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Q: Recently the PBOC publicized China's balance of foreign exchange reserves at the end of September. There was a substantial increase in the amount of foreign exchange reserves in Q3, 2010. How do you regard this increase? A: At the end of Q3, 2010, China's balance of foreign exchange reserves reached USD2648.3 billion, up USD194 billion as compared with Q2, 2010. During the first half of 2010, the balance of foreign exchange reserves increased by USD55.1 billion from the previous year. The rapid increase in foreign exchange reserves in Q3, 2010 can be ascribed to three factors: (1) China's foreign-related economy continued to grow. In Q3, 2010, the country posted a foreign trade surplus of USD65.3 billion, exceeding the surplus of USD55.3 billion in H1, 2010. China's utilized foreign investment reached USD6.924 billion and USD7.602 billion respectively in July and August of this year. (2) Some large-scale Chinese enterprises initiated public offerings on overseas markets, with large sums of foreign exchange settled by banks. For example, the Agricultural Bank of China raised more than USD10 billion by going public on the Hong Kong stock market. (3) The conversion of currencies and fluctuations in asset prices also contributed to the substantial increase in foreign exchange reserves. The fluctuations caused by changes in non-transactional values such as exchange rates and prices are included in the data publicized by the PBOC. In Q3, 2010, there was an appreciation of major non-dollar currencies, especially the Euro, against the US dollar. The exchange rate of EUR/USD posted an increase of 11 percent in Q3, 2010. The conversion of non-dollar currencies into US dollars and the fluctuations in the prices of assets led to an increase of more than 80 billion US dollars in the countrys foreign exchange reserves. The 15-percent depreciation of the EUR against the USD during the first half of 2010 reduced the increase in Chinas foreign exchange reserves. In addition, the operating income from foreign exchange reserves also contributed to the rapid increase in Chinas foreign exchange reserves. Q: Financial statistical data publicized by the PBOC indicate that in September there was an increase of RMB289.565 billion in outstanding foreign exchange funds. Does this imply a new round of hot moneyinflows? What is your point of view on pressures of fund inflows in China for the foreseeable future? A: Recently there have been comments that hot money is again flowing into China. Such comments are based on the calculation that hot money = newly-increased funds outstanding for foreign exchange surplus in trade utilized amount of foreign investment. Such a method of calculation is unscientific because it neglects the transactional items in the balance of payments, including services, income, portfolio investment, and so forth. Furthermore, it makes comparisons between statistical data of different categories, without specifying the elements and formation mechanisms of the outstanding foreign exchange funds. Thus, the conclusion is untenable, providing misleading information for an understanding of real cross-border fund flows. China will, in the short term, cope with relatively high pressures of fund inflows. The country enjoys high stability of macroeconomic operations, a promising outlook for economic growth, a tendency for the home currency to appreciate, and a strong attractiveness for foreign investment. But there exists some instability in global financial markets and the countrys macroeconomic controls confront problems such as how to manage inflation expectations and how to curb the upsurge in asset prices. These factors may increase the instability of cross-border fund flows through such channels as foreign trade, foreign investment, banks, and so forth. Comprehensive measures are needed for effective control of the risks brought about by the cross-border flow of hot money. Since the beginning of this year, the SAFE has launched a special campaign to struggle against hot money, mainly targeting the penetration of funds via channels with a high degree of openness, such as trade in goods, trade in services, direct investment, and individual transactions. From a long-term perspective, efforts should be made to improve the mechanism for the formation of the RMB exchange rate and to give further play to the fundamental role of the market mechanism to reduce opportunities for arbitrage and speculation by hot money. Efforts should also be made to combat hot money by strengthening collaboration with regulatory departments, keeping a close eye on the major channels of current regulation, and cracking down strongly on various kinds of foreign exchange transactions in violation of the relevant laws and regulations, thereby preventing the inflow of hot money. 2010-10-14/en/2010/1014/957.html
