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In recent years, the State Administration of Foreign Exchange (SAFE) has accelerated promoting the "five shifts" in foreign exchange administration by streamlining administration and delegating power, deepening the foreign exchange administration reform and stressing promoting reforms while guarding against risks, thus allowing market participants doing business in compliance with laws and regulations to fully enjoy trade and investment facilitation while continuing crackdown on foreign exchange irregularities to maintain foreign-related economic and financial security in China. Due to complex and changing economic conditions both at home and abroad, the short-term cross-border capital flows have been more fluctuating since the beginning of 2015, despite equilibrium between foreign exchange supply and demand. To guard against risks arising from abnormal cross-border capital flows, the SAFE has enhanced monitoring and checking using the big data system for the real-time cross-region, cross-market player and cross-business monitoring of all cross-border receipts and payments, and stepped up efforts to inspect the key channels of abnormal cross-border capital flows and relevant key market participants, so as to promptly identify irregularities and have relevant persons punished without interrupting normal operations of market participants that do business in compliance with laws and regulations. As we have inspected, most financial institutions, companies and individuals are in strict compliance with the regulations on foreign exchange administration, suggesting further improvement in the overall level of compliance. However, some enterprises and individuals use deceptive means such as false instruments, invalid instruments, repeatedly-used instruments and structuring of trade, or conduct outward remittance through split-off for outflows and purchases of foreign exchange in violation of regulations; some banks conduct foreign exchange sales and settlement, as well as cross-border receipts and payments of foreign exchange without performing the obligation of authenticity review, affecting the healthy and stable economic and financial development and the equilibrium of balance of payments. For the purpose of warning and education, we hereby make public the selected institutions and individuals violating foreign exchange regulations and the resulting punishments on them. From April 2012 to January 2014, Bank of Shanghai Co., Ltd. Shenzhen Branch handled 9 payments of foreign exchange under entrepot trade for 3 companies in Shenzhen, which involved a total amount of USD 30.78 million, despite the inconsistency between the destination in the contract and that on the receipt as well as between the date of transportation, trading object in the contract and those on the imports filing list. Since this violated the regulation that banks should conduct reasonable review of the authenticity of transactions under trade and of the consistency of the transactions with foreign exchange receipts and payments, the SAFE decided to impose a fine upon the said bank as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In February 2013, Shanghai Pudong Development Bank Co., Ltd. Yiwu Sub-branch refunded foreign exchange under general trade to a Zhejiang-based company, which involved an amount of USD 1.02 million, but violated the regulations on to-be-inspected accounts by making payments directly from the to-be-inspected account for revenue from exports. In March 2013, the bank handled outward remittance of USD 7.09 million under entrepot trade, despite doubts and flaws in the relevant documents submitted by a Yiwu-based company. Since this violated the regulation that banks should conduct reasonable review of the authenticity of transactions under trade and of the consistency of transactions with foreign exchange receipts and payments, the SAFE decided to impose a fine upon the said bank as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. Between June and July 2013, Ping An Bank Co., Ltd. Chongqing Branch handled payments of foreign exchange under entrepot trade for 2 companies in Chongqing, which involved USD 7.06 million and USD 2.22 million respectively, despite inconsistency between the agreed parties and the signatories in the warehousing agreement retained for the transactions. From June 2013 to February 2014, the bank handled 29 payments of foreign exchange totaling USD 85.95 million under entrepot trade for 3 companies in Chongqing, without endorsing the relevant original instruments as required and retaining any original or duplicated copies for reference. Since this violated the regulation that banks should conduct reasonable review of the authenticity of transactions under trade and of the consistency of transactions with foreign exchange receipts and payments, the SAFE decided to impose a fine upon the said bank as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. Between December 2007 and April 2014, Shanxi Shouyang Zhongsheng Weiye Dongwan Coal Mine Dedicated Railway Line Management Co., Ltd. purchased and paid overseas foreign exchange through individual split-off of corporate profits by employee, which involved a total amount of USD 4.8 million. Since this violated the regulations for foreign exchange administration on purchases and payments of foreign exchange, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In June 2013, Hubei Wuhan Rongduan Trading Co., Ltd. made 4 payments of foreign exchange under entrepot trade with 2 invalid bills of lading, which involved USD 21.27 million in total. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. From May 2013 to March 2014, Sichuan Hongda (Group) Co., Ltd. made payments of foreign exchange of USD 7.34 million for import through entrepot trade and collected foreign exchange of USD 7.37 million from export through entrepot trade repeatedly using 12 bills of lading. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In January 2014, Hunan Honors Resources Trading Limited made one payment of foreign exchange of USD 15.24 million with instruments without true and legal transaction bases. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In February 2014, Jiangsu Kunshan Jinaer Sports Instruments Co., Ltd. purchased foreign exchange of USD 3.40 million for making payments overseas, but actually for performing the contract of forward foreign exchange settlement, thus violating the regulations for foreign exchange administration on purchases and payments of foreign exchange. The SAFE therefore decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In May 2014, Shandong Chuanjun Chemical Co., Ltd. made one payment of foreign exchange of USD 2.43 million under import letter of credit through a bank using invalid instruments including a false import contract, bill of lading and commercial invoices. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In September 2014, a Mr. Zhao in Chengde, Hebei organized 23 persons including a Mr. Du to buy foreign exchange of AUD 1.23 million (or USD 1.15 million) using RMB for the purpose of individual "overseas travel", and remitted the money to Australia for Zhao to buy an overseas property. Since this violated the regulations on administration of individuals' foreign exchange, the SAFE decided to impose a fine upon Zhao as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. Market participants should learn from these cases, developing a sense of social responsibility in economic activities, enhancing self-management, pursuing robust operations and scientific development and strictly abiding by the policies and regulations on foreign exchange administration. The institutions and individuals that have violated relevant regulations and been investigated and punished should rectify their activities and raise their awareness of doing business in compliance with laws. 2015-09-18/en/2015/0918/1171.html
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The People's Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) recently announced that the foreign exchange trading time would be extended and qualified foreign players would be introduced. An official from the PBC answered press questions on relevant issues. Q: What are your major considerations in extending the foreign exchange trading time and introducing qualified foreign players? A: As the RMB exchange rate liberalization, convertibility and internationalization accelerate, there is a growing demand for speeding up the development of the domestic foreign exchange market, especially boosting the opening up of the market. This move is aimed at diversifying the players in the domestic foreign exchange market, expanding their trading channels and boosting the formation of consistent RMB exchange rate both at home and abroad. This is a reformative measure to deepen the development of the foreign exchange market. Q: What adjustments will be made to the operating time of the trading system of China Foreign Exchange Trade System (CFETS)? A: The foreign exchange trading hours will be adjusted from 9:30-16:30 to 9:30-23:30, Beijing time (the regional trading hours will remain unchanged at the moment). The operating time of the foreign currency pair and foreign currency lending system will be changed from 7:00-19:00 to 7:00-23:30, Beijing time. The market will not be closed in between. Q: Why will the strike price of spot inquiry about the exchange rate of the RMB against the USD at 16:30 Beijing time be regarded as the closing price of the day after the extension? A: After the extension, the market liquidity may still chiefly come from day trading in a fairly long time to come and will reflect to the largest extent the real supply-demand situation in China's foreign exchange market. But the liquidity in night trading will be poor and may heighten volatility in the market, making it easy for the exchange rate to be misstated and even be manipulated. If the exchange rate at 23:30 is regarded as the closing price, market makers may refer to this price to quote the central parity rate for the second day, thereby weakening the representativeness of the central parity rate as a benchmark. But if the market markers quote the central parity rate for the second day without referring to the closing price due to its lack of representativeness, the authoritativeness of the central parity rate quotation mechanism will be impacted, leading to a structural deviation of the closing price from the second-day central parity rate. As a result, the strike price at 16:30 will continue to be the closing price of the interbank foreign exchange market. Q: Will the CFETS publish more reference rates for different time after the extension? A: To facilitate foreign exchange pricing and trading and provide more reference rates for market players, the CFETS will publish reference rates for 17:00, 18:00, 19:00, 20:00, 21:00, 22:00 and 23:00 respectively on chinamoney.com.cn, in addition to those for 10:00, 11:00, 14:00, 15:00 and 16:00 as it currently does. The calculation method will remain unchanged. Q: What will be the way of trading and trading categories allowed for qualified foreign players after their entry into the interbank foreign exchange market? A: After entry into the interbank foreign exchange market, qualified foreign players will be allowed to participate through bidding and inquiry as provided by the CFETS trading system in the trading of all listed trading categories, including spot, forward, foreign exchange swap, currency swap and options transactions. Q: Do qualified foreign players have to meet some qualifications for becoming members of the interbank foreign exchange market? Q: Currently, qualified foreign players to access the interbank foreign exchange market are primarily the foreign participating banks boasting a large scale of the RMB purchase and sales