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In September 2011 the State Administration of Foreign Exchange (SAFE), the State Administration of Taxation (SAT), and the General Administration of Customs (GAC) jointly issued an announcement in which they decided to implement a pilot reform of the foreign exchange administration system for trade in goods in seven provinces (cities), such as Jiangsu and Shandong, beginning from December 1, 2011. Recently, an official from the SAFE accepted an interview by journalists on relevant issues. I. Under the current situation, what are the main concerns of the three departments such as the SAFE for introducing the pilot reform of the foreign exchange administration system for trade in goods? Answer: Before the reform of the foreign exchange administration system for trade in goods, the core of the foreign exchange administration for trade in goods consisted of the verification and writing-off management for imports and exports. The verification and writing-off management system, since its establishment in the early 1990s, involved the matching of the macro-economic situation and the balance of payments status. This played an important role in promoting the balance of payments equilibrium and guarding against the risks of cross-border capital flows. In recent years, the foreign economy of China has developed rapidly and the scale, method, and participants in foreign trade have changed greatly, therefore, the verification and writing-off management method based on a “one-to-one correspondence, case-by-case examination” needed to be changed. For this purpose, the SAFE actively adapted to the changes in the situation, transformed the concepts and methods of foreign exchange administration, and on the basis of adequate investigation and research, introduced the pilot reform of the foreign exchange administration system for trade in goods jointly with the SAT and the GAC to establish a new management mode featuring aggregate screening, dynamic monitoring, and classified management, and made relevant adjustments to the management method for export rebates and export custom declarations. The reform of foreign exchange administration system for trade in goods is helpful to further enhance the level of trade facilitation, to improve the means of foreign exchange administration, and to guard against the risks from foreign exchange receipts and payments. II. How should one understand the new administration mode combining facilitation and risk management established by the pilot reform of the foreign exchange administration system for trade in goods? Answer: The so-called combination of facilitation and risk management means simplifying the formalities and business handling procedures for receipts and payments of foreign exchange from trade and guiding and encouraging enterprises to operate their businesses according to the law, as well as improving the means for foreign exchange administration for trade in goods and guarding against risks from foreign exchange receipts and payments. The reform of the foreign exchange administration system for trade in goods, on the basis of confirmation by the enterprises of the knowledge of the relevant policies and regulations as well as the related rights and obligations, simplified the management procedures and implemented convenient policies with respect to the handling of the foreign exchange receipts and payments for trade in goods for most enterprises. This included further simplifying the requirements on document examination of foreign exchange payments for imports, cancelling the procedures for the verification and writing-off of foreign exchange collections from exports and online inspections of foreign exchange collections and settlements from exports, and significantly reducing the number of administrative licensing items under trade in goods. Furthermore, the SAFE will implement comprehensive inspections and the classified management in terms of foreign exchange receipts and payments from trade in goods, classify the enterprises in accordance with their business compliance and make dynamic adjustments to the classification, screen out the very few unusual and suspicious economic entities, and focus the supervision thereon to change the institutional arrangements of the past, i.e., “feeding the medicine to all in the case of only one being sick”. III. The reform of the foreign exchange administration system for trade in goods will be beneficial for foreign exchange held individuals. However, will it weaken state control of hot money? Answer: The reform of the foreign exchange administration system for trade in goods represents a major move by the SAFE to proactively adapt to developments and changes in the situation, to accelerate the transformation of the concepts and methods of foreign exchange administration, and to timely adjust the management methods. The reform, while providing facilitation for the market players such as enterprises and banks, further improves management and strengthens supervision of the risks of foreign exchange receipts and payments, by such means as improving the management methods, the efficiency of on-site verifications and dynamic classified management, and strengthening information sharing and regulatory cooperation among departments. This is mainly embodied in the following areas: First, the regulatory departments such as the foreign exchange authorities will have timely and comprehensive knowledge of the data on the flow of imported and exported goods and the flow of capital from receipts and payments of foreign exchange by enterprises. Second, the foreign exchange authorities will carry out fully covered monitoring to match the flows of goods and the flows of capital from the foreign trade of enterprises, will screen out through technical means those enterprises with suspicious and irregular activities, and will carry out on-site verifications. Third, the foreign exchange authorities will strengthen supervision of the enterprises with suspicious and irregular activities by examining the documents from receipts and payments, the business types, the modes of settlement and the handling procedures. Fourth, the foreign exchange authorities will carry out dynamic classified management of the enterprises, and may make adjustments to the classification of the enterprises based on their compliance. IV. It has been reported that the reform of the foreign exchange administration system for trade in goods will significantly reduce the burdens on enterprises and will simplify examination of the daily business of banks. How will this be carried out? Answer: This mainly involves the following: First, the enterprises’ foreign exchange collections from exports will not be required to be inspected online, the foreign exchange refunds for exports will not be required to undergo prior approval procedures on a case-by-case basis, and the documents required to be submitted to the banks for examination with respect to foreign exchange payments for imports will be significantly simplified; furthermore, the paper Export Verification Form for Foreign Exchange Collections will not be required in the application to the tax authorities for export rebates. Second, the verification and writing-off procedures will not be required to be handled by the foreign exchange authorities after the enterprises’ foreign exchange collections from exports. Third, real-time information interaction platforms will be established between the enterprises and the foreign exchange authorities, and most of the information submission and business reports of the enterprises will be handled online. Fourth, the verification system for the collection and payment of foreign exchange from