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To further enhance law-based foreign exchange administration and to increase the transparency and convenience of foreign exchange administration, the State Administration of Foreign Exchange (SAFE) recently promulgated a newly-modified List of Administrative Licensing Items of the State Administration of Foreign Exchange (hereinafter referred to as List of Administrative Licensing Items). The List of Administrative Licensing Items shall come into effect as of the date of promulgation. During recent years, the SAFE has made great efforts to carry out the work of constructing the administrative licensing system. A standardized legal framework for administrative licensing was established. Efforts were also made to further standardize the procedures for handling administrative licensing, to streamline administration, to delegate power to lower levels, and to sort out the administrative licensing items. Since 2002, the SAFE straightened out and cancelled 45 administrative approval items in six batches, with the approval authority of more than 20 licensing items delegated to the branches and sub-branches of the SAFE. The List of Administrative Licensing Items issued herein is the latest amendment to the 2005 version based on the progress in straightening out the administrative licensing items during recent years. The number of administrative licensing items has been reduced from 39 to 25. The newly-modified List of Administrative Licensing Items provides a comprehensive and accurate picture of the administrative licensing items currently implemented by the SAFE, as well as the key factors in the relevant procedures. With a clearer presentation, more succinct content, and simplified application materials, the List of Administrative Licensing Items will play an active role in further standardizing the procedures for exchange-related administrative licensing and will increase the transparency of foreign exchange administration. It is explicitly required by the SAFE that all branches and sub-branches of the SAFE shall enhance their sense of responsibility, sense of mission, and sense of urgency in performing their duties regarding the law-based administrative licensing of foreign exchange administration in compliance with the requirements of the new circumstances. They shall enhance awareness of complying with the system, and carry out law-based administration and administrative licensing in a conscientious manner and in strict compliance with the provisions of the Administrative Licensing Law of the PRC, the relevant laws and regulations, and the rules related to foreign exchange administration in an effort to deliver better services to the public. To deepen the reform of the foreign exchange administration system, to increase capital efficiency in domestic enterprises, and to facilitate the trade process, the State Administration of Foreign Exchange recently promulgated the Circular on Launching a Pilot Policy Program for Overseas Deposits of Export Proceeds in Some Regions, to launch a pilot policy program for overseas deposits of export proceeds (hereafter referred to as pilot program) in Beijing, Guangdong (including Shenzhen), Shandong (including Qingdao), and Jiangsu from October 1, 2010. The duration of the pilot program will be one year. The policy involved in the pilot program mainly covers the following: first, the foreign exchange authority shall strictly examine the qualifications of enterprises before granting approval to domestic enterprises to open accounts overseas. The accounts opened overseas shall be used for the deposit of the export proceeds of domestic enterprises from truthful and legitimate transactions, for external payments in goods trade and some services trade, and for external payments under the capital account approved by or registered with the foreign exchange authority; second, the foreign exchange authority will manage the scale of the total capital deposited overseas by domestic enterprises; third, the foreign exchange authority will simplify the formalities for import and export write-offs and online inspections, and implement an ex post facto reporting system for enterprises and banks; fourth, the foreign exchange authority will conduct off-site monitoring of the receipt and payment activities of the domestic enterprisesoverseas accounts and on-site inspections of any abnormalities in the monitoring process. The pilot program for overseas deposits of export proceeds is a productive attempt to complete the existing system for the administration of foreign exchange trade receipts and payments: on the one hand, it diversifies the means of adjusting the balance of payments; on the other, it paves the way for capital operations by domestic enterprises; for enterprises frequently involved in the balance of trade, it helps lower expenses and exchange settlement costs for cross-border transfers of capital in foreign exchange; for enterprises mainly competing in the international market and strong in group management, it helps improve the capital efficiency, lower overseas financing costs, and thus strengthen their competitiveness in the international market. 2010-08-27/en/2010/0827/950.html