business, an international reputation and regional representativeness. They will be allowed to access the market by the CFETS based on their willingness and in accordance with the laws. The application procedures, technical standards and charging for qualified foreign players to become members of the interbank foreign exchange market are the same as those for existing members. Q: Will qualified foreign players be required to sign a master agreement with their counterparties to participate in the trading activities in the interbank foreign exchange market? A: It is a universal practice in both domestic and foreign financial markets to sign a master agreement. To trade derivatives in China's interbank foreign exchange market, foreign players need to sign the master agreement of NAFMII or ISDA with their counterparties through their independent negotiations. Q: Can qualified foreign players become market makers given that a market maker system is currently adopted in the interbank foreign exchange market? A: As it takes time for qualified foreign players to adapt at the early stage after entering the interbank foreign exchange market, they will be allowed to participate in the trading activities in the market as a general member only and cannot become market markers at the moment. Q: What adjustments will be made to the existing model of the RMB purchases and sales business after foreign participating banks access the interbank foreign exchange market? Q: There are two business models for the foreign participating banks approved to conduct the RMB purchases and sales business to select in China's interbank foreign exchange market: First, continuing to conduct the RMB purchases and sales business directly with their domestic correspondent banks; second, applying to the CFETS for becoming a member of the interbank foreign exchange market and conducting foreign exchange trading in the market through the CFETS trading system. Foreign participating banks are allowed to choose one model only, based on their wish. Q: Is it still necessary for a domestic bank to report through RMB Cross-Border Payment & Receipt Management Information System (RCPMIS) the information on trading with a foreign participating bank allowed to conduct the RMB purchases and sales business in the interbank foreign exchange market? A: A foreign participating bank choosing to become a member in the interbank foreign exchange market is required to report to the CFETS at the close of the trading day the information relating the RMB purchases and sales it conducts in the interbank foreign exchange market through the CFETS trading system, and its counterparty does not need to report relevant information through RCPMIS. 2015-12-30/en/2015/1230/1179.html
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To standardize and facilitate operation by banks and individuals in respect of foreign exchange business, the State Administration of Foreign Exchange (SAFE) recently issued the Circular of the State Administration of Foreign Exchange on Further Improving the Administration of Individual Foreign Exchange (Huifa No. 49 [2015], the Circular). The Circular is highlighted as follows: First, the individual foreign exchange business monitoring system will be launched nationwide on January 1, 2016 and at the same time, the management information system for foreign exchange settlement and sales for individuals will be no longer in use. Second, the watch list management for individual foreign exchange business will be improved. An individual who borrows another individual's quota to handle foreign exchange settlement and sales will be put on a watch list; a risk reminder will be first issued to individuals who lend their quotas to help another individual for split settlement and sales of foreign exchange and then these individuals will be put on a watch list if they lend their quotas again. Third, regulations will be streamlined. Five foreign exchange administration regulations involving settlement and sales of foreign exchange for individuals will be nullified for deepening the understanding of and facilitating the execution by market players. Launched as the Circular is issued, the individual foreign exchange business monitoring system is designed to further facilitate foreign exchange handling by banks and individuals and improve the monitoring efficiency in respect of individual foreign exchange business, under the existing framework for the administration of individual foreign exchange. To acquire full-scale data, this system supports over-the-counter individual foreign exchange business as well as individual foreign exchange business through other channels and will run more stably. Moreover, the system, interfaced with the operating systems of banks, can effectively reduce repeated inputting by operators at banks. With this system, foreign exchange authorities will strengthen the watch list management and offsite monitoring, by acquiring, analyzing, and disseminating relevant data in a centralized manner and sharing the watch list across the country. The Circular shall come into force on January 1, 2016. 2016-01-13/en/2016/0113/1182.html
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To further enhance the transparency of foreign exchange administration policies, the State Administration of Foreign Exchange (SAFE) has reinforced legislations in key areas and streamlined regulations since the beginning of 2015, involving cross-border foreign exchange payment business through payment institutions, direct investment, settlement of foreign exchange capital, overseas loans under domestic guarantees for non-bank institutions, foreign exchange administration for insurance business, overseas disposal of non-performing assets by financial asset management companies, franchise domestic and foreign currency exchange business for individuals and foreign currency exchange business. Meanwhile, the SAFE has rescinded and announced invalid some foreign exchange administrative regulations that do not adapt to the requirements of the reform. To facilitate public enquiry and application, the SAFE then upgraded the Catalogue of Major Existing Laws and Regulations in Effect on Foreign Exchange Administration (Catalogue) and released it at its official website. The upgraded Catalogue contains 231 policies, laws and regulations on foreign exchange administration released as of June 30, 2015, which fall into 8 categories including general foreign exchange administration, foreign exchange administration under the current account, foreign exchange administration under the capital account, regulation of the foreign exchange business of financial institutions, the RMB exchange rate and the foreign exchange market, balance-of-payments and foreign exchange statistics, foreign exchange inspections and application of the laws and regulations, and the scientific administration of foreign exchange, and several sub-categories by specific business type. The SAFE will make further efforts to build and improve a long-term mechanism for sorting out laws and regulations, and streamline and upgrade the Catalogue regularly to enhance policy transparency, facilitate banks, companies, and individuals to understand and apply foreign exchange administrative regulations and promote law-based foreign exchange administration. 2015-09-01/en/2015/0901/1167.html
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The Interim Management Measures for Overseas Traders and Brokers Engaging in Futures Trading under Specific Domestic Categories (China Securities Regulatory Commission Order No. 116, "Measures") were recently promulgated, allowing overseas traders and brokers to engage in futures trading under specific domestic categories and determining crude oil futures as the first specific domestic category in China. To support the implementation of the Measures, the State Administration of Foreign Exchange (SAFE) recently published the Circular of the State Administration of Foreign Exchange on Foreign Exchange Administration for Overseas Traders and Brokers Engaging in Futures Trading under Specific Domestic Categories (HuifaNo. 35 [2015], "Circular"), clarifying the foreign exchange administration policy for overseas investors engaging in domestic commodity futures trading, and simplifying requirements on account opening, exchanges of funds and data reporting, which are involved in such trading, so as to facilitate market operations. The Circular is highlighted as follows:First, clarifying the requirements on managing foreign exchange accounts of trading entities, highlighting that special accounts shall be opened for closed operation of funds, so as to reduce trading risk. Second, specifying that the funds for futures trading by an overseas investor shall not be included in the quota for short-term external debt of a bank, in order to facilitate use of relevant funds. Third, to facilitate exchanges of funds, overseas investors are allowed to purchase and settle foreign exchange directly with their opening banks based on the real demands such as futures margin, and settlement of profits and losses, and funds can be transferred directly after the purchase and settlement of foreign exchange. Fourth, simplifying data reporting. The data on foreign-related receipts and payments involved in futures trading and related trading data shall be uniformly reported by the opening banks and exchanges through their systems. The Circular shall come into force as of August 1. 2015-10-29/en/2015/1029/1173.html
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To meet the development needs of the foreign currency banknotes business in China, and further regulate the management of receipts and payments of foreign currency banknotes by domestic institutions, the State Administration of Foreign Exchange (SAFE) recently released the Circular of the SAFE on Printing and Distributing the Measures for Managing the Receipts and Payments of Foreign Currency Banknotes by Domestic Institutions (Huifa No. 47 [2015], the Circular). The Circular is highlighted as follows: First, specifying the conditions for the receipts and payments of foreign currency banknotes by domestic institutions. When bank channels are inaccessible, such as in the cases of unsmooth transfer channels and transactions with countries/regions that are stricken by war or have poor financial facilities, domestic institutions will be allowed to handle part of receipts and payments under the current account in foreign currency banknotes. Second, specifying the requirements on banks in reviewing the receipts and payments of foreign currency banknotes. Under the principles of "knowing your customer", "understanding your business" and "due diligence", banks are required to review the authenticity, legitimacy and necessity of the receipts and payments of foreign currency banknotes. Third, improving relevant foreign exchange regulations. The SAFE will strengthen data acquisition and analysis and enhance ex-post regulation and investigation of misconduct. The Circular shall come into force as of February 1, 2016. The Interim Measures for the Administration of Collection and Payment of Foreign Cash by Domestic Institutions (Huiguanhanzi No. 211 [1996]) shall be abolished simultaneously. 2016-01-08/en/2016/0108/1181.html