trade and the online inspection system for foreign exchange collections and settlements from exports will be integrated into the Foreign Exchange Monitoring System for Trade in Goods, in order to facilitate bank business operations. Fifth, the number of administrative licensing items will be reduced from 6 to 2, i.e., list registration and registration administration of Category-C enterprises. V. We note that the Announcement on the Pilot Reform of the Foreign Exchange Administration System for Trade in Goods provides that enterprises are classified into A, B, and Categories based on dynamic classified management. What are the issues involved? What should the enterprises do in order to benefit from this policy? Answer: After the pilot reform, the foreign exchange authorities will carry out classified management of the imports and exports of enterprises. According to past experience of foreign exchange supervision of trade in goods, most of the import and export enterprises operate according to the law. Therefore, the foreign exchange authorities will classify the enterprises with normal and lawful operations into Category A, which will enjoy the facilitation policies and measures. Meanwhile, the foreign exchange authorities, by comprehensively realizing the off-site monitoring and on-site verifications and investigations, will classify the enterprises with suspicious and irregular activities into Category B or C, and will focus their supervision thereon. In this way, the limited supervision resources of the foreign exchange authorities will be focused on a few management targets. Strict management of a few enterprises will serve as a deterrent to guide and encourage the enterprises to operate their businesses according to the law. After the reform of the foreign exchange administration system for trade in goods, most enterprises operating according to the law will enjoy maximum facilitation when handling foreign exchange receipts and payments for trade in goods. As long as the enterprises have authentic and lawful trade bases for their foreign trade activities, can provide necessary evidentiary materials in accordance with the requirements of the relevant regulations, and report any trade which may result in a mismatch between the foreign exchange receipts and payments and the imports and exports in a timely manner, they will fully enjoy the benefits of the policy brought about by the reform. 2012-01-18/en/2012/0118/1028.html
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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”), and a relevant official from the State Administration of Foreign Exchange accepted an interview with journalists on related issues. Question: It has been learned that the Renminbi-against-Forex options trading was introduced in April 2011; why was the foreign exchange options portfolio business being introduced at this time? Answer: An option is a kind of right to choose. The buyer, after paying a premium to the seller, has the right to buy or sell certain subject matter of an agreed quantity at an agreed price in the future. Compared with the forward settlement and sales of foreign exchange, a foreign exchange option has the advantage of flexibility. For example, export enterprises may choose to conduct forward foreign exchange settlement or to buy a foreign exchange put option in order to guarantee the value of their future revenue from payment for goods in a foreign currency. In particular, the advantage of conducting forward foreign exchange settlement business is that it avoids possible losses from a depreciation of the foreign currency and fixes the cost in advance and avoid paying any expenses. However, it involves the sacrifice of possible gains from the appreciation of foreign currency; in contrast, the advantage of conducting the option business is that it has flexibility, i.e., in the case of a depreciation of the foreign currency, the enterprise may choose to exercise the option to conduct foreign exchange settlement at the agreed upon price; in the case of an appreciation of the foreign currency, the enterprise may choose not to exercise the option and conduct the foreign exchange settlement at the market price. However, the enterprise will have to pay a relatively high premium in advance. On April 1, 2011, the Renminbi-against-Forex options trading officially commenced on the domestic foreign exchange market whereby enterprises may buy options from the banks to hedge against exchange-rate risks. On this basis, in order to better satisfy the requirements of market players to hedge against exchange-rate risks, the Circular introduces the foreign exchange put and risk-reversal options portfolio business and the foreign exchange call and risk-reversal options portfolio business, both of which are options portfolio businesses at zero cost. The so-called options portfolio at zero cost means that the premium expenditure for the purchase of an option and the premium revenue from the sale of an option are offset by one another to make the net cost of guaranteeing the value equal to zero (or approaching zero) through the option purchase and sale portfolio. Consequently, flexibility in guaranteeing the value can be assured and the trading cost can be reduced. The most prominent feature of the foreign exchange put and risk-reversal options portfolio business and the foreign exchange call and risk-reversal options portfolio business is that there is a cap on the greatest potential loss, i.e., when the market players use the two types of businesses to hedge against exchange-rate risks for their future foreign exchange revenue or expenditures, they can fix the price for the foreign exchange settlement or purchase within a pre-set range, regardless of the direction of the changes in the exchange or the extent of the changes. From this perspective, in terms of the aforesaid two types of businesses introduced by the Circular, the risks of their products are relatively low, and they are beneficial to satisfy market demand and to conform to the actual situation in the identification, management, and tolerance of the risks by enterprises and banks at the current stage. Question: May clients sell the options from the options portfolio business that is being introduced at this time? Answer: Because the risks assumed by the seller are far greater than those assumed by the buyer, the seller needs a relatively strong risk-management capability. Based on international experience, it is common practice in newly emerging market economies to restrict the “naked short sale” of options by clients. In view of the fact that the current risk-management capabilities of domestic enterprises are still at a growth stage, in order to avoid an over-commitment of trade risks by domestic enterprises, upon the introduction of the Renminbi-against-Forex options business in April 2011, it is provided that the clients can only purchase the options from the banks and may not sell the options. However, in the options portfolio business introduced in this Circular, through the option purchase and sale portfolio the clients are granted the right to sell the options based on the purchase of the option, which is beneficial to reducing the risks of only sales of the option by clients. Question: What are the management requirements for the options portfolio business being introduced at this time? Answer: First, adhering to the principle of trading on the basis of actual needs. In order to prevent large-scale sheer speculation, the clients must have a true trading background in trade and investment to handle the options portfolio business, and the banks shall conduct the necessary examinations of their authenticity and compliance to ensure compliance with hedging