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A national work conference on foreign exchange administration was recently held in Beijing. Following the spirit of the 18th CPC National Congress, the Third and Fourth Plenums of the 18th CPC Central Committee and the Central Economic Work Conference, the conference reviewed foreign exchange administration in 2014, analyzed the current economic, financial, and BOP situations, and made plans for foreign exchange administration in 2015. Yi Gang, SAFE administrator and PBC deputy governor, delivered a work report. Deputy administrators, discipline and inspection heads, chief accountants, heads of the SAFE branches (foreign exchange administration departments) and divisions of the SAFE participated in the conference. The conference pointed out that following the plans of the CPC Central Committee and the State Council and under the direct guidance of the CPC Committee of the PBC, the foreign exchange administration departments have regarded the reform of foreign exchange administration as a top priority in 2014. Specifically, the conference promoted the "five shifts" in foreign exchange administration and reduced the administrative approval items in order to streamline administration, delegate power, and facilitate trade and investment. The conference also launched pilot reforms, such as centralized operations for the foreign exchange capital of MNCs and voluntary settlement of foreign exchange capital to promote development of the foreign exchange market and to further expand the capital utilization channels for "going global." The conference also improved the statistics and monitoring system for cross-border capital flows and stepped up foreign exchange inspections to strengthen capabilities for on-going and ex-post regulation. In addition, operations, management, and utilization of foreign exchange reserves were enhanced and capabilities were consistently improved to serve the economic restructuring, transformation, and upgrading. To sum up, the conference successfully completed the tasks established at the beginning of the year. The conference stressed that 2015 will be key to deepening the reform and will mark the first year to advance the rule of law as well as the last year to complete the 12th Five-year Plan. During the year, following the spirit of the 18th CPC National Congress and the Third and Fourth Plenums of the 18th CPC Central Committee and the plans of the Central Economic Work Conference, the foreign exchange administration departments should adapt to the new normal in economic development and accelerate the "five shifts" in foreign exchange administration to achieve the goal of realizing a basic equilibrium in the BOP. Focusing on making breakthroughs in the reform, the convertibility of cross-border capital and financial trade should be increased in good order, the foreign exchange market should be further developed, risk-prevention controls should be intensified, and an external debt and management system for capital should be built and improved under a macro-prudential management framework, and the operations, management, and utilization of the foreign exchange reserves should be enhanced innovatively so as to promote stable and healthy economic development. The conference also set the working priorities for foreign exchange administration in 2015. The foreign exchange authorities will be required to: first, adhere to law-based administration and continue to promote administrative streamlining and delegation of power in terms of foreign exchange administration; second, continue with the reform and opening up and accelerate capital account convertibility; third, maintain a bottom line for risks by intensifying monitoring, warnings, and risk responses with respect to cross-border capital flows; fourth, transform management by accelerating the building of an external debt and capital flow management system under a macro-prudential framework; fifth, put heavy pressure on those who break the laws and crack down on illegalities and foreign exchange violations; sixth, promote the development of the foreign exchange market under guidance of the market; seventh, promote innovative utilization of the foreign exchange reserves and further improve the operations and management of the foreign exchange reserves to serve the overall economic interests; eighth, step up efforts to accomplish basic tasks, such as news promotion and research based on the work priorities; and ninth, continue with strict management by enhancing CPC building, team building, and internal management, and stepping up efforts to clean up the work styles and to promote integrity among CPC officials. 2015-01-16/en/2015/0116/1143.html
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In order to facilitate settlement and sales of foreign exchange by banks and based on the Administrative Measures for Foreign Exchange Settlement and Sales by Banks (People’s Bank of China DecreeNo. 