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[Wang Yungui]: Good afternoon, ladies and gentlemen and friends from the press. We welcome you to this press conference of the State Administration of Foreign Exchange (SAFE). Given that foreign exchange administration reforms for trade in goods and trade in services have attracted wide concern, the SAFE has worked hard to implement reforms in recent years, and is holding this special press conference to release relevant information. The press conference is entitled “Practicing the 'Five Changes' to Promote Trade Facilitation.” Du Peng, director of SAFE Current Account Management Department, will host the conference. Let us welcome him to introduce the foreign exchange administration reforms under the current account. [14:58] [Du Peng]: Good afternoon, friends from the press! [15:00] [Du Peng]: In May the General Office of the State Council issued its “Opinions on Supporting Stable Growth of Foreign Trade” (Guo Ban Fa [2014] No. 19), proposing many measures to support the stable growth of foreign trade, including optimizing the structure of foreign trade and further improving the foreign trade environment. Among these measures, many are relevant to foreign exchange administration and are our work priorities for the next phase of the reform. I am delighted to have this opportunity to introduce to you the role of foreign exchange administration under the current account, especially under trade in goods and trade in services, in driving the reforms, promoting facilitation, guarding against risks, and serving the stable growth of foreign trade. The current account is closely related to our life. It primarily consists of two parts, the first is trade in goods, or imports and exports, and the second is trade in services, including cross-border travel, study abroad, transportation, and intellectual property rights. The current account, together with the capital account, comprises the major parts of a country's balance of payments. Receipts and payments of foreign exchange under the current account in China are characterized by the following three major features: [15:01] [Du Peng]: First, large size and rapid growth. Since it joined the WTO in 2001, China has witnessed rapid growth in terms of the size of the receipts and payments of foreign exchange under the current account. Increasing at an annual average of 56 percent, China's receipts and payments of foreign exchange under the current account amounted to USD 5.14 trillion in 2013. [15:01] [Du Peng]: Second, receipts and payments of foreign exchange under the current account constitute a large proportion of the overall receipts and payments of foreign exchange. They have accounted for an annual average of 70 percent since 2001, representing a major part of China’s overall receipts and payments of foreign exchange. [15:01] [Du Peng]: Third, the surplus under the current account as a percentage of GDP has gradually decreased to within the internationally recognized rational range. This percentage has been lower than 3 percent for three consecutive years, and at 2 percent in 2013 and a further decrease to 0.3 percent in the first quarter of this year. [15:02] [Du Peng]: First, the principles and objectives of foreign exchange administration under the current account [15:06] [Du Peng]: Foreign exchange administration under the current account has undergone rigid regulation and gradual liberalization to realize RMB current-account convertibility. At the end of 1996 China announced that it would accept the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund to commit to RMB current-account convertibility and would remove restrictions on international payments provided that such transactions are true and legitimate. The "authenticity verification" has since become a fundamental principle of foreign exchange administration under the current account for the purpose of preventing funds without true transactions from flowing in or out through the current account during our current special phase when the current account is fully convertible while the capital account is partially restricted so as to ensure the overall effectiveness of foreign exchange administration. [15:06] [Du Peng]: In addition to guarding against the risks of abnormal capital flows, administration of the current account aims to promote trade facilitation for the healthy development of the real economy. However, because risk prevention and facilitation promotion are contradictory, finding the best balance between the two to deliver good performance in services and administration is a significant challenge. After years of exploration and innovation, the reform of foreign exchange administration under trade in goods and the reform of foreign exchange administration under trade in services that were launched by the SAFE in August 2012 and September 2013 respectively are the best examples of the SAFE's efforts. The two reforms have effectively promoted trade facilitation via integrating regulations, simplifying documents, and removing prior approvals, while enhancing risk prevention via constructing systems that stress post monitoring and risk regulation and improving cross-departmental information sharing and joint regulation, thus effectively combining risk prevention and facilitation promotion. These reforms are the highlights of the SAFE's exploration and practice of the "five changes." [15:07] [Du Peng]: Second, the foreign exchange administration reform under the current account under the guidance of the "five changes." [15:08] [Du Peng]: The "five changes" are the overall guiding principles for the reform of foreign exchange administration. Under the fully open economic framework, in 2009 the foreign exchange authorities reviewed foreign exchange administration in China and proposed the "five changes" to deepen foreign exchange administration reform for a new phase: first, by changing approvals to monitoring and analysis; second, by changing prior regulation to post administration; third, by changing behavioral management to market-player management; fourth, by changing the presumption of guilt to the presumption of innocence, and; fifth, by changing the "positive list" to a "negative list." [15:08] [Du Peng]: Yi Gang, director of the SAFE, has mentioned and elaborated on the "five changes" on many occasions. Under the guidance of the "five changes," the foreign exchange authorities have remarkably raised awareness of market services and the and the concept of costs, dramatically changed the methods of foreign exchange administration, and put the construction of a mechanism for the system of foreign exchange administration onto a fast track. What changes have occurred to the foreign exchange administration model under the current account since the announcement of the "five changes"? To put it vividly, the traditional airport security check-in model has been changed to a novel traffic camera like model. Specifically, prior regulation, front-office approval, and behavioral regulation have been changed to post regulation, back-office monitoring, and market-player regulation. This new model is like a traffic camera that allows compliant cars to pass through but keeps track of violating cars. With front-office approval changed to back-office monitoring, the visible hand of foreign exchange administration has become an invisible hand, allowing the foreign exchange authorities to timely lock up the few violating companies without interrupting the operations of the absolute majority of companies, thus improving the relevance and effectiveness of administration and reducing the costs of regulation. [15:08] [Du Peng]: First, changing approvals to monitoring and analysis [15:08] [Du Peng]: Premier Li Keqiang has said the government departments at all levels should, with an output capacity of great courage, further streamline administration and delegate more power to lower-level governments. Thus far, the SAFE has removed 65 administrative approval items for foreign exchange administration, accounting for more than 73 percent of the total approval items, and it has declared nearly 700 regulatory documents abolished or null and void. In terms of current- account administration, since 2009 in terms of the foreign exchange reforms under trade in goods and trade in services, the SAFE has canceled 82 percent of the administrative licenses and integrated and rescinded 80 percent of the regulations, and has nullified 123 and 52 regulations respectively, constituting a total of 175. On this basis, the SAFE has established a clear and concise regulatory system primarily comprised of guidance provisions and operation procedures. The two reforms have benefited the absolute majority of market players and have effectively promoted trade facilitation. For example, after implementation of the reform of trade in goods, the average time to receive and pay foreign exchange for each transaction has been shortened by 70 percent and 85 percent respectively, thus substantially improving processing efficiency; the cost for traveling between the SAFE and the bank has also been slashed significantly and the costs for human resources have dropped by one-third. Data from company investigations and estimates of the number of companies show that foreign trade companies in China saved nearly RMB 4.8 billion in labor costs and transportation fees during the one year after implementation of the reform. Since implementation of the reform of foreign exchange under trade in services, verification documents are no longer been required by banks for the absolute majority of receipts and payments of foreign exchange under trade in services and the time that banks spend on processing has been shortened from more than 20 minutes to 5 minutes, thus helping companies save RMB 30 50 in transportation fees for each transaction. To support the reform of foreign exchange under trade in services, the tax authorities no longer require that taxpayers submit tax certificates. They have been replaced by filing for the record for outbound payments of foreign exchange, thus significantly shortening the payment cycle. [15:09] [Du Peng]: How do the foreign exchange authorities manage and safeguard our bottom line against risks since the administrative approvals have been cancelled? We depend chiefly on monitoring and analysis as well as on follow-up management. Currently, we primarily analyze and compare information, such as capital flows and goods flows of companies and individuals, using an advanced IT-based management system and we share information with Customs, the tax authorities, and the commercial authorities to comprehensively, promptly, and accurately monitor data about the transaction players. As monitoring is conducted in the back office, ordinary companies and individuals are not aware of the foreign exchange administration, but once a company or an individual violates the regulations, the SAFE will instantly take note and begin processes such as follow-up verifications, classifications, and punishments, which is the underlying meaning of “traffic camera like” administration. To guarantee the effects of the regulations, we have made great efforts to improve our hardware, making sure each key business is supported by the system, such as the monitoring system for foreign exchange under trade in goods, the monitoring system for foreign exchange under trade in services, and the monitoring system for individual settlement and sales of foreign exchange. We also are working to improve our software. The system regularly and automatically screens abnormal market players based on the early warning indicators and threshold values that we have set, and we conduct further screening manually to combine the brain with the computer. An off-site macro-medium-micro monitoring management system, or a system that identifies capital flows and overall trends based on the macro situation, understands regional and industrial capital distribution structures based on the medium level, and monitors and screens violating companies at the micro level, has been initially set up, thus organically combining three levels of efforts. For example, in 2013 we determined from our system that the capital flows and goods flows of Company A, which was engaged in "entrept trade" that attracted wide concern among the foreign exchange authorities at the time, were seriously mismatched, and the frequency of its receipts and payments of foreign