principles. Second, emphasizing the principles of integrity. In the options portfolio business, the purchase and sale by clients of options from and to banks constitute a whole contract to prevent “naked short sales” of options by clients. Furthermore, the premium received by the clients from the sale of options shall not exceed that which they paid for the purchase of the options, in order to prevent an over-commitment of risks by clients due to a net receipt of the premium. Third, simplifying market-access management. The 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 may directly engage in the options portfolio business for their clients, and the foreign exchange authorities will not provide new measures to manage market access. Question: What are the plans of the foreign exchange authorities to promote the development of the domestic and international options market? Answer: The foreign exchange authorities will cooperate with the relevant departments to foster market players and to allow them play a leading role in product innovation, and will continue steadily promoting the development of the domestic and international options market. 2012-01-18/en/2012/0118/1023.html
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The branches and foreign exchange administrative departments of the State Administration of Foreign Exchange (SAFE) in all provinces, autonomous regions, and municipalities directly under the Central Government; the SAFE branches in Shenzhen, Dalian, Qingdao, Xiamen, and Ningbo; and all policy banks, state-owned commercial banks, and shareholding commercial banks: In order to further promote the development of the Renminbi-against-Forex options market and to satisfy the requirements of economic entities to hedge against exchange-rate risks, in accordance with the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning Renminbi-Against-Forex Options Trading (Hui Fa No. 8 [2011]), the relevant issues with regard to the banks’ handling of the Renminbi-against-Forex options portfolio business are hereby notified as follows: I. The options portfolio stated in this Circular refers to the portfolio consisting of the purchase of a common European option of Renminbi against a foreign currency or the sale of one with the same currency, time limit, and principal specified in the contract, including the following two types: (1) Foreign exchange put options and risk reversal options portfolio: in view of the actual future needs for foreign exchange settlement, the client purchases a foreign exchange put option with a lower strike price (the strike price to be measured in RMB converted from a unit of foreign exchange, the same below) and meanwhile sells a foreign exchange call option with a higher strike price. (2) Foreign exchange call options and risk reversal options portfolio: in view of the actual future needs to purchase foreign exchange, the client sells a foreign exchange put option with a lower strike price and meanwhile purchases a foreign exchange call option with a higher strike price. II. The banks shall comply with the principle of actual needs and shall abide by the following provisions when handling the options portfolio business for their clients: (1) The options portfolio shall follow principles of integrity. Any operation by the client on the options portfolio, including but not limited to contract signing, position offsetting, and choice of delivery method, shall be on the entire options portfolio and shall not be on any single option trading chosen from the options portfolio. The signing of the contract between the banks and the clients in terms of the options portfolio business and any changes thereto shall be reflected in the same product specification. (2) Prior to the signing of an options contract, the banks shall require that their clients furnish a basic business contract and carry out the required examination of the contract so as to ensure that the options business that is to be conducted complies with the hedging principles. (3) Upon the maturity of the options portfolio, only one buyer of the option may exercise the option and the principle that the clients have priority to exercise the option shall be followed, i.e., only where the clients decide not to exercise the option purchased by themselves, can the banks choose whether to exercise their options; where the clients choose to exercise the option, the banks shall not exercise the option. (4) If the clients choose to exercise their option, the banks must conduct an authenticity and regulatory examination of the compliance of the receipts and payments of foreign exchange delivered by the clients. Where the clients as the sellers of the option are unable to exercise their option, the matter shall be dealt with by the parties in accordance with commercial principles. Upon the maturity of the options portfolio, where both the clients and the banks choose not to exercise the option, the clients may handle a part of the business for spot settlement and sales of foreign exchange upon the strength of the relevant documents. (5) With respect to the options portfolio, the premium received by the clients from the sales of the options shall not exceed that paid by them for the purchase of the options. III. Banks qualifying for Renminbi-against-Forex options trading on the inter-bank foreign exchange market and qualifying to operate the Renminbi-against-Forex options business for clients may handle the options portfolio business for clients. The bank branches qualifying to operate the Renminbi-against-Forex options business for clients may, after being authorized by their legal persons thereof (branches of foreign commercial banks are deemed to be legal persons), handle the options portfolio business for clients. IV. The banks shall, during the handling of the options portfolio business, respectively measure and manage the Delta options trading positions in accordance with Circular (Hui Fa No.8 [2011]) and other relevant provisions. V. The banks shall, during the handling of the options portfolio business, abide by the following statistical requirements: (1) The banks shall deem their clients’ exercise of options based on the performance of the contracts on the forward settlement and sales of foreign exchange, and shall incorporate such exercises into the statistics on the performance of the contracts on the forward settlement and sales of foreign exchange in the Monthly (Ten-day) Report on Statistics on Foreign Exchange Settlement and Sales by Banks in accordance with the Circular of the State Administration of Foreign Exchange on Distribution of the Statistical System for the Settlement and Sales of Foreign Exchange by Banks (Hui Fa No.42 [2006]). (2) The banks shall incorporate all the options trading in the options portfolio business into the Daily Report on the Comprehensive Position Management of Foreign Exchange Settlement and Sales by Banks and the statistical statements set forth in the Circular (Hui Fa No.8 [2011]) on a case-by-case basis. In particular, the Statistics on the Renminbi-against-Forex Options Business Handled by the Banks for Clients set forth in Annex 2 of the Circular (Hui Fa No.8 [2011]) shall be adjusted in accordance with the provisions of the annex to this Circular. VI. The scope of the clients, the time limit for trading, the currency of the options premium, the position offsetting, and the delivery method of the options portfolio business handled by the banks shall comply with the relevant provisions of the Circular (Hui Fa No.8 [2011]). VII. This Circular shall come into force as of December 1, 2011. The branches and foreign exchange administration departments of the SAFE shall, upon receipt of this Circular, forward it immediately to the urban commercial banks, rural commercial banks, rural cooperative banks, and foreign-funded banks within their respective jurisdictions. With respect to any problems arising from implementation, please contact the Department of the Balance of Payments of the SAFE. Tel: 010-68402385, 68402313. November 8, 2011 2012-01-18/en/2012/0118/1030.html
