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The State Administration of Foreign Exchange recently issued the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning the Banks’ Handling of Renminbi-Against-Forex Options Portfolio Business (Hui Fa No.43 [2011], hereinafter referred to as the “Circular”), and a relevant official from the State Administration of Foreign Exchange accepted an interview with journalists on related issues. Question: It has been learned that the Renminbi-against-Forex options trading was introduced in April 2011; why was the foreign exchange options portfolio business being introduced at this time? Answer: An option is a kind of right to choose. The buyer, after paying a premium to the seller, has the right to buy or sell certain subject matter of an agreed quantity at an agreed price in the future. Compared with the forward settlement and sales of foreign exchange, a foreign exchange option has the advantage of flexibility. For example, export enterprises may choose to conduct forward foreign exchange settlement or to buy a foreign exchange put option in order to guarantee the value of their future revenue from payment for goods in a foreign currency. In particular, the advantage of conducting forward foreign exchange settlement business is that it avoids possible losses from a depreciation of the foreign currency and fixes the cost in advance and avoid paying any expenses. However, it involves the sacrifice of possible gains from the appreciation of foreign currency; in contrast, the advantage of conducting the option business is that it has flexibility, i.e., in the case of a depreciation of the foreign currency, the enterprise may choose to exercise the option to conduct foreign exchange settlement at the agreed upon price; in the case of an appreciation of the foreign currency, the enterprise may choose not to exercise the option and conduct the foreign exchange settlement at the market price. However, the enterprise will have to pay a relatively high premium in advance. On April 1, 2011, the Renminbi-against-Forex options trading officially commenced on the domestic foreign exchange market whereby enterprises may buy options from the banks to hedge against exchange-rate risks. On this basis, in order to better satisfy the requirements of market players to hedge against exchange-rate risks, the Circular introduces the foreign exchange put and risk-reversal options portfolio business and the foreign exchange call and risk-reversal options portfolio business, both of which are options portfolio businesses at zero cost. The so-called options portfolio at zero cost means that the premium expenditure for the purchase of an option and the premium revenue from the sale of an option are offset by one another to make the net cost of guaranteeing the value equal to zero (or approaching zero) through the option purchase and sale portfolio. Consequently, flexibility in guaranteeing the value can be assured and the trading cost can be reduced. The most prominent feature of the foreign exchange put and risk-reversal options portfolio business and the foreign exchange call and risk-reversal options portfolio business is that there is a cap on the greatest potential loss, i.e., when the market players use the two types of businesses to hedge against exchange-rate risks for their future foreign exchange revenue or expenditures, they can fix the price for the foreign exchange settlement or purchase within a pre-set range, regardless of the direction of the changes in the exchange or the extent of the changes. From this perspective, in terms of the aforesaid two types of businesses introduced by the Circular, the risks of their products are relatively low, and they are beneficial to satisfy market demand and to conform to the actual situation in the identification, management, and tolerance of the risks by enterprises and banks at the current stage. Question: May clients sell the options from the options portfolio business that is being introduced at this time? Answer: Because the risks assumed by the seller are far greater than those assumed by the buyer, the seller needs a relatively strong risk-management capability. Based on international experience, it is common practice in newly emerging market economies to restrict the “naked short sale” of options by clients. In view of the fact that the current risk-management capabilities of domestic enterprises are still at a growth stage, in order to avoid an over-commitment of trade risks by domestic enterprises, upon the introduction of the Renminbi-against-Forex options business in April 2011, it is provided that the clients can only purchase the options from the banks and may not sell the options. However, in the options portfolio business introduced in this Circular, through the option purchase and sale portfolio the clients are granted the right to sell the options based on the purchase of the option, which is beneficial to reducing the risks of only sales of the option by clients. Question: What are the management requirements for the options portfolio business being introduced at this time? Answer: First, adhering to the principle of trading on the