exchange as well as its counterparties were questionable. Using the system to conduct a correlation analysis, we found that Company B was running in the same way and its registered address and contacts were the same as those of Company A. We immediately cooperated with government departments to conduct an on-site investigation and confirmed that the company was defrauding government subsidies through entrept trade. [15:10] [Du Peng]: The above case indicates that monitoring and analysis have an obvious effect. Since the end of May of this year, the SAFE has shifted its focus of regulation from monitoring 540,000 companies on the list to monitoring 80,000 90,000 key companies, conducted strict supervision of 3,584 Class-B companies and 623 Class-C companies, wrote off 3,793 shell companies, transferred more than 300 companies to the foreign exchange inspection authorities, and punished 189 violating companies across China, thus promoting trade facilitation while effectively improving our capability to guard against risks. [15:11] [Du Peng]: Second, changing prior regulation to post administration. [15:12] [Du Peng]: Since the cancellation of the prior approvals, we have established and continued to innovate in providing effective approaches for post administration. [15:12] [Du Peng]: First, developing a series of post administration systems during the reform, such as a comprehensive analysis system and an on-site verification system. The on-site verification system was created to require companies that are singled out by the system for abnormalities to explain such abnormalities through interviews with company heads and on-site verifications. The classified administration system was designed to classify companies based on their compliance with the laws and to provide adequate receipt and payment conveniences for Class-A companies, and to carry out strict supervision of Class-B and Class-C companies in terms of document verification, business processing, and methods of settlement so as to build a positive incentive mechanism that "offers conveniences to companies that abide by the laws, to identify suspects, and to punish violators," thus making discredited companies or individuals pay the price and smooth the way for trustworthy companies. [15:12] [Du Peng]: Second, continuing to promote innovations in approaches to administration. For example, given that some companies created fictitious trade backgrounds and raised enormous funds overseas during the first half of 2013, we designed a risk notification system, that is, the SAFE sends letters to companies whose goods flows and capital flows are seriously mismatched, requiring them to make an explanation, and the SAFE will duly downgrade those companies that fail to explain or cannot make a convincing explanation within 10 days upon receipt of such a letter. [15:12] [Du Peng]: Post regulation proves to be more cost effective. [15:12] [Du Peng]: Third, changing behavioral management to market-player management. [15:15] [Du Peng]: Over the long term, foreign exchange transactions by Chinese companies have been simple and small-sized, so behavioral regulation featuring transaction-by-transaction verifications were efficient. For example, the traditional verification system for receipts and payments of foreign exchange under trade in goods required companies to record the capital flows arising from receipts of foreign exchange for each export transaction and to record the capital flows arising from payments of foreign exchange for each import transaction. If the two capital flows matched each other, the company could smoothly undergo the various procedures; otherwise it could not receive or pay foreign exchange or file for the export tax refund as was normally the case. But as China's foreign trade surged in size in recent years, the number of companies on the list reached 540,000 and the types of trade in goods increased to 96. In the three years between 2008 and 2010, just before implementation of the pilot reform of trade in goods, there were nearly 137 million transactions involving verification of receipts and payments of foreign exchange from imports and exports, with an annual average of more than 45 million transactions. [15:15] [Du Peng]: Under such circumstances, transaction-by-transaction behavioral regulation was not efficient and economic agent based management was needed. As a result, the current-account reform abandons the traditional model of "one-to-one matching and transaction-by-transaction verification" and conducts aggregate assessments of company information using comprehensive data acquired by the system and information involving the company profile, trade in goods and trade in services, advances from customers and prepayments, deferred income and payments, foreign exchange loans, import bill advances by overseas institutions, and the opening of letters of commitment. The reform provides comprehensive searches for company information, including receipts and payments under the capital account and the filing status and classification, thus avoiding drawing a conclusion from incomplete data. This shift enhances regulatory efficiency, reduces administrative interruptions for the absolute majority of market players, and creates a loose market environment for fair competition for trustworthy and law-abiding companies. [15:15] [Du Peng]: Fourth, changing from "presuming guilty" to "presuming innocent" and from a "positive list" to a "negative list." [15:19] [Du Peng]: The traditional current-account system was aimed to guard against violating companies, so companies had to submit considerable evidence for prior verification and were required to undergo complex procedures. To have their business processed, each company had to go through a rigorous document verification, which could easily delay the business processing. Since the reform, document verification has been streamlined and the verification process has been simplified, offering a great convenience for companies and individuals. In particular, as the traffic camera like management is implemented, 99 percent of companies throughout the country can hardly perceive of the existence of foreign exchange administration. In addition, the letter of commitment system is based on a presumption of innocence, that is, the foreign exchange authorities will liberalize management of those companies that sign the accountability document and commit to abiding by the laws. [15:19] [Du Peng]: Before the reform, current-account management stressed a "positive list," or "companies or individuals were not allowed to do anything that was not explicitly stipulated by law," because we traditionally introduced legislation by positively listing the items and attempted to list all the authenticity verification evidence for various ways of trading and various business formats. For example, before the current- account reform, verification evidence was listed one by one for more than 100 foreign exchange items under trade in services. But since the kickoff of the reform, except for transactions of trade in services that are explicitly prohibited by national laws and regulations, companies engaged in trade in services are only required to provide core verification elements, including contracts and invoices, for the banks to verify the authenticity in line with the three operational principles, thus basically meeting the requirements of "doing things not explicitly prohibited by the law." But, in general, the "negative list" management approach is still being explored and still needs time before it can be widely applied. [15:27] [Du Peng]: To sum up, in response to the proposal of the Third Plenum of the Eighteenth CPC Central Committee that "efforts should be made to further streamline administration and delegate more power to lower-level governments," and to "give the market a decisive role in allocating resources," the foreign exchange authorities have actively made innovations in the concepts and methods of administration to align them with the direction of the socialist market economic reform and to meet the overall requirements of the central government and the State Council in terms of streamlining administration and delegating more power to lower-level governments and to accelerate the transformation of government functions. The foreign exchange authorities are working to improve risk regulation regarding receipts and payments of foreign exchange so as to enhance regulatory efficiency while serving the real economy and vigorously promoting trade facilitation, thereby integrating administration and services. [15:27] [Du Peng]: Third, initial ideas on implementing the “Opinions on Supporting Stable Growth of Foreign Trade” to advance the reform of foreign exchange administration under the current account. [15:27] [Du Peng]: The foreign exchange administration reforms under trade in goods and trade in services are the highlights of the SAFE's exploration and implementation of the "five changes." To achieve these changes, we still face with huge challenges. For example, some grassroots foreign exchange administration staff have not fully adapted to the new administration approach and their ability to focus on key tasks and priority regulations amid the heavy regulation loads and the short supply of regulatory employees needs improving. We also need to further enhance our professional capabilities to promote trade facilitation and to enhance risk prevention. [15:28] [Du Peng]: As is known, in May the General Office of the State Council released the “Opinions on Supporting Stable Growth of Foreign Trade,” proposing requirements to sustain stable growth in trade in goods, supporting the development of trade in services, enhancing trade facilitation, improving financing services, and supporting the development of foreign trade companies. This also requires us to further deepen the reform of foreign exchange administration under the current account including trade in goods and trade in services. Our measures are as follows: [15:28] [Du Peng]: First, vigorously promoting trade and investment facilitation. Develop systems and mechanisms of foreign exchange administration that can be copied and promoted to respond to China's new round of reform and opening up and to support the development of the Shanghai Free Trade Zone and the special economic zones; to provide more foreign exchange policy support for centralized fund management at MNCs to underpin the development of MNCs; to drive the upgrading of exports and the balanced development of trade, to promote the development of cross-border e-commerce, and based on the existing 22 pilot companies in 5 regions, to study how to expand the pilot regions and the scope of foreign exchange payments for cross-border e-commerce of third-party payment institutions; to provide foreign exchange policy facilitation for individuals to conduct foreign trade and policy support for the development of border trade to underpin the development of small and micro businesses. [15:28] [Du Peng]: Second, safeguarding our bottom line against risks and enhancing regulation of cross-border capital flows. We will focus our attention on the impact that international economic and financial trends, especially the progress and methods of the QE tapering, will have on China's foreign exchange and will develop our response plans. We will enhance monitoring of key companies and special monitoring of key businesses, such as banks' on- and off-balance-sheet financing products, to guard against the rise of trade structuring; focus on system upgrading, improving system application capability, and exploring pragmatic and effective approaches, such as building a "regulator system" to assign fixed personnel to regulate and serve a batch of companies and a "sample bank system" to monitor and analyze companies with a large proportion of foreign exchange