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The State Administration of Foreign Exchange, the State Administration of Taxation, and the General Administration of Customs recently jointly issued an announcement in which they decided to reform the foreign exchange administration system for trade in goods and to optimize and upgrade the information-sharing mechanism for foreign exchange receipts from exports and export rebates. Entering into effect as of December 1, 2011, a pilot reform will take place in provinces (cities) such as Jiangsu , Shandong , Hubei , Zhejiang (excluding Ningbo ), Fujian (excluding Xiamen ), Dalian , and Qingdao . The reform of foreign exchange administration for trade in goods mainly includes the following: First, improving foreign exchange administration for trade in goods and preventing risks in foreign exchange receipts and payments. The foreign exchange authorities will carry out comprehensive verifications on the flows of imported and exported goods and on the flows of capital from receipts and payments from trade, will conduct classified management of enterprises based on their compliance with the provisions on foreign exchange administration, and will dynamically adjust the results of the classified management. Most enterprises will enjoy facilitation during the handling of foreign exchange receipts and payments from trade; meanwhile the foreign exchange authorities will strengthen supervision of non-compliant enterprises with respect to document examination regarding receipts and payments from trade, business type, mode of settlement, and relevant handling procedures. Second, simplifying the formalities for receipts and payments of foreign exchange from trade and the relevant handling procedures. Enterprises will not be required to handle verifications and writing-off formalities after receipts and payments of foreign exchange from trade; the documents required for enterprise compliance with foreign exchange payments for imports will be simplified significantly, and foreign exchange payments may be handled with the banks upon the strength of the import customs declaration, contract, invoice, or any other documents that can prove the authenticity of transactions. The bank documents and examination procedures for foreign exchange payments by enterprises will be simplified significantly and foreign exchange collections from exports will not be subject to online inspections. Third, simplifying the export-rebate vouchers. During the pilot period, where the export enterprises in the pilot regions apply for export rebates, they will not be required to provide a paper Export Verification Form for Foreign Exchange Collections. The tax authorities will, in accordance with the relevant provisions, examine the enterprises’ export rebates with reference to the information provided by the foreign exchange authorities on the foreign exchange receipts from exports and the classification of the enterprises. Fourth, adjusting customs declaration procedures for exports. During the pilot period, where the export enterprises in the pilot regions make customs declarations on exports, they shall still provide an Export Verification Form for Foreign Exchange Collection in accordance with the provisions in force. Upon nationwide acceptance of the reform of the foreign exchange administration system for trade in goods, the State Administration of Foreign Exchange and the General Administration of Customs will adjust the customs declaration procedures for exports and in general will cancel the Export Verification Form for Foreign Exchange Collections. Fifth, improving regulatory synergy. The State Administration of Foreign Exchange, the State Administration of Taxation, and the General Administration of Customs will further strengthen their cooperation, realize data-sharing, improve coordination mechanisms, and rigorously crack down on irregular cross-border capital flows and activities such as tax fraud and smuggling that are in violation of the relevant laws. Reforming the foreign exchange administration system for trade in goods and establishing a new administration mode combining facilitation and risk management are important measures conforming with the development and changes in the scale, mode, and participants in the country’s foreign trade and responding to the current balance of payments situation. They are an important element in the transformation of the concept and methods of foreign exchange administration. Optimizing and upgrading the information-sharing mechanism for foreign exchange receipts from exports and export rebates is beneficial to reduce social costs, improve the means of foreign exchange administration, and further enhance the level of trade facilitation. 2011-09-15/en/2011/0915/1013.html
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In order to further improve foreign exchange management of the capital account, simplify the procedures for administrative examination and approval, and promote the facilitation of trade and investment, the State Administration of Foreign Exchange (The SAFE) recently issued the Circular of the SAFE on Cancellation or Adjustments of Certain Approval Authorities and Administrative Measures for Foreign Exchange Business under the Capital Account (HuiFa No. 20 [2011], hereinafter referred to as the Circular). The Circular will come into effect as of June 1, 2011. The Circular mainly stipulates the following: First, it cancels the registration and approval of overdue deferred payments in the management of trade-credit registration. Where an enterprise registers to withdraw deferred payments within 120 days (inclusive) upon the issuance of the import customs declaration by customs, it is unnecessary to undergo the overdue registration and approval formalities at the local foreign exchange authority. Second, the Circular cancels the examination and approval for the return of foreign exchange under advance payments in the management of trade-credit registration. When foreign exchange from the advance payments of an enterprise is returned, the enterprise can directly log into the Trade- Credit Registration Management System to go through the cancellation procedures, as well as to go through the formalities to enter the returned funds into the account in accordance with the relevant regulations on foreign exchange administration of the current account. Third, the designated foreign exchange banks can directly handle the procedures for when foreign exchange obtained through a reduction in state-owned shares in overseas listed companies is transferred to the national social security fund and put on file. Fourth, the branches and foreign exchange administrative departments of the SAFE are authorized to check and ratify the quota for the balance of external financing guarantees (excluding those explicitly stipulated to be ratified by the SAFE) for the designated foreign exchange banks registered within their jurisdictions in accordance with the current regulations on the administration of external guarantees. Fifth, the base ratio for advance payments of goods under trade credit is increased from 30 percent to 50 percent. This policy adjustment will help enterprises reduce costs and enhance efficiency. While vigorously simplifying the ex-ante approval procedures, the SAFE will also increase efforts to conduct off-site inspections and to carry out ex-post supervision, constantly improving foreign exchange administration of the capital account and steadily advancing the convertibility of the RMB under the capital account. 2011-05-27/en/2011/0527/998.html