2 [2014], hereafter referred to as the “Measures”), the State Administration of Foreign Exchange recently issued a Circular on Printing and Distributing the Detailed Rules for the Implementation of the Administrative Measures for Foreign Exchange Settlement and Sales by Banks (Huifa No. 53 [2014], hereafter referred to as the “Rules”). In order to carry out the reform agenda regardingstreamlining administration and delegating power to lower levels, these Rules integrate the regulations on market entry for foreign exchange settlement and sales by banks, administration of spot foreign exchange settlement and sales, management of RMB and foreign exchange derivatives and the comprehensive position of foreign exchange settlement and sales by banks, and make adjustments to some of their content. The highlights are as follows: First, management of market entry for foreign exchange settlement and sales and RMB/foreign exchange derivatives transactions will be integrated, and the filing procedures for foreign exchange settlement and sales by banks will be simplified. Second, the requirement of unified service marksfor RMB and foreign currency conversions for individuals is abolished and substituted by the provision that banks conducting foreign exchange settlement and sales to individuals shall put the service mark in a conspicuous position. Third, daily examinations of the comprehensive position of foreign exchange settlement and sales will be substituted by a weekly examination, while the policy that links the comprehensive position of foreign exchange settlement and sales with the foreign exchange loan-to deposit ratio is abolished. Fourth, the approval authority forRMB and foreign currency conversion of the equity capital (working capital) of banks will be delegated to lower levelsandthe approvals for the foreign exchange settlement and sales by banks on behalf of their debtors will be cancelled. Last, the principles of “understanding your transactions, knowing your customers, and performing due diligence” are specified for foreign exchange settlement and sales. The Rules will come into effectas of January 1, 2015. 2015-01-20/en/2015/0120/1144.html
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To further enhancethe policy transparency regarding foreign exchange administration, the State Administration of Foreign Exchange (SAFE)continued toreinforce legislations in key areas and sort out regulations, and improved regulations on administration of foreign exchange sales and settlement by banks and foreign exchange administration for overseas listingin the second half of 2014. Meanwhile, the SAFE rescinded and announced invalid some foreign exchange administrative regulations as the foreign exchangeadministration reform proceeded. 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 259 policies, laws and regulations on foreign exchange administration released as of December 31, 2014, 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-basedforeign exchange administration. 2015-02-09/en/2015/0209/1147.html
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To implement the requirements of the CPC Central Committee and the State Council to streamline administration and decentralization, and the administration by law, to further improve the transparency of the foreign exchange administration policies, and to promote trade and investment facilitation, the State Administration of Foreign Exchange (SAFE) has recently released the Circular of the SAFE Announcing Thirty-four Repealed and Expired Regulatory Documents on Foreign Exchange Administration (Huifa No. 44 [2014]), based on ongoing efforts to streamline effective foreign exchange administration regulations in a centralized manner. According to the Circular, thirty-four regulatory documents on foreign exchange administration will be abolished or will expire, among whicheighteen will be abolished and sixteen will expire. Such documents include five comprehensive regulations, two regulations on foreign exchange administration under the current account, nine regulations on foreign exchange administration under the capital account, ten regulations on supervision of the foreign exchange business of financial institutions, three regulations on the RMB exchange rate and the foreign exchange market, two regulations on the balance of payments and foreign exchange statistics, and three regulations on foreign exchange inspections and application of the laws and regulations. The SAFE will next continue to engage in a long-term mechanism to clear up the laws and regulations, carry out such work on a regular basis so as to provide facilitation to banks, enterprises, and individuals to understand and utilize the laws and regulations on foreign exchange administration, carry forward foreign exchange administration according to law, and promote the facilitation of trade and investment. 2014-11-26/en/2014/1126/1128.html
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To standardize and improve foreign exchange administration for the overseas listed domestic companies, and facilitate market operations, the State Administration of Foreign Exchange (SAFE) has recently released the Circular on Foreign Exchange Administration for Overseas Listings (Huifa No. 54 [2014], “Circular”), cancelling the approval for settlement of foreign exchange under repatriated funds raised overseas, in an effort to simplify registration and data submission. The Circular stresses administration streamlining, power delegation and simplified management to further facilitate domestic companies in foreign exchange operation for overseas listing. It is highlighted as follows: First, cancel approval for settlement of foreign exchange under repatriated funds raised overseas under overseas-listed foreign-invested shares, and allow overseas listed companies to directly settle foreign exchange with banks. Second, integrate foreign exchange accounts. Domestic companies and their domestic shareholders can open their own foreign exchange accounts for centralized funds remittance and transfer if necessary. Third, allow the repatriation, unrestricted foreign exchange settlement and transfer of remaining funds after outward remittance through activities including repurchase by domestic companies and share increase by their domestic shareholders. Last but not least, abolish printed statements to simplify registration and data submission. The circular shall come into force as of the date of release. 2015-01-28/en/2015/0128/1145.html
