the import and export verification and writing-off system. Promoting progress in preparation of a pilot reform of the import and export verification and writing-off system and steadily moving ahead with the reform of the system. Further intensifying the joint coordination mechanism among the trade administrative departments in an effort to lay a foundation for the overall reform of the import and export verification and writing-off system. In addition, it is also imperative to proceed with various tasks in an orderly fashion in light of the work arrangements defined at the national work conference on foreign exchange administration at the beginning of this year, further perfect the operation and management of foreign exchange reserves, actively advance law-based administration and regularize the laws and regulations, thoroughly carry out Striving for Excellencecampaigns, enhance the construction of a clean and honest government, and continually improve the internal control system and the level of internal management. 2011-08-04/en/2011/0804/1009.html
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6. Some people hold the opinion that China's foreign exchange reserves are hard-won money-earned by thousands of domestic enterprises and Chinese individuals in exchange for actual goods, energy, and resources, and with implicit environmental costs. What is your comment about this? Answer: China's foreign exchange reserves are formed when the Peoples Bank of China puts in our base currency and purchases foreign currencies on the foreign exchange market. The home-currency capital used in these purchases directly adds to the liabilities of the Central Bank, whereas Chinas foreign exchange reserves, equal in amount to the liabilities, show up on the asset side of the Central Banks balance sheet. When buying foreign exchange, the Peoples Bank of China pays a corresponding amount of RMB to the original holder of the foreign exchange. In other words, in the formation of the foreign exchange reserves, businesses and individuals are not contributing their foreign exchange to the State for free, but they are selling it to the State in return for an equivalent amount of RMB. These transactions are voluntary in nature and equivalent in value. The economic interests of businesses and individuals have already materialized when they trade their foreign exchange for Renminbi. 7. China has a huge stockpile of foreign exchange reserves that is regarded by the international community as a sovereign wealth fund, and relevant investment operations are often restricted by various factors, such as market capacity and politics. Is it possible for parts of the foreign exchange reserves to be entrusted to domestic professional financial institutions or international investment institutions and to be separately managed? Answer: Foreign exchange reserves, like sovereign wealth funds, professional asset management companies, and other types of institutional investors, are restricted by the international situation, market conditions, and regulatory rules. But unlike other institutional investors, foreign exchange reserves are very different in terms of fund sources, operational objectives, risk controls, and so forth. To ensure the safety of foreign exchange reserve assets, and to bring into full play the comparative advantages of massive operations in a mature investment market, China adheres to independent management of its foreign exchange reserves. Meanwhile, various effective methods have been explored to expand investment channels, including entrusted operations. Since 1996, the investment of a proportion of the foreign exchange reserves has been selectively entrusted to leading asset management institutions at home and abroad, all of which have a resounding reputation, a large amount of assets under their management, and an exceptionally successful performance record within the industry. Great importance has been attached to the risk management by these external managers, and their operations have been closely monitored as part of the overall risk management framework so as to ensure the safety of our foreign exchange assets. 8. Foreign exchange reserves should be from the people and for the people.If it is inappropriate to distribute foreign exchange reserves directly to the people, then is it possible to strip a part of the foreign exchange reserves and build a Sovereign Pension Fund in order to enhance Chinas social security system? Answer: Both suggestionseither directly distributing the foreign exchange reserves among the public, or using the reserves directly for social welfare programs such as pension insurance, medical care, and educationinvolve the same question: can the foreign exchange reserves be distributed and used without compensation? Unlike fiscal surpluses, foreign exchange reserves are created when the Central Bank purchases foreign currencies on the foreign exchange market; they represent foreign-exchange assets that correspond to the home-currency liabilities on the Central Banks balance sheet. To spend the foreign exchange reserves without compensation is to print money at will, and unchecked expansion of the issuance of money by the Central Bank will lead to dire consequences, such as inflation. Under the guidance of the management principle of compliance with the laws and regulations, utilization with compensation, increased efficiency, and effective regulation,efforts have been, and will continue to be made, to explore innovative channels for the management of foreign exchange reserves, so as to contribute to Chinas economic construction and to improving the peoples livelihood. 