basis of actual needs. In order to prevent large-scale sheer speculation, the clients must have a true trading background in trade and investment to handle the options portfolio business, and the banks shall conduct the necessary examinations of their authenticity and compliance to ensure compliance with hedging principles. Second, emphasizing the principles of integrity. In the options portfolio business, the purchase and sale by clients of options from and to banks constitute a whole contract to prevent “naked short sales” of options by clients. Furthermore, the premium received by the clients from the sale of options shall not exceed that which they paid for the purchase of the options, in order to prevent an over-commitment of risks by clients due to a net receipt of the premium. Third, simplifying market-access management. The banks that qualify for Renminbi-against-Forex options trading on the inter-bank foreign exchange market and that qualify to operate the Renminbi-against-Forex options business for clients may directly engage in the options portfolio business for their clients, and the foreign exchange authorities will not provide new measures to manage market access. Question: What are the plans of the foreign exchange authorities to promote the development of the domestic and international options market? Answer: The foreign exchange authorities will cooperate with the relevant departments to foster market players and to allow them play a leading role in product innovation, and will continue steadily promoting the development of the domestic and international options market. 2012-01-18/en/2012/0118/1023.html
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The branches and foreign exchange administrative departments of the State Administration of Foreign Exchange (SAFE) in all provinces, autonomous regions, and municipalities directly under the Central Government; the SAFE branches in Shenzhen, Dalian, Qingdao, Xiamen, and Ningbo; and all policy banks, state-owned commercial banks, and shareholding commercial banks: In order to further promote the development of the Renminbi-against-Forex options market and to satisfy the requirements of economic entities to hedge against exchange-rate risks, in accordance with the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning Renminbi-Against-Forex Options Trading (Hui Fa No. 8 [2011]), the relevant issues with regard to the banks’ handling of the Renminbi-against-Forex options portfolio business are hereby notified as follows: I. The options portfolio stated in this Circular refers to the portfolio consisting of the purchase of a common European option of Renminbi against a foreign currency or the sale of one with the same currency, time limit, and principal specified in the contract, including the following two types: (1) Foreign exchange put options and risk reversal options portfolio: in view of the actual future needs for foreign exchange settlement, the client purchases a foreign exchange put option with a lower strike price (the strike price to be measured in RMB converted from a unit of foreign exchange, the same below) and meanwhile sells a foreign exchange call option with a higher strike price. (2) Foreign exchange call options and risk reversal options portfolio: in view of the actual future needs to purchase foreign exchange, the client sells a foreign exchange put option with a lower strike price and meanwhile purchases a foreign exchange call option with a higher strike price. II. The banks shall comply with the principle of actual needs and shall abide by the following provisions when handling the options portfolio business for their clients: (1) The options portfolio shall follow principles of integrity. Any operation by the client on the options portfolio, including but not limited to contract signing, position offsetting, and choice of delivery method, shall be on the entire options portfolio and shall not be on any single option trading chosen from the options portfolio. The signing of the contract between the banks and the clients in terms of the options portfolio business and any changes thereto shall be reflected in the same product specification. (2) Prior to the signing of an options contract, the banks shall require that their clients furnish a basic business contract and carry out the required examination of the contract so as to ensure that the options business that is to be conducted complies with the hedging principles. (3) Upon the maturity of the options portfolio, only one buyer of the option may exercise the option and the principle that the clients have priority to exercise the option shall be followed, i.e., only where the clients decide not to exercise the option purchased by themselves, can the banks choose whether to exercise their options; where the clients choose to exercise the option, the banks shall not exercise the option. (4) If the clients choose to exercise their option, the banks must conduct an authenticity and regulatory examination of the compliance of the receipts and payments of foreign exchange delivered by the clients. Where the clients as the sellers of the option are unable to exercise their option, the