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Since the beginning of 2014, the SAFE has further intensified efforts to sort out the laws and regulations, based on which the directory of major laws and regulations on foreign exchange administration currently in effect was updated. The updated Directory of Major Laws and Regulations on Foreign Exchange Administration Currently in Effect (as of July 31, 2014, hereinafter referred to as “Directory”) has been posted on the official Web site of the SAFE. The Directory includes a total of 297 laws and regulations on foreign exchange administration. Grouped into eight major items, 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 statistics, foreign exchange administration statistics, foreign exchange inspections and application of the laws and regulations, and the scientific administration of foreign exchange, the policies and regulations are further divided into some sub-items based on the their specific types of business in order to facilitate public inquiries. The State Administration of Foreign Exchange will further establish and refine the long-term mechanism for sorting out the laws and regulations and will regularly update the Directory so as to increase knowledge and its use by banks, enterprises, and individuals in an effort to promote law-based foreign exchange administration. 2014-11-26/en/2014/1126/1130.html
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In order to implement the spirit of the Third Plenary Session of the 18th CPC Central Committee, further streamline administration and delegate power to lower levels, diversify market players, and promote the development of the foreign exchange market, the Circular of the State Administration of Foreign Exchange on Adjusting the Relevant Management Policies Regarding Entry into Inter-bank Foreign Exchange Market by Financial Institutions (Huifa No. 48 [2014], "the Circular”) was recently released by the State Administration of Foreign Exchange (SAFE). The major contents of the Circular include: First, to promote the streamlining of administration and the delegation of power to lower levels, to cancel ex-ante approvals for financial institutions to enter the inter-bank foreign exchange market, and to give further play to the regulatory functions of market mechanisms. Second, to improve market supervision, to define the basic transaction rules for financial institutions in the inter-bank foreign exchange market, and to continue to facilitate the establishment of a new foreign exchange market management framework that focuses on both government supervision and market discipline. Third, to clean up and consolidate the laws and regulations, to repeal four foreign exchange management documents involving the entry of financial institutions into the inter-bank foreign exchange market, and to enhance the transparency of foreign exchange management policies. This Circular shall take effect as of January 1, 2015. 2014-12-17/en/2014/1217/1140.html
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The State Administration of Foreign Exchange (SAFE) recently issued a circular announcing that the Regulations on Centralized Operations and Management of MNCs’ Foreign Exchange (Interim) (HuiFa No. 23 [2014], hereinafter referred to as the Regulations) will come into force as of June 1, 2014, in an attempt to deepen the pilot reform on centralized operations and management of multinationals’ (MNCs’) foreign exchange based on the early stage of the reform. A responsible person from the SAFE provided an interview to the press. I. What are the objectives of deepening the pilot reform on centralized operations and management of MNCs’ foreign exchange? A: The objectives include: first, to serve the real economy. Trade and investment facilitation will be vigorously promoted to further reduce operating costs for enterprises, to help enterprises make full use of the two markets and the two resources, and to support the economic development of MNC headquarters by creating conditions for industrial transformation and upgrading. Second, to further streamline administration and to delegate power to lower-level governments. Efforts will be made to advance the transformation in the concepts and approaches to foreign exchange administration and to make full use of the decisive role of the market in terms of resource allocations. Third, to explore capital account convertibility systems and mechanisms that can be replicated and promoted; to encourage enterprises and banks to make business innovations and to explore exchange facilitation for investment and financing, thus reducing foreign exchange administration costs, enhancing the international competitiveness of enterprises and banks, and continuing to release reform dividends. Fourth, to carry out integrated regulation and to enhance risk prevention and controls. Efforts should be made to conduct macro-prudential administration, to improve the orderly bi-directional flow mechanism for cross-border capital, to enhance analysis of the declaration and monitoring of data, and to firmly stick to our bottom line in terms of guarding against systemic and regional financial risks. II. According to our understanding, the pilot reform was kicked off at the end of 2012. What are the considerations this time around for deepening the pilot reform? A: In order to strengthen financial support for cross-border trade investment, since December 1, 2012 the SAFE has carried out three stages in the pilot reform of centralized operations and management of MNCs’ foreign exchange in 12 provinces and cities throughout the country. Seventy-three enterprises have joined the pilot reform (including 2,247 member units both at home and abroad), and 12 domestic and foreign banks have become pilot cooperative banks. The pilot reform, fully following market demand, has produced significant results. First, financial costs for enterprises have been reduced dramatically, thus significantly benefiting the real economy. For example, in Beijing alone, within