9. Currently, the foreign exchange position of domestic commercial banks is generally tight, thereby placing certain restrictions on their ability to support foreign trade and on the going globalpolicy of enterprises. Can we lend some of Chinas foreign exchange reserves to domestic commercial banks? Answer: China has sufficient foreign exchange reserves and convenient channels for foreign exchange purchases, which can fully satisfy the legitimate needs of commercial banks and enterprises to purchase foreign exchange. If banks and enterprises need foreign exchange for foreign trade and going global,they can purchase it with RMB funds at any time and without any policy barriers. The practice of simply lending foreign exchange reserves to domestic banks, however, will further reduce foreign exchange purchases and correspondingly exert more pressures on the foreign exchange purchases of the Peoples Bank of China (PBOC), which will not be advantageous to macro control. In recent years, taking into consideration the overall strategic situation of national development and based on the principle of compliance with the laws and regulations, utilization with compensation, increased efficiency, and effective regulation, the PBOC and SAFE have developed various channels to apply the foreign exchange reserves, effectively serving the needs to purchase foreign exchange by banks and enterprises and strongly supporting foreign trade and implementation of the going global strategy. 10. In recent years, on several occasions China has put maintained that it encourages foreign exchange to beheld by the people,but why is it difficult to realize this? Answer: In recent years, Chinas balance of payments has maintained a twin surplus,and especially after the global financial crisis, international liquidity has proliferated and large-scale foreign exchange net inflows have resulted in the continuous accumulation of foreign exchange reserves. At present, China actively supports residents to hold and use foreign exchange, and the nation has realized full convertibility under the current account and is able to fully satisfy the foreign exchange purchase needs of residents for trade in goods and trade in services as well as other purposes under the current account. Under the capital account, except for partial control over some high-risk balance of payments transactions, there are no policy barriers to either foreign direct investments by enterprises or investment in overseas capital markets by enterprises and individuals through qualified domestic institutional investors (QDII). However, due to an anticipated RMB appreciation as well as the interest margin and exchange rate difference between domestic and overseas markets, enterprises and individuals now have a strong desire to settle foreign exchange and they are generally unwilling to hold or retain foreign exchange. In other words, the barrier to foreign exchange to be held by the peoplelies not in policy, but in the willingness of the holders of the foreign exchange. 2011-07-25/en/2011/0725/1006.html
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In the first half of 2011, the foreign exchange authorities maintained tough measures against hot money, investigated 1,865 cases involving violations of foreign exchange laws and regulations, and imposed relevant penalties of more than USD16 billion, an increase of 26.2 percent and 26.9 percent respectively over the same period of the last year. With respect to the current key channels and typical methods of inflows and settlement of illegal and irregular foreign exchange funds, the foreign exchange authorities have further improved inspection methods, comprehensively promoted the use of an off-site foreign exchange inspection system, implemented multi-dimensional monitoring of the foreign exchange receipts and payments of various market players, and continually improved the accuracy of cracking down on activities in violation of the foreign exchange laws and regulations. In the first half of 2011, the foreign exchange authorities in different localities carried out special inspections of over 80 items, investigated a number of major cases occurring in Guangdong , Shanghai , Jiangsu , Shandong , Guangxi, and Hainan , and imposed relevant penalties. During the inspections, the foreign exchange authorities strictly carried out law-based administration, adhered to implementing legal procedures and imposing appropriate penalties, as well as energetically facilitated the legitimate operations of enterprises. As for the investigations and penalties, the total amount of administrative penalties and confiscations imposed by the foreign exchange authorities in the first half of the year was RMB260 million, exceeding that for all of the last year (RMB243 million). Among the penalized activities in violation of the regulations on foreign exchange administration of financial institutions, the following activities are relatively common: exceeding the short-term external debt quota, handling foreign exchange settlement and sales in violation of the regulations on foreign exchange administration, handling receipts and payments under the capital account in violation of the regulations on foreign exchange administration, and failing to carry out reasonable examinations and verifications of the authenticity of the receipt and payment instruments under the current account. The former three irregular activities involved a total of USD9.27 billion, accounting for 57.9 percent of the entire amount involved. Among the penalized activities of enterprises in violation of the regulations on foreign exchange administration, the following are the most common: first, changing without approval the use of foreign exchange or the RMB funds from foreign exchange settlement, second, activities in violation of the regulations on external debt administration, and third, activities such as remitting foreign exchange to China in violation of the regulations on foreign exchange administration or illegal foreign exchange settlement. The above three irregular activities involved a total of USD2.51 billion, accounting for 15.7 percent of the entire amount involved. Facing the complicated economic situations both at home and abroad, the foreign exchange authorities will continue to rigorously crack down on irregular cross-border capital flows, with special focus on seriously combating the inflows of hot money, further improving inspection methods, and intensifying the investigation and punishment of major cases. Furthermore, the foreign exchange authorities will strengthen coordination and cooperation with the relevant regulatory authorities, give full play to the role of the relevant coordination mechanisms, and create a synergy for dealing with and cracking down on hot money. 2011-08-16/en/2011/0816/1010.html
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The SAFE recently released preliminary data on China ’s Balance of Payments Statement for the second quarter and the first half of 2011. The current account and the capital and financial account (including net errors and omissions) posted a "twin surplus" in Q2 of 2011, and international reserves maintained their growing momentum. In Q2, the surplus under the current account reached USD69.6 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods, income, and current transfers reached USD68.5 billion, USD4.4 billion, and USD7.5 billion, respectively, whereas the deficit in trade in services amounted to USD10.8 billion. Meanwhile, China ’s surplus under the capital and financial account (including net errors and omissions) totaled USD67 billion. In particular, net inflows of direct investments amounted to USD40.2 billion. International reserve assets posted an increase of USD136.5 billion. Specifically, transactions in foreign exchange reserve assets registered an increase of USD136.9 billion (exclusive of the influence of non-transaction changes in value such as exchange rates and prices) and the reserve position in the IMF registered a decrease of USD200 million. In H1 of 2011 the surplus under the current account was USD98.4 billion and that under the capital and financial account (including net errors and omissions) was USD179.3 billion, whereas international reserves registered an increase of USD277.7 billion. 2011-08-16/en/2011/0816/1011.html
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In the first half of 2011 , the foreign exchange administrative departments and the public security organs worked closely to launch a series of special campaigns to crack down on illegal cross-border fund flows in Guangdong, Fujian, Shenzhen, and other provinces and cities, uncovering 10 cases of underground money shops and online speculation in foreign exchange involving a total amount of over RMB10 billion, destroying 16 illegal trading nests, arresting 37 foreign exchange criminal suspects, collecting cash equivalent to RMB5.3 million, freezing 200-odd bank cards and passbook accounts with capital equivalent to RMB13 million, and seizing a number of tools for committing crimes, such as cars and computers. These campaigns effectively cracked down on underground money shops and other foreign exchange-related illegal activities and played a significant role in containing irregular flows of cross-border funds and deterring inflows of “hot money.” During the next stage, based on the principle of “simultaneous dredging and blocking,” the SAFE will coordinate with the public security organs and other relevant departments to maintain the tough measures to combat the underground money shops and other crimes and to step up the extended checkup of the sources and directions of upstream and downstream funds to these shops so as to curb the space for such criminal activities. 2011-08-27/en/2011/0827/1012.html
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The SAFE recently released Chinas International Investment Position (IIP) as of the end of March 2011. This is the first time that China has released its quarterly IIP statistical data. The statistics reveal that at the end of March 2011, China's external financial assets hit USD4394.8 billion, a rise of 17 percent over the end of 2010; external financial liabilities reached USD2460.8 billion, a rise of 5 percent; and external net financial assets totaled USD1934 billion, a rise of 8 percent. Among the external financial assets, direct investments abroad totaled USD317.4 billion, portfolio investments totaled USD263.5 billion, other investments totaled USD698.3 billion, and reserve assets reached USD3115.6 billion, accounting for 7 percent, 6 percent, 16 percent, and 71 percent of external financial assets respectively. In terms of external financial liabilities, foreign direct investments totaled USD1526 billion, portfolio investments USD223.1 billion, and other investments USD711.7 billion, accounting for 62 percent, 9 percent, and 29 percent of external financial liabilities respectively. The IIP is a statistical statement that reflects at a specific point the stocks of financial assets and liabilities of one country or region to other countries or regions in the world; together with the trade flows and the international balance of payments, it reflects the complete international accounts system of the country or region. 2011-07-26/en/2011/0726/1007.html