business; and, driven by classified management, further enhance the level of cross-departmental regulation. [15:28] [Du Peng]: Third, deepening understanding and accelerating talent building to comprehensively transform management in accordance with the requirements of the "five changes." Training and instruction will be provided to foreign exchange administration staff through policy training, case communications, and professional instruction, so that all staff in the foreign exchange system will be transformed into those who are good at business management, monitoring and verification, and situation analysis by improving their comprehensive quality and professional skills, and to meet the transformation requirements as soon as possible. [15:29] [Du Peng]: Thank you very much! Next I would like to answer your questions on the reform of foreign exchange administration under the current account, the "five changes" on foreign exchange administration, and other relevant issues. [15:29] [Journalist from Economic Information Daily] Just now, you mentioned guarding against risks. We all know that at the end of last year the SAFE introduced the “Circular on Improving Foreign Exchange Administration for Bank Trade Financing.” I am wondering about the effect of this Circular and about any new measures to crack down on false trade financing. Thank you. [16:11] [Du Peng]: You just asked two questions, the first is how to guard against risks after the implementation of the reforms. As I have just now said, there are two priorities in current-account management, one is promoting trade facilitation and the other is guarding against risks. These are somewhat contradictory with one another. If great efforts are made to provide trade facilitation, management may be weakened, whereas if management is enhanced with the introduction of many regulations, companies will face inconveniences. This is a good question, but it is very tricky. The foreign exchange authorities have long been struggling with this issue, which will be effectively addressed during the reform of foreign exchange administration under trade in goods and trade in services: documents have been significantly simplified, many administrative licenses have been canceled, and, as I have just now said, the two reforms will be followed by two major and four minor reforms. In processing their foreign exchange, companies no longer have to come to the SAFE for verification, thus substantially promoting trade facilitation. [16:12] [Du Peng]: Regarding the regulations, an advanced comprehensive back-office monitoring system has been built. Currently, under the current account, including trade in goods, trade in services, and individual accounts, a sound and efficient monitoring system has been put in place. Scientific and rational threshold values have been established in the system, and basic information about companies can be obtained through the system. Under trade in goods, for example, companies need to first register, entering their relevant information into the system, so we can understand the industry in which they are engaged, their main businesses, the registered capital, and their business scope, and we must have a well-defined objective in mind when making analyses and comparisons. Second, a comprehensive regulatory system has been built within the system. Problems and issues at the macro, medium, and micro levels can be analyzed via the system. At the macro level, we can understand the overall situation regarding the receipts and payments of foreign exchange since the system can monitor any changes in receipts and payments. We can also promptly understand abnormalities in any region or any industry through medium-level analysis. Based on these problems, we can carry out a deep analysis and obtain some micro information, such as information about the company or the individual. [16:12] [Du Peng]: Third, enhancing the classified management of companies through monitoring. Classified management of companies follows a specific standard. For example, under trade in goods, the standard is whether the flow of capital and the flow of goods match one another. If not, the company will be required to make explanation, or we will conduct an on-site verification to identify any violating behavior by the company. Under trade in services, since there is no issue of matching between capital flows and goods flows, we need to rely on the system to judge and identify whether a company's capital inflows and outflows match its overall size and type of business, and whether its capital inflows and outflows increase substantially and frequently. With these approaches, we can efficiently verify companies and carry out classified management on such a basis. [16:12] [Du Peng]: Fourth, verification through banks and financial institutions. Since implementation of the reform of foreign exchange administration under trade in goods, documents have been substantially streamlined, and banks are now required to verify the authenticity and legitimacy of companies' transactions following the three principles of knowing your customers, knowing your business, and due diligence investigations. The above three approaches have been very helpful in guarding against risks. The following is some data that we should reveal: we took special actions last May to verify companies' structuring of trade after adoption of post regulation and during the month categorized 614 companies as Class-B companies and 3 companies as Class-C companies. This suggests that violating behavior by companies can be promptly identified using the above approaches. [16:13] [Du Peng]: We have long been concerned about such false trade and structuring of trade. We know that currently there are two markets, two exchange rates, and two interest rates. If the above circumstances are not changed, companies will continue financing from arbitrage through financial control. Given this, last year our foreign exchange inspection department conducted inspections of entrept trade, identifying within a short time and verifying 1,082 copies of false documents, which were worth USD 2.5 billion. In turn, in December 2013 the SAFE released a circular on improving foreign exchange administration associated with banks' trade financing business. As required by the circular, banks should verify the authenticity and legitimacy of trade financing, especially long-term trade financing that is longer than 90 days, while actively supporting the development of the real economy. Banks should conduct authenticity verifications based on the characteristics and abnormal transactions of a company, regardless of whether or not the deposit for trade financing has been paid in full. We have also enhanced monitoring of abnormal companies, especially those whose long-term trade financing has increased abnormally and has typical features of arbitrage. [16:13] [Du Peng]: In the meanwhile, we have intensified punishment of violating banks and companies. By the end of 2013 after the release of the circular, we issued more than 1,500 copies of risk notifications to companies engaged in trade financing, requiring them to make an explanation and guiding them to carry out a verification. Among these, during the month 251 companies were categorized as Class-B and Class C- companies, including 193 Class-B companies and 58 Class-C companies. After release of the circular, especially in the first quarter of this year, the balance of receipts and payments from entrept trade was down 26 percent year on year and 29 percent month on month, the signing value of usance L/Cs of more than 90 days was down 3 percent month on month, and the growth of the balance was down 11 percentage points, indicating significant results have been achieved. We will continue to pay close attention to this issue during the next step. As long as there are interest- rate spreads and exchange-rate spreads between China and other countries, there will be violating companies. Given this, we will step up efforts to verify companies, continue to require banks to enhance verification in accordance with the three principles, intensify punishment of violating companies, and have the creditability of discredited companies lowered in various departments through information sharing and mutual recognition in enforcement to curb the growth of false trade. [16:13] [Journalist from Economic Daily]: As you have just now said, China's surplus under the current account as a percentage of GDP has dropped year by year, and China's trade in goods surplus fluctuated sharply this year. Do you think China's surplus under the current account will continue to drop or will it remain stable in the near future? Thank you! [16:19] [Du Peng]: You have noted that China's surplus under the current account as a percentage of GDP in recent years has dropped year by year. Of investment, consumption, and exports, the three drivers behind China's economic growth, net exports contributed most to the economy, but in recent years they have fallen significantly as a percentage of China's GDP. The statistics we have collected show that China's surplus under the current account as a percentage of GDP has fallen within the internationally recognized rational range, or 4 percent, since 2010. The ratio further dropped from 2 percent in 2013 to 0.3 percent in the first quarter of this year, which is a product of our efforts in recent years to expand domestic demand, restructure, reduce the surplus, and promote a balance. Overall, falling within the rational range will have a positive influence on the balance of payments in China. [16:20] [Du Peng]: We believe that there will be a certain surplus in the receipts and payments of the current account for the foreseeable future, but its ratio to GDP will remain at a relatively low and rational level, and the trade in goods surplus will remain the major source of the surplus under the current account. Currently, the advanced countries that are our traditional export markets will see a stronger overall economic recovery than they did in 2013, so demand for our exports will rise. In the meanwhile, as the Chinese economy sustains stable growth while the prices of some bulk stocks in the global market remain low and lack sufficient momentum for growth, China's import growth will also remain stable. [16:20] [Du Peng]: But it is likely that trade in services will see a widened deficit in the future, especially travel and study abroad that account for a large proportion of the balance of trade in services, because Chinese residents' consumption, including travel and study abroad, is in a rising phase, which leads to large outbound payments. Overall, as the deficit and surplus accounts evolve and influence one another, the surplus under the current account will be volatile at a low level. In the next step, the foreign exchange authorities will continue to pay close attention to economic and financial developments both at home and abroad, especially the influence of the U.S. QE tapering on China's foreign exchange receipts and payments. To respond to these influences, we will follow the principle of balanced management, study timely solutions, and develop relevant response plans, lest there are some abnormal in or out capital flows during a certain period. Thank you! [16:21] [Journalist from China National Radio]: Since the current account in China is currently convertible whereas the capital account is not, some companies use funds under the capital account to conduct arbitrage through the current account. How will the reform of foreign exchange administration under the current account that enhances trade facilitation curb arbitrage and can it guard against risks in this respect? [16:21] [Du Peng]: Good question. I have given this lady some answers to this in the first question, and here I would like to repeat them briefly: we will guard against