one year the pilot enterprises delivered more than RMB 100 million in comprehensive returns. Second, the policy environment for a “headquarters economy” has been further optimized, thus promoting an upgrading of the industrial structure. As the pilot reform has proceeded, some MNCs have promoted their financial management centers in China to financial management centers in the Asia-Pacific region, and some have established worldwide regional settlement centers in China. Third, the international competitiveness of banks has been enhanced. Some pilot banks have witnessed a steady increase in market share and have achieved mutual benefits and a win-win situation with enterprises by providing innovative capital management services for the MNCs. Fourth, breakthroughs have been made in the existing framework, thus accumulating rewarding experiences for exploring regulation by market players and capital account liberalization. Fifth, risk prevention and control measures have been put in place, making sure the risks of foreign exchange receipts and payments remain under control. As the pilot results prove that centralized operations and management of MNCs’ foreign exchange are rather mature and effective and have been well received and supported by enterprises, banks, and local governments, the conditions for further deepening the pilot reform have been met. As a result, the SAFE has introduced these Regulations. III. What improvements and innovations are now being made in terms of deepening the pilot reform? A: This reform, unlike the existing management system that distinguishes the current account from the capital account, breaks down the regular boundary between the current account and the capital account, centralizing management of the foreign exchange of domestic and overseas member enterprises respectively by engaging MNCs that have a relatively sound corporate governance structure and reducing overall settlement and exchange costs and providing enterprises with wider space for capital operations, thus reflecting the servicing of the real economy. First, by making innovations to the MNCs’ account system. MNCs are allowed to open either domestic or international accounts, or both, for foreign exchange to carry out centralized foreign exchange management of domestic and global member enterprises. The master account for international foreign exchange may be used free of charge for overseas transfers without quota limits, and the funds under the domestic and international accounts may be conditionally transferred among one another. It is advised that funds be transferred in line with the specified limits for the external debt and outbound lending so as to provide financing benefits to domestic and overseas members. Second, facilitating the centralized utilization of funds by MNCs. MNCs can carry out centralized collections of funds from different member enterprises and of funds of different natures under the same account. They can handle receipts and payments of funds under the current account for domestic member enterprises, carry out centralized fund receipts and payments and netting settlements, and engage in direct investments, external debt, and outbound lending to reduce their financial costs. Third, further simplifying the document review process. Banks should process the receipts, settlements, purchases, and payments of foreign exchange under the current account in line with the principles of "understanding the customers," "understanding their businesses," and “carrying out due diligence reviews." A form must be filed for recording taxes for outbound payments under trade in service items. Fourth, limits on the external debt and outbound lending may be utilized in a coordinated manner. MNCs can either manage or utilize all limits on the external debt and outbound lending of member enterprises in a centralized manner, or can centralize some of the limits on the external debt and outbound lending to facilitate adjustments to the surpluses and deficits among member enterprises. Fifth, managing capital fund and external debt settlements of foreign exchange based on a "negative list" approach. The foreign exchange of capital funds and external debt may first be settled by entering the special RMB deposit accounts opened by the enterprises and it may be paid after verification of its authenticity. IV. To which market players is the policy for deepening the pilot reform applicable, and what are the application procedures? A: MNCs (member enterprises are consolidated for calculation), or single enterprise groups with foreign exchange receipts and payments equal to or exceeding USD 100 million in the prior year, whether China-funded or foreign-funded, can engage in the pilot reform on centralized operations and management of MNCs’ foreign exchange if they have real business requirements and specified management measures and approaches, have no material behavioral violations with respect to foreign exchange, and their trade in goods are classified as Category A. However, deepening the pilot reform cannot be completed once and for all; it should be advanced in phases, with priority given to those enterprises with significant business requirements, sound internal-control mechanisms, and strong risk-control capabilities. Based on the demands of the real economy, the pilot reform will be able to meet the development requirements for foreign exchange receipts and payments and to follow the principles for progressive development and smooth and steady implementation, without mandatory participation by enterprises. Enterprises that plan to carry out the pilot reform should submit in advance the documents to be filed with the branches of the SAFE and upon filing they can start up such businesses. The SAFE branches will provide supervision by strengthening monitoring and analysis. V. How