matter shall be dealt with by the parties in accordance with commercial principles. Upon the maturity of the options portfolio, where both the clients and the banks choose not to exercise the option, the clients may handle a part of the business for spot settlement and sales of foreign exchange upon the strength of the relevant documents. (5) With respect to the options portfolio, the premium received by the clients from the sales of the options shall not exceed that paid by them for the purchase of the options. III. Banks qualifying for Renminbi-against-Forex options trading on the inter-bank foreign exchange market and qualifying to operate the Renminbi-against-Forex options business for clients may handle the options portfolio business for clients. The bank branches qualifying to operate the Renminbi-against-Forex options business for clients may, after being authorized by their legal persons thereof (branches of foreign commercial banks are deemed to be legal persons), handle the options portfolio business for clients. IV. The banks shall, during the handling of the options portfolio business, respectively measure and manage the Delta options trading positions in accordance with Circular (Hui Fa No.8 [2011]) and other relevant provisions. V. The banks shall, during the handling of the options portfolio business, abide by the following statistical requirements: (1) The banks shall deem their clients’ exercise of options based on the performance of the contracts on the forward settlement and sales of foreign exchange, and shall incorporate such exercises into the statistics on the performance of the contracts on the forward settlement and sales of foreign exchange in the Monthly (Ten-day) Report on Statistics on Foreign Exchange Settlement and Sales by Banks in accordance with the Circular of the State Administration of Foreign Exchange on Distribution of the Statistical System for the Settlement and Sales of Foreign Exchange by Banks (Hui Fa No.42 [2006]). (2) The banks shall incorporate all the options trading in the options portfolio business into the Daily Report on the Comprehensive Position Management of Foreign Exchange Settlement and Sales by Banks and the statistical statements set forth in the Circular (Hui Fa No.8 [2011]) on a case-by-case basis. In particular, the Statistics on the Renminbi-against-Forex Options Business Handled by the Banks for Clients set forth in Annex 2 of the Circular (Hui Fa No.8 [2011]) shall be adjusted in accordance with the provisions of the annex to this Circular. VI. The scope of the clients, the time limit for trading, the currency of the options premium, the position offsetting, and the delivery method of the options portfolio business handled by the banks shall comply with the relevant provisions of the Circular (Hui Fa No.8 [2011]). VII. This Circular shall come into force as of December 1, 2011. The branches and foreign exchange administration departments of the SAFE shall, upon receipt of this Circular, forward it immediately to the urban commercial banks, rural commercial banks, rural cooperative banks, and foreign-funded banks within their respective jurisdictions. With respect to any problems arising from implementation, please contact the Department of the Balance of Payments of the SAFE. Tel: 010-68402385, 68402313. November 8, 2011 2012-01-18/en/2012/0118/1030.html
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At the end of September 2011, China’s outstanding external debt (excluding that of Hong Kong SAR, Macao SAR, and Taiwan Province) reached USD697.164 billion. Specifically, the outstanding registered external debt was USD440.564 billion and the balance of trade credit between enterprises was USD256.6 billion. With respect to the term structure, the outstanding long- and medium-term external debt (with the remaining term) was USD189.539 billion, accounting for 27.19 percent of the outstanding external debt. The outstanding short-term external debt (with the remaining term) was USD507.625 billion, accounting for 72.81 percent of the outstanding external debt. Specifically, the outstanding registered short-term external debt (with the remaining term) was USD251.025 billion and the balance of trade credit between enterprises was USD256.6 billion. In terms of the composition of the short-term external debt, at the end of September 2011 the balance of trade-related credit was USD374.996 billion, accounting for 73.87 percent of the outstanding short-term external debt (with the remaining term). Specifically, the trade credit between enterprises and bank trade financing accounted for 50.55 percent and 23.32 percent respectively. As trade-related credit is mainly based on real import and export trade, the growth of such payments is basically consistent with that of import and export trade in China; therefore, the increase in the proportion of this short-term external debt will not affect the security of China’s external debt. In terms of types of debtors, the outstanding debt of Chinese-funded financial institutions was USD209.605 billion, accounting for 47.58 percent of the outstanding registered external debt; the outstanding debt of foreign-funded enterprises