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The State Administration of Foreign Exchange (SAFE) and the General Administration of Customs (GAC) recently signed a Memorandum of Cooperation between the State Administration of Foreign Exchange and the General Administration of Customs on the Joint Promotion of Reform of the Foreign Exchange Administration System for Trade in Goods in order to strengthen cooperation between departments, efficiently promote the reform of the foreign exchange administration system for trade in goods, and jointly improve the level of cooperative supervision. The SAFE and the GAC have already established effective cooperative mechanisms to coordinate policy formulation, to share regulatory information, and to strengthen business cooperation. The execution of this Memorandum further defines the process of coordinating business and the exchange of regulatory information between the parties and other affairs in accordance with the needs to promote the reform of the foreign exchange administration system for trade in goods. The main contents of this Memorandum include: First, adjusting the business process and function of the system for coordination between the foreign exchange authorities and the customs. Upon the date of nationwide generalization of the reform of the foreign exchange administration system for trade in goods, the management method with the Export Verification Form for Foreign Exchange Collection will be cancelled; the foreign exchange authorities and the banks will no longer make a note of the amount of the customs declaration or deduct (or increase) the receivable foreign exchange quota from exports through the online inspection system for customs declaration of imported goods and the online inspection system for foreign exchange collections and settlements from exports; the customs will maintain the current operation of issuing and printing the certification sheets for receipts and payments of foreign exchange from the customs declaration for imported and exported goods . Second, further strengthening the sharing of regulatory information. The GAC and the SAFE will strengthen their exchange of regulatory information in such areas as the data on the customs declaration for imported and exported goods of enterprises, the information about the classified management of the enterprises, the ratios of export receipts and import payments of foreign exchange of enterprises, and the electronic data on the receipts and payments of foreign exchange for trade in goods of enterprises on a case-by-case basis, and will realize their data sharing. The execution of the Memorandum represents a management concept and a service consciousness of keeping up with the times and of reform and innovation, while effectively promoting trade facilitation and is beneficial to creating a synergy to rigorously crack down on illegal behavior such as irregular cross-border capital flows, evasion and illegal purchases of foreign exchange, and smuggling, and to effectively safeguarding the security of the foreign economy and finances of China. 2012-01-18/en/2012/0118/1027.html
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In order to regulate the banksown foreign exchange settlement and sales business and to facilitate banking operations, the State Administration on Foreign Exchange (the SAFE) recently released the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning Improving the Administration of the BanksOwn Foreign Exchange Settlement and Sales (Huifa No. 23 [2011]) (hereinafter referred to as the Circular). The Circular will come into effect as of July 1, 2011. The Circular standardizes regulation of the settlement and sales of foreign exchange under the banks own current and capital accounts: first, it embodies balanced management by establishing unified quantitative standards for the conversion of the banks capital (or working capital) between domestic and foreign currencies; second, it reflects convenient operationsby straightening out and integrating the administrative policies on the banks own foreign exchange settlement and sales and standardizing such business that is not clearly stipulated in some of the current policies; third, it reflects a streamlined review process by simplifying the requirement for ex-ante review for the settlement of the banks profits in foreign exchange and canceling the ex-ante review requirement for the dividends and bonuses paid by banks to foreign shareholders as well as for profits remitted by foreign banks; fourth, it stresses laying emphasis on major items by standardizing foreign exchange settlement and sales for items that have a great impact on balance of payment and foreign exchange operations; and fifth, it represents ex-post supervisionby reiterating the statistical requirements for the banks own foreign exchange settlement and sales as well as regarding the information to be submitted by the banks. The release of this Circular is expected to reduce the review requirements, streamline the administrative process, and facilitate the banks own foreign exchange settlement and sales and other related business activities in an orderly manner. 2011-06-13/en/2011/0613/1000.html
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In order to prevent and crack down on hot money and other kinds of cross-border fund inflows in violation of the regulations, to maintain the healthy and steady operation of the foreign exchange market, and to ensure the economic and financial security of the state, since the latter half of February 2010, the State Administration of Foreign Exchange (SAFE) has launched special campaigns to struggle against hot money and other kinds of fund inflows in violation of the regulations in some provinces (regions and cities) with massive inflows of foreign exchange funds. To date, 197 cases of foreign exchange transactions in violation of the regulations have been disclosed, involving a total amount of USD7.34 billion. At the beginning of October 2010, the SAFE launched a new round of special inspections to combat foreign exchange fund inflows in violation of the laws and regulations. In total, 3 head offices of commercial banks, 33 branches of Chinese-funded banks, and 9 branches of foreign-funded banks have been inspected, covering areas such as foreign exchange settlement and sales, short-term external debt, offshore financing, sources and utilization of foreign exchange funds, and so on. The inspections show that with constant efforts to improve financial services, the majority of the banks have enhanced their awareness of business compliance, and as a result overall compliance has improved. However, it was also found that some banks had operated in violation of the relevant regulations. The major forms of violations include: the amount of the short-term debt exceeding the quota, illegal foreign exchange settlement of capital and settlement and sale of foreign exchange by individuals, fund collections and payments under the current account and the capital account in violation of the regulations on the administration of foreign exchange accounts, failure to conduct authenticity examinations when offering foreign exchange transaction services for clients, and so forth. By complying with the relevant laws, the SAFE has dealt with the said cases in a centralized manner and has imposed severe punishments. Since October 2010, the SAFE has imposed penalties on banks conducting business in violation of the regulations in 20 regions, including