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According to statistics from the State Administration of Foreign Exchange (SAFE), from January to March 2010, bank settlements of foreign exchange for clients were USD94 billion in January, USD76.3 billion in February, and USD100 billion in March respectively; the total was USD270.3 billion. Bank sales of foreign exchange for clients were USD53.8 billion in January, USD54.5 billion in February, and USD69.3 billion in March; the total was USD177.6 billion. The balance between bank settlements and sales of foreign exchange for clients was USD40.2 billion in January, USD21.8 billion in February, and USD30.7 billion in March, resulting in a total surplus of USD92.7 billion. During the period from January to March 2010, domestic banks foreign-related collections for clients were USD132.3 billion in January, USD108.1 billion in February, and USD141.8 billion in March respectively; the total was USD382.2 billion. External payments by domestic banks for clients were USD102.1 billion in January, USD93 billion in February, and USD125.80 billion in March; the total was USD320.9 billion. The balance between domestic banks foreign-related collections and payments for clients was USD30.2 billion in January, USD15.1 billion in February, and USD16 billion in March, resulting in a total surplus of USD61.3 billion. Glossary and relevant definitions The Balance of Payments refers to all economic transactions occurring between residents and non-residents in China, including all financial transactions and barter resulting in changes in the assets and liabilities of residents and non-residents. Bank Settlement and Sales of Foreign Exchange for Clients refers to settlement and sales services of foreign exchange provided by designated foreign exchange banks for their clients, exclusive of settlement and sales of foreign exchange conducted by designated foreign exchange banks for themselves and transaction data on the inter-bank foreign exchange market. Statistics on bank settlement and sales of foreign exchange for clients are conducted at the time of the exchange of the RMB and the foreign currency. Specifically, settlement of foreign exchange is the process by which the owner of the foreign exchange sells exchange to designated foreign exchange banks; the sale of foreign exchange is the process by which exchange is sold by the designated foreign exchange banks to the users of foreign exchange. The balance between the settlement and sales of foreign exchange is the offset balance between the settlement and sales of foreign exchange, which will be balanced by the banks through bank transactions on the inter-bank foreign exchange market. This is the major cause of changes in the amount of foreign exchange reserves, which is not equivalent to the net change in foreign exchange reserves during the same period. The bankssettlements and sales of foreign exchange for clients are not counted in compliance with the principle applicable to the transactions between residents and non-residents, which only include the transactions between banks and their clients in domestic and foreign currencies, i.e., the exchange and transactions between RMB and foreign exchange. Their statistical scope differs from the transactions under the balance of payments. Foreign-related Collections and Payment by Banks for their Clients refers to the collection and payment occurring between domestic non-bank resident institutions/individuals (collectively called the non-bank section) and non-resident institutions/individuals through domestic banks, which are exclusive of the collection and payment in cash and foreign-related collections and payments by the banks themselves. They include: cross-border collections and payments between non-bank sections and non-residents through domestic banks (including RMB and foreign exchange), and domestic collections and payments between non-bank sections and non-residents through domestic banks (currently including collections and payments in foreign exchange and collections and payments in RMB under the RMB settlement item for cross-border trade). The statistics are collected at the time when the clients conduct foreign-related collections and payments at domestic banks. Specifically, the foreign-related collections by banks for their clients refer to funds collected by non-bank sections from non-residents via domestic banks; the banksexternal payments for their clients refer to the funds paid by non-bank sections to non-residents through the domestic banks. Although foreign-related collections and payments by banks for their clients constitute an integral part of the balance of payment statistics, in principle they differ from the balance of payment statistics. The capital receipt and payment system is the statistical principle for banksforeign-related collections and payments for their clients, whereas the accrual basis is the statistical principle for the balance of payments. The banksforeign-related collections and payments for their clients only reflect cash flows between domestic non-bank sections and non-residents and do not reflect the barters and foreign-related transactions conducted by the banks themselves, and their statistical scope is smaller than that of the balance of payments. 2010-09-20/en/2010/0920/952.html