does one apply for the filing procedures to engage in the pilot reform? A: The filing procedures are divided into two parts. First, the operations procedures of the SAFE branches for filing with the SAFE. If the branches plan to carry out centralized operations and management of MNCs’ foreign exchange in their respective jurisdictions, they should formulate and refine their operations procedures, such as the conditions for access based on the Regulations and the actual local situation, and should implement the procedures after filing with the SAFE according to the procedures. In order to ensure that the centralized operations and management of MNCs’ foreign exchange are conducted smoothly and to provide facilitation to enterprises to engage in such business, the branches should complete the filing procedures by June 1, 2014. Second, MNC filing with the SAFE branches. MNCs, such as those in the Shanghai Pilot Free Trade Zone, should file with the local SAFE branches before engaging in such business. MNCs that had already started this business prior to implementation of the Regulations do not need to file with the branches if they plan to continue their previous framework and policies for centralized operations and management of foreign exchange; if they plan to adjust the pilot plan in accordance with the Regulations, they only need to submit to the branches those materials, such as their modified business requirements, rather than those materials that have already been submitted. The branches shall complete the filing procedures and issue the notice of filing within 20 days upon receipt of the filing of the completed application materials. VI. After starting the pilot reform, how will MNCs carry out the centralized receipts and payments of foreign exchange and netting settlements under the current account? A: MNCs can designate a sponsor to carry out the foreign exchange receipts and payments under the current account on behalf of the domestic member enterprises in a centralized manner, to centralize the accounting of foreign exchange receivables and payables under the current account during a certain period of time, and to settle the net amount after the receipts and payments are offset. In principle, the netting settlement should be conducted at least once every calendar month. The procedures for foreign exchange collections and settlements, as well as for purchases and payments, have been significantly streamlined, and the administering banks should conduct the relevant business in line with the principles of “understanding the clients,” “understanding their businesses,” and “carrying out due diligence reviews.” Although the MNCs’ foreign exchange receipts and payments under the MNCs’ current account have been greatly facilitated, banks and enterprises should perform their corresponding legal obligations to ensure the authenticity of the transactions. When a bank verifies the authenticity, it should retain the documents for five years for future review; and the enterprise should retain the receipt-related and payment-related documents for each transaction for five years for future review. For both the actual receipt and payment data of the sponsors and the original receipt and payment data of the member enterprises prior to the centralized receipts and payments or netting settlements, the BOP statistical declaration and the information on the verification declaration on the trade in goods should be carried out as per all the relevant stipulations. All SAFE branches should enhance off-site monitoring and on-site verifications and examinations by making full use of technologies, such as the monitoring and analysis platform for cross-border capital flows. VII. As the pilot reform is conducted, how will the MNCs handle voluntary foreign exchange settlements under the external debt and foreign direct investments (FDI)? A: When MNCs operate and manage foreign exchange under the external debt and FDI in a centralized manner, they can make adjustments in the use of funds among the domestic member enterprises and can voluntarily settle the foreign exchange. Foreign exchange under FDI includes foreign exchange capital funds, funds under the asset realization account, as well as funds under the domestic reinvestment account. The following regulations should be followed with respect to foreign exchange settlements: First, foreign exchange settlements should be conducted by the sponsor designated by the MNCs via the master domestic account that they have opened for the foreign exchange. Second, RMB funds obtained from the foreign exchange settlement should be transferred to the corresponding special RMB deposit account opened by the sponsor (capital account—the account for payment after the settlement of the foreign exchange). When the use of funds is applied, the opening bank should make direct payments upon verifying the authenticity and should retain the relevant documents for five years for future review. The relevant documents may be those involving items that fall within the business scope of the sponsor or those involving items that fall within the business scope of the member enterprises. In principle, the documents should be submitted by the fund user. Third, the use of funds after the settlement of the foreign exchange should follow the prevailing regulations on foreign exchange administration and should not be used for purposes prohibited by the laws and regulations. Fourth, banks and enterprises should submit foreign exchange settlement and payment data to the relevant business information system of the foreign exchange authorities in a timely and accurate manner as per the regulations. VIII. After the MNCs carry out the pilot reform, how should they declare the BOP? A: The sponsor and member enterprises for the centralized operations of the MNCs’ foreign