these risks through first, the system; second, classified management; third, bank monitoring; fourth, punishment of violating companies with abnormal capital inflows. Thank you. [16:22] [Journalist from People’s Daily Online] It has been emphasized by the central government that management by a negative list shall become the direction of management and reform, and you have also mentioned that among the “five changes” in foreign exchange administration there is also one “change” that focuses on replacing the “positive list” with a “negative list.” I am wondering how management by a negative list will be implemented during the reform of the current account. [16:37] [Du Peng]: I have just now also mentioned management by a negative list, which means that any transaction can be carried out unless it is explicitly forbidden by law. Preliminary exploration has been carried out to reform foreign exchange administration under the current account. We know that China started to accept the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund in 1996. Since then, relevant foreign-related receipt and payment activities under the current account have not been restricted provided that such activities have authentic and legitimate transactional backgrounds. This means, in principle, we do not have negative-list management under the current account, or, in other words, any business under the current account can be conducted. However, we have also conducted exploration and made efforts in this regard. We have mainly implemented negative-list management measures based on the classified management under trade in goods, which are targeted at special entities. [16:37] [Du Peng]: Currently we do not have specific document verification and approval requirements for Class-A enterprises engaged in trade in goods, and we only impose standards on the main principles that banks follow and the core vouchers that they require for authenticity verification as well as on certain key procedures. For Class-B and Class-C enterprises under trade in goods, we set limits on the scope of receipts and payments of their trade in goods in the form of a negative list. For example, it is stipulated that Class-B and Class-C enterprises are not allowed to make deferred payments of longer than 90 days nor are they allowed to sign export contracts that contain articles for receipt of foreign exchange of longer than 90 days, and Class-C enterprises are not allowed to handle receipts and payments of foreign exchange under entrept trade. In addition, we have set specific rules for personal businesses. All of this is what we have done to replace positive-list management with negative-list management. [16:38] [Du Peng]: With the development of the foreign exchange situation and changes in business in the future, it is not unlikely that we may impose restrictions on other activities. Except for such restrictions, all business under the current account can be conducted. This is part of our work in the process of transferring from positive-list management to negative-list management. [16:38] [Journalist from China Daily]: You have just now mentioned issues about cross-border payments, cross-border e-commerce, and third-party payments. Could you please say something more about this? [16:54] [Du Peng]: Cross-border e-commerce has received vigorous support from the government. From the perspective of management functions, the foreign exchange authorities mainly perform monitoring and management of receipts and payments as well as monitoring and management of exchange activities of enterprises. Therefore, the foreign exchange authorities chiefly support the development of cross-border e-commerce in terms of fund receipts and payments. Presently, we are conducting a third-party pilot payment program for cross-border e-payment commerce in 22 companies of five regions throughout the country, i.e., fund transfers of cross-border e-commerce organizations and individuals via third-party payments. These 22 companies are located in Beijing, Shanghai, Shenzhen, Chongqing, and Hangzhou. We are very cautious about this program as this is still an emerging business. [Du Peng]: Enterprises should first obtain a license from the People’s Bank of China for third-party payments if they wish to launch this business. Then they are required to set up an external electronic network based payment system. We will conduct an inspection of the system and allow them to launch this business if they pass the inspection. Based on the current situation, the volume of third-party payments is not very big because we have set some limits on the amount and scope of goods under trade in services, and we only allow micro-payments of less than USD 10,000 or the equivalent under trade in goods. [16:55] [Du Peng]: Currently we are summarizing the experience of the pilot program to identify related problems. For the next step, we may further expand the pilot-program efforts in regions, business varieties, and funds, which are all under exploration now. We may introduce some specific measures this year, for example, expanding the scope of enterprises and regions included in the program. Thank you for your question! [16:56] [Wang Yungui]: Thank you for your support and attention to foreign exchange administration. This is the end of the press conference today. Thank you! [16:56] (The original text was released at people.com.cn) 2014-07-23/en/2014/0723/1122.html
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To deepen the reform of the foreign exchange administration system, standardize receipts and payments under cross-border guarantees, and promote investment and financing facilitation for enterprises and the convertibility of the capital account in an orderly manner, the State Administration of Foreign Exchange (SAFE) recently issued the Regulations on Foreign Exchange Administration for Cross-border Guarantees (Huifa No. 29 [2014], hereafter referred to as the “Regulations”). Guo Song, director of the SAFE's Capital Account Management Department, provided an interview on the relevant issues. Q: What is the background for introducing the reform of foreign exchange administration for cross-border guarantees at this time? A: The major regulations on foreign exchange administration for cross-border guarantees prior to the reform were developed in the 1990s and they played a positive role in promoting China’s economic and technological cooperation with other countries, supporting the development of foreign trade, facilitating labor service exports, introducing advanced technology, equipment, and funds from other countries, and smoothly conducting external financial activities based on the historical conditions during that time. With the rapid development of China’s foreign-related economy and the expansion in the size of transactions in the balance of payments, cross-border guarantee activities have become increasingly diversified and complex. The previous regulations, which covered external guarantees and domestic loans with only overseas guarantees, are no longer able to satisfy the development requirements of the market. The relevant policies on guarantee management require redundant approval and verification procedures, and this management approach lags behind market demand. Further, these policies impose many limits on the qualifications for cross-border guarantees involved in domestic and overseas financing by enterprises, resulting in high operating costs for enterprises. Therefore, against the macro backdrop of promoting the streamlining of administration and decentralization and the liberalization of the capital account, the SAFE has adjusted the management concept under the guidance of the "five changes” and has introduced the Regulations at a proper time based on an adequate survey and solicitation of opinions during the preliminary phase. In the Regulations, the scope of foreign exchange administration for cross-border guarantees is rationally defined based on the objectives and duties of foreign exchange administration, and all types of cross-border guarantees whose form conforms to the legal requirements, use payments as an approach for performance, and may have a significant influence on the BOP are included in the scope of the policy adjustment, thus significantly liberalizing foreign exchange administration for cross-border guarantees, thus addressing the challenges confronted by domestic enterprises, such as the difficult and costly financing, and promoting the general process of the capital account. Q: What measures have been taken in this reform for streamlining administration and decentralization? A: The Regulations aim to vigorously promote the streamlining of administration and decentralization to significantly improve the investment and financing policy environment for domestic enterprises. All ex-ante approvals related to cross-border guarantees as well as ex-ante verifications for the performance of guarantees and most restrictions on business qualifications are eliminated and replaced by self-discipline and registration management; only “some cross-border guarantees for liabilities or claims of residents to non-residents newly added after the performance of the guarantees” are integrated into the scope of the deal-by-deal registration. Meanwhile, the relevant laws and regulations are streamlined and integrated and 12 normative documents related to foreign exchange administration for cross-border guarantees are abolished, thus improving the transparency of foreign exchange administration policies. Q: How will this reform address the problems of difficult and costly financing of domestic enterprises？ A: The reform will unify treatment for domestic and overseas enterprises, providing more financing facilitation for domestic enterprises. Among the external loans with domestic guarantees, the qualification restrictions on the trading players will be abolished and the differences in management policies between the financing guarantees and the non-financing guarantees, and between the banking institutions and the non-banking institutions, will be removed. Further, under the premise of meeting the relevant restrictions, the practice of ex-ante application to the SAFE for the relevant quota will be abolished and Chinese and foreign-funded enterprises will be allowed to sign contracts without submitting an application. Guarantees can be performed within the amount of one time of the net assets so as to unify and significantly improve the policy on domestic loans with overseas guarantees for Chinese and foreign enterprises in China. With guarantees from overseas institutions, domestic enterprises can raise funds from domestic financial institutions more conveniently and at a relatively low cost, which will reduce their financing difficulties and costs. Q: With the introduction of the Regulations, domestic institutions and individuals will no longer be required to obtain ex-ante approvals when providing external loans with domestic guarantees, and ex-ante verifications will no longer be required when the performance of the guarantee occurs. Will this provide conveniences for domestic institutions and individuals to transfer assets overseas? A: The Regulations abolish or significantly streamline the ex-ante approval and registration procedures for external loans with domestic guarantees, which is conducive to improving the policy environment for overseas investments and financing by Chinese enterprises and facilitating Chinese institutions and individuals to carry out investment and financing activities reasonably and legitimately in other countries. Therefore, the Regulations are aligned with the general requirement of serving the real economy through financial services. Meanwhile, to prevent domestic institutions and individuals from maliciously leveraging the channels for external loans with domestic guarantees to