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According to the statistical data released by the State Administration of Foreign Exchange (SAFE), in July 2010 foreign exchange settlement and sales by banks on behalf of clients amounted to USD114.2 billion and USD87.6 billion respectively. The surplus of foreign exchange settlement and sales amounted to USD26.6 billion. During the month of July 2010, foreign-related receipts and payments of domestic banks on behalf of clients amounted to USD162.2 billion and USD134.6 billion respectively. The surplus of foreign-related receipts and payments reached USD27.6 billion. Annex: Definition of terms and interpretation Balance of payments (BOP) refers to all economic transactions occurring between residents and non-residents in China, including all financial transactions and barter transactions resulting in any changes to assets and liabilities thereof. Foreign exchange settlement and sales by banks on behalf of clients refer to foreign exchange settlement and sales conducted by designated foreign exchange banks for their clients, excluding data on foreign exchange settlement and sales conducted by designated foreign exchange banks on their own behalf and data on inter-bank foreign exchange market transactions. The time of conversion between Renminbi and foreign currency is regarded as the time-point for the statistics. Specifically, foreign exchange settlement refers to the sale of foreign exchange to designated foreign exchange banks by owners of foreign exchange; foreign exchange sales refer to the sale of foreign exchange by designated foreign exchange banks to users of foreign exchange. The differences between foreign exchange settlement and sales are regarded as an offset balance, which will be balanced by the banks through transactions on the inter-bank foreign exchange market. This is the major reason for changes in the amount of foreign exchange reserves, which is not equivalent to the net change in foreign exchange reserves during the same period. The principle for transactions between residents and non-residents does not apply to the preparation of statistics on foreign exchange settlement and sales by banks on behalf of clients, and such statistics only cover transactions of RMB and foreign currencies between the banks and their clients, namely, exchange transactions between RMB and foreign currencies, which fall outside the category of the balance-of-payments statistics. Foreign-related receipts and payments of banks on behalf of clients refer to receipts and payments occurring between domestic non-bank resident institutions and individuals (collectively called the non-bank sector) and non-resident institutions and individuals through domestic banks, which are exclusive of the receipts and payments in cash and foreign-related receipts and payments by the banks themselves. They include: cross-border receipts and payments between non-bank sectors and non-residents through domestic banks (including RMB and foreign exchange), and domestic receipts and payments between non-bank sectors and non-residents through domestic banks (currently including receipts and payments in foreign exchange and receipts and payments in RMB under the RMB settlement item for cross-border trade). Statistics are collected at the time when the clients conduct the foreign-related receipts and payments at the domestic banks. Specifically, foreign-related receipts of banks on behalf of clients refer to funds collected by non-bank sectors from non-residents via domestic banks; external payments by banks on behalf of clients refer to the funds paid by non-bank sectors to non-residents through domestic banks. Although foreign-related receipts and payments of banks on behalf of clients are an integral part of the balance-of-payments statistics, the accounting method for the statistics, different from the accrual basis of accounting required by the balance of payments statistics, is based on a cash basis. In addition, it merely reflects fund flows between the non-bank sectors and non-residents, and does not include the barter transactions and foreign transactions conducted by the banks themselves. Furthermore, the scope of the statistics on the foreign-related receipts and payments of banks on behalf of clients is smaller than the scope of the balance-of-payments statistics. 2010-09-01/en/2010/0901/951.html
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With the rapid development of Chinas foreign-related economy and the increasing cross-border interactions by individuals, bank cards, as a safe and convenient mode of payment, have gained growing popularity for cross-border consumption. In order to improve the management of foreign currency bank cards and to familiarize the public with the relevant management policies, the State Administration of Foreign Exchange (SAFE) recently promulgated the Circular on Regulating the Administration of Foreign Currency Bank Cards (Huifa No.53 [2010], hereafter referred to as the Circular). The Circular will come into force as of November 1, 2010. According to the Circular, the four original laws and regulations on foreign exchange administration with regard to foreign exchange bank cards have been integrated into one set of laws. Meanwhile, the fundamental principle for the management of bank card-related foreign exchange businesses is specified in three respects: (1) insistence on the convertibility of the current account; both residents and non-residents are allowed to use their bank cards for cross-border consumption for tourism, services, etc; (2) the use of domestic bank cards outside of China shall be subject to the management rules of the merchant category codes; cash withdrawals outside of China shall be conducted within the prescribed amounts, and shall be handled by the card-issuing financial institutions or the bank card organizations in charge of the transfer; (3) the relevant authorities shall keep records on bank card transactions, monitor and track abnormal transactions efficiently, and investigate and deal with illegal acts and non-compliance with the regulations in a timely manner. With reference to the working practices in recent years, the Circular has made adjustments to the limit of withdrawals of RMB in cash at ATM by foreign cards within China, viz. each transaction shall not exceed RMB3000. The Circular will play an active role in enhancing the transparency of the laws and regulations on the administration of foreign exchange, enabling the public and the banks to better understand and carry out the relevant regulations on foreign exchange administration so as to facilitate the use of bank cards by the public for cross-border interactions. As a result, larger amounts of foreign-related transactions will be conducted within the bank system and greater transparency of the foreign-related economy will be achieved. 2010-10-11/en/2010/1011/955.html