Guangdong, Jiangsu, Beijing, Shanghai, and so forth. The entities involved include 79 branches of 16 incorporated banks, such as the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China (ABC), the Bank of China (BOC), China Construction Bank (CCB), China CITIC Bank, Shanghai Pudong Development Bank (SPDB), Xiamen International Bank, and Yamaguchi Bank. Penalties have been imposed in the form of fines, suspensions of certain kinds of foreign exchange businesses, punishment of senior management, and so forth. In order to warn and educate the banks and their branches, to further enhance the banks awareness of business compliance, and to create social synergy to struggle against the hot money,the SAFE circulated information about the cases of non-compliance in various batches. The first batch of typical cases, involving banks that illegally conducted foreign exchange business and were penalized, was announced on October 28, 2010. Now information about the second batch of cases is being circulated as follows according to the progress of the relevant inspections: In January 2009, the sub-branch of the ICBC in Yanbu county of Foshan city failed to scrutinize the vouchers for foreign exchange settlement and handled a foreign exchange settlement deal involving capital totaling USD26.32 million for a real estate company in Foshan, which violated the regulations on the administration of foreign exchange settlement of capital. According to the Regulations of the Peoples Republic of China on Foreign Exchange Administration (hereinafter referred to as the Regulations), the SAFE imposed fines on the said sub-branch and suspended its capital settlement business for 3 months. Meanwhile, fines were imposed on two senior managers in the said sub-branch. During the period from January to December 2009, the sub-branch of the ICBC in Hanjiang county of Yangzhou city failed to scrutinize the vouchers for the settlement of foreign exchange and concluded 22 deals of foreign exchange settlement of capital for three foreign-invested enterprises, including a textile company in Yangzhou, involving a total amount of USD19.174 million. Such behavior was deemed to be in breach of the relevant regulations on the administration of foreign exchange settlement of capital. Therefore, the SAFE imposed fines on the said sub-branch and suspended its capital settlement business for 3 months pursuant to the regulations. In November 2009, the Liuli sub-branch of the CCB in Shanghai failed to scrutinize the vouchers for the settlement of foreign exchange and completed one deal of foreign exchange settlement of capital totaling HKD63.1166 million for a shopping company. Furthermore, the inspection revealed that no vouchers were issued for HKD26.7212 million of the total amount. This violated the regulations on the administration of foreign exchange settlement of capital. In light of this, the SAFE imposed fines on the sub-branch and suspended its capital settlement business for 3 months pursuant to the regulations. In September 2009, the Sanyuan sub-branch of the CCB Beijing branch failed to examine vouchers in the amount of USD1.73 million for foreign exchange settlement when handling foreign exchange settlement business for individuals in excess of the annual total limit. Such behavior was deemed to be in violation of the relevant regulations on the administration of foreign exchange settlement of capital. The SAFE thereby imposed fines on the said sub-branch and suspended its foreign exchange settlement and sale business for 6 months pursuant to the regulations. In April 2009, the Baoan sub-branch of the CCB Shenzhen branch settled USD2.3 million-worth of short-term loans in foreign exchange for an instrument company in Shenzhen. Such behavior was deemed to be in violation of the relevant regulations on the administration of foreign exchange settlement under the capital account. The SAFE thereby imposed fines on the sub-branch and suspended its foreign exchange settlement business for capital projects for 3 months according to the regulations. During the period from March 2008 to May 2010, the Fuzhou branch of the Xiamen International Bank handled 33 foreign exchange settlement deals without using the information system for the administration of foreign exchange settlement and sale for individuals, involving a total amount of HKD 17.2842 million. This violated the relevant regulations on the administration of individual foreign exchange. The SAFE thereby imposed fines on the said branch and suspended its foreign exchange settlement business for individuals for 6 months according to the regulations. During the period from February to October 2009, the Zhongxing sub-branch of the SPDB in Ningbo city handled 56 foreign exchange settlement deals for a person surnamed Dong and 55 other domestic individuals by splitting large sums of foreign exchange into smaller parts, involving a total amount of USD2.7659 million. In accordance with the regulations, the SAFE imposed fines on the said sub-branch. In May, July, and August 2010, the business department of the Dalian branch of the China CITIC Bank had USD1.3779 million-worth of capital settled through 3 petty cash deals for a real estate company in Dalian. The department failed to scrutinize the vouchers for the foreign exchange settlement, resulting in a violation of the relevant regulations on the administration of capital settlement business. The SAFE thereby imposed fines on the department and suspended its capital settlement business for 3 months pursuant to the regulations. In December 2009, the Jiangnan Sub-Branch of the ICBC in Yulin city completed 14 foreign exchange settlement deals in cash for individuals by splitting large sums of money into smaller parts, involving a total amount of USD67, 000. In May 2010, the business department of the ICBC Yulin branch concluded 5 deals of spot exchange settlement for individuals by splitting large sums of money into smaller parts, totaling HKD 2.3 million. Such behavior was deemed to be in violation of the relevant regulations on the administration of individual foreign exchange, and the SAFE thereby imposed fines on the said sub-branch and branch and suspended their foreign exchange settlement and sale business for 3 months pursuant to the regulations. The designated foreign exchange banks, as the major channels for conducting foreign exchange business, should firmly embrace the philosophy of scientific development and fulfill their social responsibilities in an earnest manner and in strict compliance with the regulations on foreign exchange administration. The banks referred to in this circular should attach great importance to their violations, examine their business operations, and rectify any acts of non-compliance. Other banking institutions should draw lessons from the above-mentioned cases so as to strengthen their internal management and to operate their businesses according to the laws and regulations. The foreign exchange authorities will continue to improve financial services to facilitate the operation of market entities; meanwhile, they will intensify supervision of the foreign exchange business of banks, enhance the approaches for foreign exchange inspections, and crack down severely on hot money and other kinds of cross-border fund flows that do not comply with the law, thus promoting the healthy development of the foreign-related economy and finance. 2010-12-29/en/2010/1229/973.html