was USD132.027 billion, accounting for 29.97 percent; the outstanding debt of foreign-funded financial institutions was USD54.373 billion, accounting for 12.34 percent; the outstanding sovereign debt borrowed by ministries under the State Council was USD38.597 billion, accounting for 8.76 percent; the outstanding debt of Chinese-funded enterprises was USD5.797 billion, accounting for 1.31 percent; and the outstanding debt of other institutions was USD 165 million, accounting for 0.04 percent. In terms of types of debt, the balance of international commercial loans amounted to USD370.998 billion, accounting for 84.21 percent of the outstanding registered external debt, with the proportion rising by 4.23 percentage points compared with the end of 2010. The balance of foreign government loans and of loans granted by international financial organizations amounted to USD69.566 billion, accounting for 15.79 percent. In terms of the currency structure, debt in U.S. dollars accounted for 75.81 percent of the outstanding registered external debt, representing an increase of 5.4 percentage points compared with the end of 2010. Debt in Japanese yen accounted for 8.11 percent, representing a decline of 0.45 percentage point compared with the end of 2010. Debt in euro accounted for 7.21 percent, representing a rise of 2.8 percentage points compared with the end of 2010. Other kinds of debt, including SDRs and HKD, accounted for 8.87 percent, a decline of 7.75 percentage points compared with the end of 2010. In terms of the sectors in which the debt is invested, based on the Industrial Classifications of the National Economy, USD53.482 billion was invested in the manufacturing sector, accounting for 24.24 percent of the medium- and long-term outstanding registered external debt (based on contract terms); USD27.677 billion was invested in the transportation sector, the warehousing sector, and the postal-services sector, accounting for 12.54 percent; USD17.354 billion was invested in the production and supply of electric power, coal, gas, and water, accounting for 7.87 percent; USD8.152 billion was invested in the information technology services sector, accounting for 3.69 percent; and USD10.69 billion was invested in the real estate sector, accounting for 4.85 percent. From January to September 2011, medium- and long-term external borrowing totaled USD33.948 billion, an increase of USD6.101 billion, or 21.91 percent, on a year-on-year basis; Repayment of the principal totaled USD20.961 billion, an increase of USD3.057 billion, or 17.07, percent, on a year-on-year basis; Interest payments totaled USD1.779 billion, a year-on-year decrease of USD252 million, or 12.41 percent. Net inflows under the outstanding long- and medium-term external debt totaled USD11.208 billion, up 41.66 percent on a year-on-year basis. 2012-01-18/en/2012/0118/1029.html
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The State Administration of Foreign Exchange (SAFE) and the General Administration of Customs (GAC) recently signed a Memorandum of Cooperation between the State Administration of Foreign Exchange and the General Administration of Customs on the Joint Promotion of Reform of the Foreign Exchange Administration System for Trade in Goods in order to strengthen cooperation between departments, efficiently promote the reform of the foreign exchange administration system for trade in goods, and jointly improve the level of cooperative supervision. The SAFE and the GAC have already established effective cooperative mechanisms to coordinate policy formulation, to share regulatory information, and to strengthen business cooperation. The execution of this Memorandum further defines the process of coordinating business and the exchange of regulatory information between the parties and other affairs in accordance with the needs to promote the reform of the foreign exchange administration system for trade in goods. The main contents of this Memorandum include: First, adjusting the business process and function of the system for coordination between the foreign exchange authorities and the customs. Upon the date of nationwide generalization of the reform of the foreign exchange administration system for trade in goods, the management method with the Export Verification Form for Foreign Exchange Collection will be cancelled; the foreign exchange authorities and the banks will no longer make a note of the amount of the customs declaration or deduct (or increase) the receivable foreign exchange quota from exports through the online inspection system for customs declaration of imported goods and the online inspection system for foreign exchange collections and settlements from exports; the customs will maintain the current operation of issuing and printing the certification sheets for receipts and payments of foreign exchange from the customs declaration for imported and exported goods . Second, further strengthening the sharing of regulatory information. The GAC and the SAFE will strengthen their exchange of regulatory information in such areas as the data on the customs declaration for imported and exported goods of enterprises, the information about the classified management of the enterprises, the ratios of export receipts and import payments of foreign exchange of enterprises, and the electronic data on the receipts and payments of foreign exchange for trade in goods of enterprises on a case-by-case basis, and will realize their data sharing. The execution of the Memorandum represents a management concept and a service consciousness of keeping up with the times and of reform and innovation, while effectively promoting trade facilitation and is beneficial to creating a synergy to rigorously crack down on illegal behavior such as irregular cross-border capital flows, evasion and illegal purchases of foreign exchange, and smuggling, and to effectively safeguarding the security of the foreign economy and finances of China. 