exchange should declare to the banks the nature of the cross-border fund receipts and payments as per the stipulations and should declare the BOP statistics. First, the receipt and payment of cross-border funds via the master domestic and international accounts for foreign exchange should be declared in accordance with the BOP declaration requirements for cross-border fund receipts and payments. The fund receipts and payments between the master domestic and international accounts for foreign exchange and domestic non-residents should be declared based on the requirements for transactions between domestic residents and domestic non-residents. Second, capital transfers between principal domestic and international accounts for foreign exchange are not subject to BOP declarations, but the relevant data should be submitted based on the requirements for foreign exchange transfers between domestic residents. Third, with respect to the BOP declaration for centralized receipts and payments or netting settlements under the current account, declaration of the actual payment data and the original receipt and payment data that are recovered from each deal should be differentiated. IX. What measures will be taken to prevent and control risks from deepening the pilot reform? A: First, the “valve” for controlling and regulating the limits will continue to be rigorously implemented. Transfers between the master international and domestic accounts will be conducted within the specified limits for the external debt and outbound lending. Second, data monitoring will be strengthened. Special account codes will be assigned to the master domestic and international fund accounts to collect foreign exchange receipt and payment information; data recovery declarations will be conducted for centralized receipts and payments as well as for netting settlements. Third, the responsibilities of banks and enterprises will be stressed. Banks and enterprises will sign confirmation letters to ensure business compliance. Fourth, verifications and inspections will be enhanced. When banks and enterprises conduct the relevant business, they will be required to retain the relevant documents for future review and to strengthen statistical data monitoring and analysis via the cross-border fund monitoring platform of the foreign exchange authorities to ensure the controllability of risks. 2014-06-20/en/2014/0620/1113.html
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The Decision on Major Issues Concerning Comprehensively Deepening the Reforms (hereafter, the Decision), deliberated and adopted at the Third Plenum of the 18th CPC Central Committee, makes significant arrangements for the next phase of China’s market-oriented financial reform. What is new about the reform? How will the reform be advanced? A reporter from Xinhua News Agency recently interviewed Yi Gang, deputy governor of the People’s Bank of China (PBC) and administrator of the State Administration of Foreign Exchange (SAFE). Accelerating liberalization of interest rates and deregulating deposit interest rates when conditions are met. Xinhua Reporter: How do you understand the change in the expression from “steadily push ahead with” to “accelerate” with respect to interest-rate liberalization in the Decision? How will we accelerate? Yi Gang: Interest-rate liberalization is a key to China’s market-oriented reform. As highlighted by the Decision, China will allow the market to play a decisive role in allocating resources, which will require the introduction of interest-rate liberalization, thus leading to the new expression in the Decision. Interest rates include deposit interest rates, loan interest rates, as well as interest rates for bonds and financial products. The interest rates for bonds and financial products have been liberalized for many years and loan interest rates have also been fully liberalized. Only the deposit interest rate is yet to be liberalized, but we will push ahead with marketization of the deposit interest rate when conditions are met. “Conditions are met” means replacing the current deposit interest rate adopted by the central bank possibly by the Shanghai interbank offered rate (the Shibor) or the 7-day repo rate. When commercial banks are fully accustomed to fixing prices by adding or deducting basis points based on the Shibor or when commercial banks verify internal capital based on the market benchmark, it will be time to liberalize deposit interest rates. Since deposit interest rates affect everyone, we will be very prudent in terms of their liberalization. Instead of being low, China’s deposit interest rates are actually well in excess of those in many external currencies, such as the HKD, USD, EUR, YEN, and GBP. The liberalization of deposit interest rates will be instrumental for allowing markets to play a better role in resource allocations, thus benefiting the public, financial institutions, and SMEs, and it will be favorable for the development of financial products. Accelerating capital account convertibility to improve the global competitiveness of the Chinese economy Xinhua: Regarding capital account convertibility, what does the substitution of the new expression “accelerate” to replace “gradually achieve” in the Decision indicate? Is there a timetable for this? YG: China achieved current account convertibility for the Renminbi in 1996, contributing to the rapid development of its foreign trade. Since China’s external investments and foreign investments in China do not match China’s economic conditions, it is necessary to achieve capital account convertibility. If the capital account is convertible, China will become a power with external investments and also a place that will be most attractive to global capital. With such an internally and externally liberalized capital market, China will see substantial