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In order to ensure the economic and financial security of the state and to severely crack down on hot money, since February 2010, the State Administration of Foreign Exchange (SAFE) has launched a series of special campaigns to combat hot money in provinces and cities with large amounts of foreign exchange businesses. With intensified efforts to crack down on cross-border fund flows with no verifiable trade/investment background, by the end of October 2010, 197 cases in violation of the foreign exchange regulations were discovered and disclosed, involving a total sum of USD7.34 billion. Among these cases, 178 were filed and penalties were imposed. For the purpose of raising the awareness of banks and enterprises in handling the foreign exchange business in compliance with the regulations, warning and instructing entities involved in the violation of the regulations and of creating a social synergy for cracking down on the hot money,the SAFE has decided to circulate the non-compliance cases in stages, based on the types of entities involved. During implementation of the special campaigns, priority was given to inspections of banks handling the settlement and sales of foreign exchange, short-term external debts, offshore financing, as well as to the sources and utilization of foreign exchange funds and so forth. Inspections show that with constant efforts to improve financial services, all the designated foreign exchange banks have enhanced their awareness of the compliance risks, with further improvements achieved on the overall condition of compliance operations. However, there are still some banks that put a priority on business expansion and ignore compliance operations. Their inadequate fulfillment of the verification of authenticity has given rise to the inflow of hot money, producing a negative impact on the equilibrium in the balance of payments as well as on the healthy and stable development of the national economy and finance. Cases of bank violations of the foreign exchange regulations that have been penalized are hereby circulated as follows: On November 22, 2007, China Construction Bank Limited, Jiangmen Branch, handled settlement of foreign exchange in the amount of HKD31.5 million for capital of a foreign-funded enterprise. These funds were subsequently used to extend loans to the administration committee of a high-tech industrial development zone, but the purpose of the funds as declared by the enterprise was a security deposit for land purchases This violates the relevant regulations on the administration of exchange settlement for capital. In accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE decided to impose administrative penalties on the branch in the form of fines. During the period from January 20 to May 22, 2009, the Agricultural Bank of China Limited, Guanghua Sub-Branch in Chengdu City, handled the cross-border collection of foreign exchange for 28 individuals within the territory of China. Among the individuals, 20 collected funds from a payer who was outside the territory of China, with and 8 collecting from the same payer, after which the funds were settled and transferred immediately to an individual within the territory of China. Such acts violate the relevant regulations on the administration of individual foreign exchange due to the fact that large sums of money were split into smaller amounts for the settlement and sales of foreign exchange. In accordance with the Regulations of the Peoples Republic of China on Foreign Exchange Administration, the SAFE decided to impose administrative penalties on the sub-branch in the form of fines. On November 21, 2007 and March 27, 2008, the Bank of China, Zhenhai Sub-Branch in Ningbo City, handled the settlement of foreign exchange for the external debts of a company in the amount of USD13.58 million. It was verified that the purpose of the settlement failed to conform to the purpose ratified by the SAFE; meanwhile, the bank failed to pay the settled funds directly to the payee within the prescribed time limit. This violated the relevant regulations on the administration of foreign exchange settlement for external debts. In accordance with the Regulations of the Peoples Republic of China on Foreign Exchange Administration, the SAFE imposed fines on the sub-branch and ordered that it correct its behavior. On May 7 and 8, 2009, the Bank of China, Guchengtai Sub-Branch in Xining City, handled the settlement of foreign exchange for the capital fund of a foreign-funded enterprise in the amount of HKD85.3 million and HKD28.2 million respectively. The funds were subsequently used for capital investments, which exceeds the business scope of the enterprise and violates the relevant regulations on the administration of foreign exchange settlement for capital funds. In accordance with the Regulations of the Peoples Republic of China on Foreign Exchange Administration, the SAFE decided to impose administrative penalties on the sub-branch in the form of a 3-month suspension of involvement in foreign exchange settlement and sales. During the period from October 2006 to July 2007, German-based NORD/LB, Shanghai Branch, handled 12 agency import deals with a letter of credit for a number of Chinese-funded banks, involving a total sum of USD26.98 million. With no prior notice delivered to the Chinese-funded issuing bank, the branch transferred all the financial claims to the aforesaid Chinese-funded bank to its overseas branches. This violated the regulations of the state on the administration of external debts. In accordance with the Regulations of the Peoples Republic of China on Foreign Exchange Administration, the SAFE decided to impose administrative penalties on the branch in the form of fines. On February 1, 2008, the Bank of East Asia (China) Limited, Guangzhou Branch, handled the settlement of foreign exchange for a Hong Kong resident in the amount of HKD11 million to be used for the purchase of non-residential housing. This violated the relevant state regulations allowing overseas individuals to purchase commercial residential housing for their own use within the territory of China for the purpose of satisfying their basic living needs. In accordance with the Regulations of the Peoples Republic of China on Foreign Exchange Administration, the SAFE decided to impose administrative penalties on the branch in the form of fines. During the period from September 1, 2008 to June 30, 2010, the Agricultural Bank of China Limited, Yichun Branch, handled 35 foreign exchange settlements of capital for a number of foreign-funded enterprises, involving a total amount of over RMB100 million. The branch failed to carefully examine the relevant funds and to preserve the vouchers for the settlement in accordance with the law. This violated the relevant regulations on the administration of foreign exchange settlements of capital. In accordance with the Regulations of the Peoples Republic of China on Foreign Exchange Administration, the SAFE decided to impose administrative penalties on the branch in the form of fines. In 2009, a number of institutions, including Taijiang Sub-Branch within the jurisdiction of the Business Department of the Industrial and Commercial Bank of China Limited, Fujian Branch, failed to handle the settlement and sales of foreign exchange for individuals through the information system for the administration of settlement and sales of foreign exchange for individuals in 42 deals involving a total amount equivalent to USD265,000. These institutions, including the Gulou Sub-Branch within the same jurisdiction, failed to handle the deferred payments of foreign exchange for enterprises in accordance with the regulations in three deals involving a total amount equivalent to USD2.94 million. In accordance with the Regulations of the Peoples Republic of China on Foreign Exchange Administration, the SAFE decided to impose administrative penalties on the aforesaid sub-branches in the form of fines. As the main channel