transfer assets overseas, the Regulations make sure that the potential reputational and financial costs of the guarantors due to malicious defaults will be raised substantially by taking an array of measures, such as disclosures of guarantee information, due diligence investigations by banks, verification of trends in the guarantor’s performance, control over new contracts after default, and off-site verifications and foreign exchange inspections, so as to encourage the guarantor to operate with integrity and in compliance with the laws and regulations. According to the Regulations, where the guarantor under external loans with domestic guarantees is a non-banking institution, the guarantor is not allowed to sign new contracts for external loans with a domestic guarantee without the approval of the SAFE before the overseas debtor pays off the debts to the domestic guarantor due to the guarantor's performance of the guarantee. To a certain extent, this will prevent domestic institutions and individuals from transferring assets overseas via the performance of the guarantee. Q: Are domestic organizations allowed to freely sign “other forms of cross-border guarantee” contracts other than those on external loans with domestic guarantees and domestic loans with overseas guarantees? A: According to the Regulations, with the exception that necessary foreign exchange registration formalities must be carried out and some restrictions on the qualifications must be followed for external loans with domestic guarantees and for domestic loans with overseas guarantees, domestic institutions can freely execute other forms of cross-border guarantee contracts. However, it should be noted that the Regulations only cancel the foreign exchange administration restrictions for the signing of the guarantee, which does not mean there are no restrictions on other fields closely related to the content of the guarantee contracts or that the restrictions have been abolished. For example, there are still necessary restrictive stipulations on foreign debt management, cross-border investments, and security interest. Therefore, although compliance situations in foreign exchange administration will not affect the effectiveness of the guarantee contracts, if conflicts occur between the contents of the contracts and the regulations on foreign exchange administration or the restrictive stipulations in other fields, the guarantee contracts may cease to be executable. To make sure the creditor under the guarantee can successfully claim guarantee rights and the guarantor can smoothly perform the guarantee performance obligations, the signing of the guarantee contracts must conform to “the principle of no potential conflict." In other words, unless otherwise expressly stipulated under the Regulations, the signing of cross-border guarantee contracts and possible new cross-border claims and debts relationships and the asset ownership relationship established after the performance of the guarantee contract shall not create potential conflicts with the existing stipulations for the capital account or other restrictive stipulations of the relevant departments. The guarantee contract cannot be performed if there is such a conflict and can only be performed if there is no such conflict. Therefore, this will effectively guard against the signing of cross-border guarantee contracts in violation of the relevant stipulations. Q: How will this reform guard against the risks associated with abnormal fund flows while facilitating cross-border guarantee activities? A: To address the risks incurred by the drastic increase in external claims and debts arising from the concentrated performance of large-amount guarantees and threatening the BOP, the Regulations take the following risk control measures: first, acquiring guarantee contract signing and performance data which may add to the external claims and debts on a deal-by-deal basis; second, restraining cross-border guarantee transactions among all parties involved via self-disciplinary requirements, such as a review of trends in guarantee performance (a due diligence investigation), temporary suspension of new contract signings after a default and a negative list for fund use; third, reinforcing monitoring and disposal of violations of guarantee activities via claims and debt registration, off-site verifications, and foreign exchange inspections; fourth, retaining the SAFE's power to make timely adjustments to the cross-border guarantee management approaches in accordance with the BOP guarantee clauses. With these arrangements, the risks of cross-border fund flows under guarantees will generally remain under control. Q: How can one make sure that all parties involved in the guarantee will earnestly perform their self-disciplinary obligations under the Regulations after the ex-ante approvals and verifications are abolished in an all-round way? A: On the one hand, this reform cancels all restrictive stipulations on foreign exchange administration and ex-ante approvals for contract signing; on the other hand, in order to retain “teeth” and satisfy the risk prevention requirements, a number of self-disciplinary restrictive stipulations which may lead to administrative penalties in cases of violations are retained. The above management approach features both delegation of powers and self-discipline and comes closer to the management concept under a market economy. It has clear self-disciplinary stipulations for relevant entities of cross-border guarantees, such as temporary suspension after defaults, verification of performance trends, restrictions on the use of funds, due diligence investigations, obligations of truthful statements and moral restrictions, and it sets out corresponding penalties so as to achieve the purpose of “ex-ante measures against gentlemen and ex-post measures against villains." Q: Currently, China’s foreign exchange receipts and payments are still under pressure from net inflows. Do the Regulations make any policy arrangements for this? A: With regard to the net inflow pressures on China’s foreign exchange receipts and payments, this reform has adopted differentiated institutional arrangements for different types of cross-border guarantees: the complex management formalities for external loans with domestic guarantees (creating external claims after performance of the guarantee) will be cancelled; proper standards and restrictions will be retained for domestic loans with overseas guarantees (generating external debts after the performance of guarantees) which may cause fund inflows. Q: We have noticed that in 2009 the SAFE put forward the “Five Changes" with respect to the concept of and approaches to foreign exchange administration, and has taken the “Five Changes” as its work priority since the very beginning of this year. How is this effort reflected in this reform? A: The introduction of the Regulations represents a crucial step in implementing the “Five Changes” in capital account management. Specifically, this reform has abolished the approval and verification of cross-border guarantees and has shifted work priority to the monitoring and analysis of cross-border capital flows, thus achieving the change from focusing on “approvals” to focusing on “monitoring and analysis.” While abolishing the quota verifications and approvals on a deal-by-deal basis, ex-post verifications of cross-border guarantee entities and behavior have been strengthened to realize the change from focusing on "ex-ante monitoring" to focusing on "ex-post management." The Regulations have weakened deal-by-deal compliance management for guarantee transaction behavior and have put more emphasis on management of domestic entities for guarantee transactions. While simplifying the standards for classifying the transaction entities, differentiated classified management is conducted for different types of entities. For example, management of banks is more liberalized than that of non-banking institutions, and management of large institutions is more lenient than that of small- and medium-sized institutions, thus achieving the transition from "behavior management" to "entity management." The qualification limitations in the ex-ante verifications for cross-border guarantees are canceled, the registration steps for certain types of guarantees are defined as a “procedural review,” and investigations of the violations are shifted to ex-post off-site verifications and foreign exchange inspections, thus achieving a change from “guilty until proven innocent” to “innocent until proven guilty.” Under the premise of significantly liberalizing cross-border guarantees, a “negative list” is proposed for fund use under the cross-border guarantees, thus achieving the change from a “positive list” to a “negative list.” Q: The Regulations have been officially implemented for over two months; could you please tell us something about their implementation? A: Since the official implementation of the Regulations on June 1, banks and enterprises have embraced this reform. Banks report the reform offers both challenges and opportunities, and Chinese enterprises have seen a remarkably shorter time for the handling of business with the local foreign exchange bureaus. Given the growth in business volume, the cross-border guarantee business has been operating smoothly. Among the external loans with domestic guarantees and domestic loans with overseas guarantees, the two types of cross-border guarantees that have been integrated into the registration management, the guarantee balance of the former is growing faster, with no abnormal growth in the performance of the cross-border guarantees. Q: What measures will the SAFE take to deepen this reform during the next step? A: During the next step, the SAFE will continue to pay close attention to market feedback and further satisfy policy appeals, promote investment and financing facilitation, and earnestly service the real economy. Meanwhile, cross-border guarantee statistical monitoring will be strengthened and off-site inspections and risk management will also be enhanced to lay a solid foundation for further deepening the reform of the foreign exchange administration system and for accelerating the convertibility of the RMB under the capital account. (Reporter: Xu Zhiping) (August 20, Financial News) 2014-10-21/en/2014/1021/1127.html