2012-01-18/en/2012/0118/1027.html
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The SAFE recently released the Preliminary Data on China’s Balance of Payments Statement for the Third Quarter of 2011. The current account and the capital and financial account posted a “twin surplus” in Q3 of 2011, and international reserves maintained their growing momentum. In Q3, the surplus under the current account totaled USD57.8 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods and current transfers reached USD85.3 billion and USD6.9 billion respectively, whereas the deficit in trade in services and income amounted to USD20.2 billion and USD14.1 billion respectively. Meanwhile, China’s surplus under the capital and financial account (including net errors and omissions) totaled USD33.9 billion. In particular, net inflows of direct investments amounted to USD35.9 billion. International reserve assets posted an increase of USD91.7 billion. Specifically, transactions in foreign exchange reserve assets registered an increase of USD92.1 billion (exclusive of the influence of non-transactional changes in value such as changes in the exchange rates and prices), the reserve position in the IMF registered a decline of USD300 million, and special drawing rights registered a decline of USD100 million. In the first three quarters of 2011, China’s surplus under the current account totaled USD145.6 billion and the ratio of the surplus under the current account to GDP was 3.0 percent. Meanwhile, this year China’s surplus under the capital and financial account totaled USD229.8 billion (including net errors and omissions). China’s international reserve assets posted an increase of USD375.4 billion. 2012-01-18/en/2012/0118/1024.html
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In order to further promote the development of the domestic and international options market and to satisfy the requirements of economic entities to hedge against exchange-rate risks, the State Administration of Foreign Exchange recently issued the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning the Banks’ Handling of Renminbi-Against-Forex Options Portfolio Business (Hui Fa No. 43 [2011], hereinafter referred to as the “Circular”). The Circular will come into effect as of December 1, 2011. The main contents of the Circular include: First, introducing the foreign exchange put and risk-reversal options portfolio business and the foreign exchange call and risk- reversal options portfolio business; Second, providing that banks will comply with the regulatory requirements such as trading on the basis of actual needs and integral management when handling the options portfolio business for their clients; Third, allowing banks that qualify for Renminbi-against-Forex options trading on the inter-bank foreign exchange market and that qualify to operate the Renminbi-against-Forex options business for clients to directly engage in the options portfolio business for their clients. The issuance of the Circular is beneficial to improve instruments for enterprises to avoid exchange-rate risks, to improve the banks’ means of risk management, to continuously promote the development of the domestic foreign exchange market, and to give full play to the market’s basic role in the allocation of resources. 2012-01-18/en/2012/0118/1022.html
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According to statistical data released by the State Administration of Foreign Exchange (SAFE), in October 2011 the amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD115.2 billion and USD112.1 billion respectively. The surplus of foreign exchange settlement and sales by banks on behalf of clients amounted to USD3.2 billion. For the first ten months of 2011, the cumulative amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD1326.5 billion and USD942.6 billion respectively. The surplus of foreign exchange settlement and sales was USD383.9 billion. In October 2011, foreign-related receipts and payments of domestic banks on behalf of clients amounted to USD186.8 billion and USD175.9 billion respectively; and the surplus of foreign-related receipts and payments reached USD10.9 billion. In the first ten months 2011, the cumulative foreign-related receipts and payments of banks on behalf of clients amounted to USD1896.7 billion and USD1637.8 billion respectively; and the surplus of the cumulative foreign-related receipts and payments reached USD258.9 billion. 