improvements both in productivity and competitiveness. But there are worries that capital account convertibility will mean full liberalization and the free flow of hot money into and out of China. These worries are unnecessary. As stated in the Decision, efforts will be made to improve the external debt and capital flow management system under a macro-prudential framework, suggesting that we should monitor capital to make it easy to convert and that we should deepen the monitoring of the balance of payments statistics and the cross-border capital flows. When the capital account is convertible, mechanisms for anti-money laundering, anti-terrorism financing, and anti-tax havens will be maintained. This will be a step-by-step and orderly process rather than allowing free flows of hot money without management. Xinhua: As highlighted in the Decision, efforts should be made to push ahead with a two-way opening of the capital market. Can we interpret a two-way opening to mean Chinese residents will buy foreign stocks and foreign investors will buy A-shares? YG: A two-way opening of the capital market with respect to liberalization of the capital market as well as the bond market and other derivatives markets has multiple indications and will be advanced step by step. It means that Chinese investors can use two kinds of resources and two markets to optimize resource allocations on a broader scale. With more options, higher efficiency, and a broader horizon, China’s economic agents will have wider freedoms. Steadily accelerating capital account liberalization will be conducive to outbound investments by Chinese firms, including direct investments, co-financing, greenfield investments, equity investments, and M&A investments. We need to address the multiple needs of firms. However, worries about more outflows than inflows are unnecessary. Since China is the largest emerging market, managers of global assets can be expected to deploy their assets to China and to show great confidence in China. If the market is opened up further, offering more conveniences to global investors to access the Chinese market with respect to assets allocations and investments, China will become more attractive to the world. Allowing private capital to set up banks and quickly building a deposit insurance system Xinhua: As stated in the Decision, qualified private capital will be allowed to set up financial institutions, such as small- and medium-sized banks. I am wondering what measures will be taken in this regard? YG: This is a very important decision. Allowing qualified private capital to initiate banks is undoubtedly a further step in opening up the domestic market. This move will make sure that public capital, the non-public economy, and private capital will move into the banking sector on an equal basis to deliver easy and efficient financial services to the society, ultimately benefiting micro and small businesses as well as the general public. Xinhua: The Decision highlights that a deposit insurance system will be established. What will this consideration be based on? Does this indicate that people’s bank deposits will be safe? YG: Responsible departments are actively preparing schemes related to the deposit insurance system and will launch the system in the near future. There are three priorities in the deposit insurance system. First, this system is designed to protect depositors’ interests and rights for the benefit of the absolute majority of depositors. Second, unlike what has been done in the past—i.e., protecting the deposits of the public more actively than protecting the deposits of firms—this system will benefit SMEs. Third, the systemic mechanism will be positive and encouraging, thus preventing moral risks in economic terms. With such a mechanism in place, banks will become more prudential and will comply more fully with the laws and regulations, thus decreasing the premiums and risks and enhancing their reputation. Banks with better reputations will have better images. This system is a very important part of the infrastructure in China’s financial market and a cornerstone to China’s financial stability. Globally, the deposit insurance system is very mature. The system has played a significant role, especially during the financial crisis and the European debt crisis. It increases financial stability and allows society’s expectations for the financial sector to be more transparent. With such a system in place, our bank deposits will be more secure. As deposit insurance premiums are paid by financial institutions, the public will perceive no difference. The premium rate, measured by the risk exposure, will be low compared with global levels. There will be no charge for the premium as they reach a certain level. Improving the market-based exchange-rate formation mechanism for the Renminbi to enhance the resilience of the exchange rate Xinhua: The Decision states that efforts should be made to improve the market-based exchange-rate formation mechanism. I am wondering how we can make further improvements? What are your ideas about an RMB appreciation? YG: First, accelerate market construction. As it is not very convenient in terms of some products and transactions, more products need to be offered to provide firms with tools for hedging and risk prevention. Second, enhance the resilience of RMB exchange rates by establishing a fully resilient, two-way floating and market-based exchange-rate formation mechanism. Third, in improving the mechanism, efforts must be made to make sure RMB exchange rates remain stable at a rational and balanced level. Xinhua: Since the exchange-rate reform was first inaugurated, the RMB exchange rate has risen by more than 34 percent. Is this a balanced level? What is your idea of a balanced level? YG: Currently RMB exchange rates are very close to a balanced