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The State Administration of Foreign Exchange (SAFE) recently issued the Circular Concerning the Issuance of Provisions on Foreign Exchange Management for Cross-border Guarantees (HuiFa [2014] No. 29) and a person-in-charge at the SAFE accepted an interview with the media on the Provisions on Foreign Exchange Management for Cross-border Guarantees (hereafter referred to as the “Provisions”). I. What is the background to the promulgation of the Provisions? The previous regulations regarding foreign exchange management pf cross-border guarantees included: the Administrative Measures on External Guarantees by Domestic Institutions (YinFa [1996] No. 302), the Rules for Implementation of the Administrative Measures on External Guarantees by Domestic Institutions ([97] HuiZhengFaZi No. 10), the Circular Concerning Issues related to the Management of External Guarantees by Domestic Institutions (HuiFa [2010] No. 39), and the Circular of the State Administration of Foreign Exchange on the Issuance of Administrative Measures for Registration of Foreign Debt (HuiFa [2010] No. 19). During the initial stage after the release of these regulations, they played a positive role in terms of promoting economic and technological cooperation with foreign countries, supporting foreign trade development, facilitating the export of labor services, introducing advanced foreign technologies, equipment, and capital, and smoothly conducting foreign-related financial activities, standardizing the behavior of the external guarantees, and strengthening management of the external guarantees . With the rapid development of China’s foreign-related economy and the ever-expanding scale of transactions in the balance of payments, the behavior of cross-border guarantees has become increasingly diversified and complex. However, the above regulations only cover external guarantees and domestic loans with offshore guarantees and they fail to include other types of cross-border guarantees, so they cannot satisfy our current requirements for market development. Meanwhile, with regard to the relevant guarantee management policies that have been clarified, the relevant approval and verification procedures are complex, and lag behind in terms of the management mode relative to the market requirements and result in relatively high management costs. Therefore, under the guidance of the “Five Transformations,” the SAFE adjusted its thinking about management, promoted the streamlining of administration and delegation of power to lower levels as well as the transformation of functions, and promulgated the Provisions in good time based on adequate investigations and solicitation of opinions at an early stage in order to facilitate cross-border guarantee activities and to promote capital account convertibility under the guarantee item. II. What is the main idea behind this reform in terms of the approach to cross-border guarantee management? The Provisions mainly reflect the following ideas about management: Firstly, streamlining administration and delegating power to lower levels. Cancelling or substantially cutting back on the scope of control over quantity and the scope of registration of cross-border guarantees, with only the part of “partial cross-border guarantees that generate new liabilities or claims by residents to non-residents upon the compliance of the guarantees” subject to registration on a case-by-case basis. Meanwhile, the laws and regulations have been clarified and consolidated, and twelve normative documents related to cross-border guarantees have been abolished. Second, functions are transformed. The boundary between foreign exchange management and regulatory responsibilities for cross-border guarantees is now rationally defined. Based on the objectives and responsibilities of foreign exchange management, the scope of foreign exchange management of cross-border guarantees is rationally defined and cross-border guarantees integrated into foreign exchange management shall have the following features: conforming to the requirements in terms of the forms in a legal sense, guaranteeing compliance with payment methods, determining the relative amount in the balance of payments, and so forth. Meanwhile, by giving due regard to higher law, international practices, and market demand, foreign exchange management shall be disconnected from judgments about the effectiveness of contracts on cross-border guarantee transactions. Foreign exchange registration conducted by the foreign exchange authorities in line with their statutory duties for the balance-of-payments statistics is different from the confirmation registration performed by the relevant authorities of the industry in terms of both purpose and effectiveness, and it cannot be used as collateral or for going against a third party. Third, ex-ante approval is changed to ex-post regulation. All ex-anti approvals have been cancelled and registration has become the major management approach. The ex-ante review and approval procedures for the conclusion and compliance of the guarantee contracts have been cancelled and have been replaced by proportional self- registration management; and most of the business qualification limits have been abolished. Fourth, risk prevention is strengthened. In parallel with streamlining administration and delegating power to lower levels, efforts are made to prevent cross-border guarantees from becoming a channel for abnormal capital flows by means of support systems and regulatory approaches. The monitoring and analysis responsibilities of the foreign exchange authorities are clarified to emphasize off-site verifications, monitoring, and inspections, and to strengthen investigations of violation responsibilities. III. What is the content of this reform in terms of foreign exchange management of external loans with domestic guarantees? In the Provisions, the major content of the management of external loans with domestic guarantees includes: 1. Cancelling the quantity controls for external loans with domestic guarantees. Cancelling the ex-ante approvals or indicator verifications for financing or non-financing of external loans with domestic guarantees of domestic institutions. 2. Cancelling unnecessary qualification limits. Except for general restrictive clauses (e.g., on the use of guarantee funds) universally applicable to all institutions, qualification limits are abolished for specific entities (the requirement of the asset and liabilities ratio of the guarantor and the guarantee, or of related-party relationships) or for specific transactions (e.g., non-financing guarantees). 3. Registration is the major mode of management. Statistics and monitoring shall be conducted on external loans with domestic guarantees within the existing capital account information system. 4. Approvals for the compliance of guarantees are cancelled. Banks can handle the compliance of external guarantees on their own, and non-banking financial institutions and enterprises can handle compliance procedures with the banks based on the registration certificate for the guarantee. 5. Where external claims are generated upon the compliance of the guarantee, registration of external claims shall be handled as per the relevant requirements. IV. What is the content of this reform in terms of foreign exchange management of domestic loans with offshore guarantees? In the Provisions, the major content with respect to management of domestic loans with offshore guarantees includes: 1. Clarifying the business qualifications. The creditors shall be domestic financial institutions, the debtors shall be non-financial institutions, and the guaranteed liabilities can only be common loans or credit lines in the home currency or in foreign currency. 2. Centralized registration of the creditors. The creditors (i.e., domestic financial institutions) shall handle the filing of the statistics with the foreign exchange authorities via the capital account information system in a centralized manner. 3. The creditors shall handle collection of the payment for the compliance of the guarantees on their own. Domestic financial institutions can handle collection of the payment for the compliance of the guarantees directly with the overseas guarantors. 4. Debtors shall handle the external debt registration upon the compliance of the guarantee. Where external debts are generated upon the compliance of the guarantee, external debt registration shall be carried out, but it will not be subject to the quota for common external debts. With regard to external debts incurred by the compliance of domestic loans with offshore guarantees, the balance of the outstanding principal shall not exceed one time the value of the debtor’s net assets. V. According to the Provisions, in addition to external loans with domestic guarantees and domestic loans with offshore guarantees, how shall other cross-border guarantee contracts signed by domestic institutions be managed? According to the Provisions, with the exception of the necessary foreign exchange registration procedures that shall be performed and the certain qualification limits that shall be maintained for external loans with domestic guarantees and for domestic loans with offshore guarantees, domestic institutions can conclude cross-border guarantee contracts in other forms on their own. It should be emphasized that for cross-border guarantee contracts in other forms, the Provisions only abolish the limits on the conclusion of the guarantee contracts in terms of foreign exchange management, and the claim of the guarantee rights by the creditor under the guarantee item and the fulfillment of the guarantee compliance obligations by the guarantor shall still conform to the relevant administrative provisions on the external debt, direct investments, portfolio investments, and so forth. VI. How shall relevant risks be prevented and controlled after this policy reform? In order to address the risks from the sharply rising external claims and debts incurred by the large centralized guarantee compliance resulting from exposure to the international balance of payments, the following major risk control measures are adopted by the Provisions: First, statistics on the conclusion and compliance of the guarantee contract, which may lead to newly-added external claims and debts, shall be collected on a case-by-case basis. Second, cross-border guarantee transaction activities of all parties involved shall be restrained by means of guarantee compliance audit reviews (due diligence review), temporary suspension of contract conclusions after default as well as a negative list approach for capital use and other self-disciplinary requirements. Third, monitoring and disposal efforts will be reinforced for guarantee activities in violation of the regulations by adopting measures such as registration of claims and debts, off-site verifications, and foreign exchange inspections. Fourth, rights to conduct timely adjustments to the cross-border guarantee management patterns will remain with the foreign exchange authorities by means of the balance-of-payments safeguard clause. Through the above arrangements, cross-border fund flow risks under the guarantee item can be kept controllable. VII. In what respects does foreign exchange management reform of cross-border guarantees promote capital account convertibility? Release and implementation of the Provisions will achieve policy consistency in foreign exchange management for cross-border guarantees and a basic convertibility of cross-border guarantees. These are reflected in the following areas: in the field of domestic guarantees with external loans, although ex-ante approvals, approvals for the guarantee compliance, and most of the qualification limits are abolished, this reform maintains case-by-case registration in the contract conclusion process; while in the field of domestic loans with offshore guarantees, under the premise of conforming to the relevant restrictive conditions, Chinese- and foreign-funded enterprises are permitted to conclude contracts on their own and to handle guarantee compliance that is within one time the value of their net assets. Thus the policies on domestic loans with offshore guarantees for Chinese- and foreign-funded enterprises in China are unified and significantly improved. 2014-07-07/en/2014/0707/1117.html
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In order to promote and regulate development of the foreign exchange market and to strengthen its self-regulatory administration, currently, under the guidance of State Administration of Foreign Exchange and organized by China Foreign Exchange Trade System, the interbank foreign exchange market maker has formulated and released the Guidelines on the Professional Ethics and Market Practices in the Interbank Foreign Exchange Market (hereinafter referred to as the Guidelines). The Guidelines are a self-regulatory document aimed at regulating transactions in the interbank foreign exchange market and an effective supplement to the regulatory documents, conducive to promoting the establishment of a new foreign exchange market administration framework, led by industry self-regulation and assisted by government regulation. FILE: Guidelines on the Professional Ethics and Market Practices in the Interbank Foreign Exchange Market 2014-08-18/en/2014/0818/1124.html