2012-01-18/en/2012/0118/1026.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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Q: Since the Fed initiated the QE tapering at the beginning of this year, some emerging economies have been struggling due to the currency depreciation and capital flight. Under such circumstances, what changes have occurred in terms of China’s cross-border capital flows and what are the main contributing factors? A: Presently China still has a large amount of net inflows of cross-border capital. In January 2014, China reported USD 73.3 billion of surplus in sales and settlements of spot foreign exchange and USD 25.4 billion of surplus in sales and settlements of forward foreign exchange (signed contracts), each representing a record high. Amidst the overall currency depreciation in the emerging markets, the RMB exchange rate remained stable during the month, with the nominal and real effective RMB exchange rate indexes prepared by the BIS up 1.2 percent and 2.1 percent respectively. Internal and external factors such as the real economy, the market, and seasonal fluctuations are the primary contributors to the massive amount of net inflows of foreign exchange. Customs statistics show that in January the surplus of imports and exports amounted to USD 31.9 billion, representing an increase of 13 percent year on year. Ministry of Commerce statistics show that within the month foreign capital disbursements amounted to USD 10.8 billion, up 16 percent year on year. Further, market sentiment prone to inflows continued after September 2013. Despite the polarization in the emerging economies, China has witnessed good economic performance and the RMB exchange rate has remained stable. Within the context of the key advanced economies continuing to maintain low interest rates, market players both at home and abroad remained bullish regarding the RMB and bearish regarding foreign currencies. In the run-up to the Chinese New Year, foreign trade businesses commonly accelerate exports and collection of expenses, resulting in a huge demand to convert foreign exchange into RMB. Additionally, huge amounts of compensation and funds for family maintenance are remitted by overseas migrant workers and overseas Chinese. Q: Recently the RMB exchange rate has been on the decline both at home and abroad. On February 25, the spot rate hit a 7-month low in the domestic market. What do you think about this phenomenon? A: It is true that the RMB exchange rate has presented bi-directional fluctuations both at home and abroad, which can be explained by the following four factors: (1) the recent movements in the RMB exchange rate are the culmination of the adjustments by market players of the RMB trading strategies during earlier stages; (2) the range of fluctuations has been normal as compared with the currency fluctuations in the advanced and emerging markets; (3) as the institutional reform of the RMB exchange rate deepens and the market begins to play a more decisive role in setting the rate, bi-directional volatility of the exchange rate will become normal, calling for efforts by market players to adjust their strategies and to adapt to any changes; (4) the bi-directional fluctuations of the RMB exchange rate at a balanced and rational level will be conducive to promoting an equilibrium in the BOP, creating a better foreign-related economic environment and guarding against financial risks. Q: As the global economy is still facing a post-crisis period, with increasing complexity of the economic and financial environments both at home and abroad, will there be any risks from a massive amount of cross-border capital flight? A: There is little likelihood that China will see massive and sustained cross-border capital flight in the foreseeable future. This can be attributed to two factors: the first is that China’s net inflows of cross-border capital through real economic channels, e.g., trade and investment, will remain massive due to the strong economic fundamentals. It is especially noteworthy that the country will gradually develop and put into practice a series of reform programs in related fields after the Third Plenum of the 18th Central Committee of CPC. This will play a helpful role in achieving the country’s mid- and long-term economic-growth objectives. Over the long term, a positive economic outlook and a huge market potential will continue to be a magnet for capital inflows. The restoration of the global economy, especially of the developed economies, will enable China to maintain a surplus in imports and exports. The second is that the fiscal and financial risks in the country remain under control. The robust current account, the dominance of mid- and long-term capital in the form of FDI in external debts and the abundance of foreign exchange reserves have strengthened the country’s capability to withstand any external impacts. Meanwhile, it should be noted that the country will face great uncertainties in terms of its external environment. Given that China's balance in the current account will gradually improve and the exchange rate of the RMB will tend to move in a rational direction toward equilibrium, there is still a likelihood that the country will witness bi-directional fluctuations of cross-border capital. Thus, it is necessary that with respect to this situation the market players adopt a rational perspective and adopt measures to cope with the changes. Looking ahead, the SAFE will continue to intensify efforts to monitor cross-border capital flows, further increase policy and data transparency, improve pre-arranged policy planning to cushion the impacts of the bi-directional cross-border capital flows, and adopt rigorous measures to guard against risks so as to maintain the healthy and sustainable development of the foreign-related economy. 2014-02-26/en/2014/0226/1109.html