level. To understand the RMB exchange rates, one must analyze the pressures and benefits from a RMB appreciation. Despite the fact that a RMB appreciation imposes pressures on export businesses, it greatly benefits the public: first, it has enhanced overall national strength; second, the prices of imported goods that are closely related to people’s livelihood, such as beans and crude oil, have been reduced; third, shopping, studying, and traveling abroad have become cheaper. Since the kick-off of the exchange-rate reform in 2005, the nominal exchange rate of the RMB against a package of other currencies has risen 17 percent; in other words, the RMB has appreciated less than 2 percent per year. This pace indicates that China’s labor productivity and economic efficiency have improved, and China’s economic competitiveness has gradually been enhanced since the reform and opening up. (Originally released at http://www.xinhuanet.com on November 26, 2013.) 2013-12-02/en/2013/1202/1092.html
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To conscientiously serve the real economy, promote the facilitation of trade and investment, support the transformation and upgrading of the industrial structure, and explore investment and financing exchange facilities, the State Administration of Foreign Exchange (SAFE) released the Circular on the Issuance of Provisions on Centralized Operations and Management of Multinationals' Foreign Exchange (Interim) (Huifa No. 23 [2014], hereinafter referred to as the Provisions), based on the pilot program that has been carried out since the end of 2012. The Provisions state that following the principle of using funds through overall planning, efficiently allocating resources, and effectively guarding against risks based on the domestic and international markets, efforts should be made to make further innovations and deepen the pilot reform on centralized operations and management of multinationals’ (MNCs') foreign exchange: First, making innovations in the MNCs' account system. MNCs should be allowed to open either domestic or international master accounts, or both, for foreign exchange to centralized foreign exchange management for domestic and global member companies, including centralized collections and payments of foreign exchange and netting settlements, with the limits on the external debt and outbound lending under the account to be shared either entirely or partially. Second, further streamlining the review of documents. Banks should process the collection, settlement, purchase, and payment of foreign exchange under the current account in line with the principle of "understanding the customers," "understanding their businesses," and carrying out "due diligence reviews." A form must be filed to record the taxes for outbound payments under trade in services. Third, facilitating the MNCs’ allocation of funds. No limits will be imposed on the master account and overseas transfers of international foreign exchange funds, which can be carried out freely; within the limits of the external debt and outbound lending, domestic and international accounts will be connected to facilitate companies’ internal balancing of the surpluses and deficits. Fourth, managing the settlement of foreign exchange capital funds and the external debt based on a "negative list" approach. Foreign exchange capital funds and the external debt will be settled at the discretion of the MNCs, and outbound payments will be made after a review of the authenticity of the transactions. Fifth, enhancing statistical monitoring to prevent and control risks. Efforts shall be made to collect the receipts and payments and to centralize collections, payments, and net settlements of the MNC's foreign exchange in an all-round way to report a net reduction in data, with the documents retained in cases of inspections to make sure the control and monitoring "valve" on the limits is preserved. The deepening of the pilot reform on centralized operations and management of MNCs' foreign exchange reflects a transformation in foreign exchange concepts and management modes and is an important part of the deepening of the reform of the foreign exchange management system. First, further streamlining administration and delegating more power to lower levels to serve the real economy in an all-round way. Minimizing approval interventions to the best extent and facilitating capital utilization by businesses are favorable for further reducing financial costs for companies and for providing a benign policy environment for MNCs to establish capital centers in China, which will be favorable for creating conditions for the transformation and upgrading of the industrial structure and for promoting a transformation of the economic development pattern. Second, exploring ways to facilitate exchanges for investments and financing and for accumulating experiences in RMB capital account convertibility. Using the same account to achieve centralized management of different types of capital will improve the companies' and banks' capabilities to make innovations in capital management, thus opening up new approaches and accumulating new experience for the deepening of the reforms and for expanding the opening up in an all-round way. Third, improving the macro-prudential supervisory framework to carry out comprehensive supervision and to guard against risks. Based on the demands of the real economy, the framework should be implemented step by step and in a steadfast manner. Statistics on cross-border capital flows should be collected, with off-site monitoring and on-site verifications and inspections enhanced, so as to make sure our bottom line, eliminating systemic and regional financial risks, is strictly maintained. The Provisions will come into force as of June 1, 2014. (End.) 2014-06-20/en/2014/0620/1114.html