for handling foreign exchange business, all designated foreign exchange banks should further consolidate the concept of scientific development, earnestly fulfill their social responsibilities, and strictly comply with the policies for the administration of foreign exchange business. The involved banks referred to in this Circular should pay great attention to their violations of the relevant regulations, examine their handling of the business using the regulations as a benchmark, and conscientiously correct their non-compliance in their handling of the business. Banks and relevant institutions should draw lessons from the above cases, strengthen their internal management, and handle their businesses in compliance with the laws and regulations. The SAFE will, in addition to performing its role to further improve financial services and facilitate the business operations of market entities, strengthen supervision over the foreign exchange business of banks, improve constantly the effectiveness of foreign exchange inspections, increase the efficiency of supervision and inspection, crack down severely on cross-border flows of hot money in accordance with the law, and continue to promote the healthy development of the foreign-related economy and finance. October 28, 2010 2010-10-28/en/2010/1028/962.html
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Mr. Deng Xianhong, Deputy Administrator of the SAFE, was recently interviewed by Rui Chenggang, reporter from the Finance and Economics Channel of CCTV. Rui Chenggang (hereinafter referred to as Rui): First, I would like to express my thanks to you for accepting this interview. Can we start from the term? Deng Xianhong (hereinafter referred to as Deng): OK. Rui: How do you define hot money? Deng: To date, there is no uniform definition of hot money. From my point of view, hot money should be categorized differently in countries allowing free capital flows and countries imposing foreign exchange controls. In China, all illegal capital flows without authentic transactional backgrounds (either in trade or investment) and in violation of the foreign exchange administration regulations are considered hot money and are the target of our attack. One of the goals of our macro-economic regulatory policy is to lessen interest-oriented pursuit of the market featured by excessive speculation. And we will take strong administrative measures to combat hot money,which is in breach of both the laws and regulations. Rui: As for hot money statistics, we have many approaches in the media. How do you calculate the amount of hot money? Deng: In the context of partially imposed capital controls, hot money flows into a country in the guise of being legal. In other words, it is impossible for hot money to get across the border if it is identified as illegal. Therefore, only by inspections and examinations can we know the amount of hot money. Hot money is somewhat like disbanded soldiers who hide themselves in the thick forest. Only by searching the forest can we get to know the actual number of disbanded troops. Certainly some funds may escape from capture. But I can definitely say that in China, there are no massive inflows of hot money and hot money is only dispersed in small amounts. Rui: You disagree with the comment that the inflow of hot money is accelerating. Why is this comment being spread throughout the society? Deng: Analysis shows that there is a considerable amount of net inflows and surplus. However, we cannot equate such inflows and surplus with hot money. Our analysis indicates that a large amount of the net inflows and surplus results from the allocation of assets and liabilities of enterprises based on their expectations of market interest rates and exchange rates. Serious analysis shows that the settlement of foreign exchange contributes slightly to the increase in net inflows and surplus. However, when it comes to foreign exchange purchases and payments, a large amount of the transactions (imports) are carried out in the form of trade financing, deferred payments, external loans with internal guarantees, overseas agent-based payments, and overseas financing as a substitute for foreign exchange payments. Thus, it appears that the outflow of foreign exchange is relatively small. Rui: It is true that in the wake of the global financial crisis, the country is facing increasing inflows of capital or liquidity and that may not necessarily be hot money.Is this the reality? Deng: It is the reality. To combat the financial crisis, some developed countries adopted quantitative easy monetary policies which gave rise to an overwhelming liquidity of funds. Amidst the financial crisis, China took the lead in restoring its economy and achieving a rapid increase in foreign trade. That led to the formation of a gap that led to some expectations about interest margins and exchange margins. The country will see a considerable amount of net inflows of funds, and the inflows will trigger an increase in a favorable balance. Though this has created some pressure for us, we cannot equate the net inflows and surplus with hot money. As mentioned previously, all capital flows with verifiable transactional backgrounds are the results of normal economic activities. Rui: What are the major motivations for the inflow of hot money in pursuit of arbitrage by illicit means? Deng: The expectation of an RMB appreciation, the expectation of a rising stock market, and the expectation of a rise in the real estate market. The hot money is generally driven by such expectations, which in turn serve as the target for hot money inflows. Rui: In addition to their basic functions, what are the major roles of commercial banks in preventing the inflow of hot money? Deng: Inspections show that some banks have failed to perform their verification duty, that is to say, some banks have failed to comply completely with the policy requirements for foreign exchange administration, which has given rise to the inflow of hot money.Generally, our inspections during the past few years show that banks have strengthened their regulatory compliance. The banks compliance with the relevant regulations plays an important role in preventing hot money because complete compliance by one bank will mean effective administration of thousands of market entities. Rui: It is really hard to impose effective regulation on the underground money shops. What are the SAFEs effective approaches for combating against such underground money shops? Deng: During recent years we have come up with some effective methods for cracking down on underground money shops. For example, we established close collaboration with the public security organs to jointly combat the underground money shops and we have encouraged social forces to become involved. Since the beginning of 2010, we have discovered 13 large-scale money shops. Instead of combating the shops separately, we are now cracking down on them en masse. Rui: The last question: Are there any foreign investors who have different opinions about the intensified efforts for combating hot money? I mean, they may worry that these efforts may affect their investments? Is this a double-edged sword to a certain degree? Deng: A good question. It is true that we need to pay special attention to law-based administration when combating hot money. We should take effective measures to combat the illegal inflow of funds. Meanwhile, we need to ensure that the crackdown is carried out according to the law. It should not affect the legal operations of market entities. In a word, we need to achieve a trade-off between cracking down on hot money and implementing the reform of foreign exchange administration. Rui: Thank you so much. 2010-11-10/en/2010/1110/967.html