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A briefing on the inspection of the banks’ foreign exchange was recently held by the SAFE. The heads of the relevant businesses of 21 Chinese-funded banks and 11 foreign counterparts attended the meeting. It was pointed out at the meeting that in 2013 the SAFE earnestly implemented the decisions and arrangements of the CPC Central Committee and the State Council, rigorously promoted facilitation of trade and investment, carefully prevented risks arising from cross-border capital flows, increased efforts to inspect the banks, as the major channel of cross-border capital flows, seriously investigated foreign exchange–related violations by banks and actively warned the banks of the risks of foreign exchange operations so as to encourage the banks to improve their compliance with foreign exchange operations. Based on the findings, on a whole the banks’ compliance with foreign exchange operations has been improved, but violations still exist as banks put an emphasis on business expansion and neglect administration of internal controls. The meeting provided information on foreign exchange–related violations by banks, revealing a total of 439 cases discovered during 2013. The violations mainly included: 1. not handling foreign exchange settlements and sales in accordance with the relevant regulations. For example, some banks failed to create foreign exchange settlement and sale items separately and failed to handle their own foreign exchange settlement and sale business in compliance with the relevant regulations; while some banks handled foreign exchange capital settlements for companies and foreign exchange settlements and sales for individuals in violation of the relevant rules. 2. Failing to review the authenticity and consistency of the capital receipts and payments on the current account in accordance with the relevant regulations. For instance, some banks handled the balance of foreign exchange generated through trade in goods for unlisted companies, and some banks failed to review the retained data during the handling of capital receipts and payments for trade in goods (transit trade included) in compliance with the relevant regulations and provided receipts and payments business for Class B and Class C companies which is in violation of the relevant rules. 3. Violating the relevant regulations to provide capital receipts and payments on the capital account. Some banks failed to make timely foreign payments using the capital (RMB) acquired by handling foreign exchange capital settlements and sales in accordance with the relevant regulations. 4. Not complying with the relevant regulations to make statistical declarations on the balance of payments and to submit the relevant data. In addition, internal control systems were not improved, authenticity reviews were mere formalities, and some banks engaged in arbitrage by taking advantage of inbound and outbound linkages and avoiding the regulations by means of off-balance-sheet business innovations. All these issues require more attention. It was requested at the meeting that all banks should enhance their macro awareness, handle the relationship between individual benefits and the policy orientation in a correct manner, actively conduct their foreign exchange business in a rational way, enhance a sense of responsibility, practically carry out “understanding your customers,” seriously fulfill their duty of authenticity reviews, improve compliance awareness, strengthen internal control administration and system construction, and further improve the operational level of compliance to create a sound environment for the foreign exchange market. It was stressed at the meeting that in 2014 the SAFE will, in accordance with the decisions and operations of the CPC Central Committee and the State Council, continue to decentralize and further improve the level of facilitation of trade and investment, promote growth of the real economy, and, at the same time, closely monitor cross-border capital flows, prevent shocks from two-way capital flows across borders, maintain the bottom line in avoiding systemic and regional financial risks, and continuously reinforce and improve inspections of the foreign exchange business of financial institutions, such as banks, to encourage the finance industry to better serve the real economy and maintain foreign-related economic and financial security. 2014-04-23/en/2014/0423/1112.html