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In order to improve administration of the bankssynthetic positions in foreign exchange settlement and sales and to facilitate the conduct of the relevant business by banks, the State Administration of Foreign Exchange (SAFE) recently promulgated the Circular on Relevant Issues concerning the Administration of the BanksSynthetic Positions in Foreign Exchange Settlement and Sales (Huifa No. 56 [2010]) (hereinafter referred to as the Circular). The circular shall come into force as of the date of promulgation. This Circular collates and integrates the 7 normative documents pertaining to the administration of bankssynthetic positions in foreign exchange settlement and saleshereinafter referred to as the positions . In the Circular, the principles for the administration of the positions are defined, including unified ratification of legal persons, limited management, management on an accrual basis, examination and regulation on a daily basis, and regular reconciliation against the accounting subjects; specific management requirements for the positions have also been further clarified concerning the position application, adjustment, and ratification, as well as the submission of the relevant data on the positions; moreover, the management requirements have been integrated with regard to application of balance controls in the special RMB accounts for foreign exchange settlement and sales to foreign-funded banks which have not opened RMB business, and in the centralized management of the positions of the branches of foreign banks. As of the date of issuance, the limits of the banks existing position remain unchanged. The Circular will play an active role in improving the transparency of laws and regulations on the administration of foreign exchange and simplifying management processes, thus enabling banks to better understand and implement the relevant regulations. As a result, the foreign exchange settlement and sales business and the relevant business activities will be carried out in an orderly manner. 2010-10-20/en/2010/1020/958.html
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In Q2 of 2010 the current account and the capital and financial account continued to post a "twin surplus" and international reserves maintained growing momentum. China's surplus under the current account totaled USD72.9 billion, an increase of 35 percent year on year. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods, income, and current transfers reached USD59.5 billion, USD8 billion, and USD9.9 billion, respectively, whereas the deficit in trade in services amounted to USD4.5 billion. Meanwhile, China's surplus under the capital and financial account totaled USD25.8 billion, a decrease of 68 percent year on year. In particular, the net inflows of direct investments and other investments amounted to USD21.5 billion and USD12.4 billion respectively, whereas the net outflows of portfolio investments reached USD9.5 billion. International reserve assets posted an increase of USD82.1 billion, a drop of 17 percent year on year as calculated on a comparable basis. Specifically, transactions in foreign exchange reserve assets registered an increase of USD81.1 billion (exclusive of the influence of non-transaction value change factors such as exchange rates and prices) and the reserve position in IMF registered an increase of USD900 million. In the first half of 2010, China's surplus under the current account totaled USD126.5 billion, a decrease of 6 percent year on year. Meanwhile, China's surplus under the capital and financial account totaled USD90 billion, an increase of 48 percent year on year. International reserve assets posted an increase of USD178 billion, a rise of 8 percent as calculated on a comparable basis. In addition, the BOP Analysis Team of the SAFE released China's Balance of Payments Report for the First Half of 2010 in order to facilitate an understanding of the data and analysis of China's balance of payments among all social groups. 2010-10-12/en/2010/1012/956.html
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According to the statistical data released by the State Administration of Foreign Exchange (SAFE), in August 2009 the amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD113.2 billion and USD84.1 billion respectively. The surplus of foreign exchange settlement and sales amounted to USD29.1 billion. During the month of August 2010, foreign-related receipts and payments of domestic banks on behalf of clients amounted to USD163.4 billion and USD137.1 billion respectively. The surplus of foreign-related receipts and payments reached USD26.3 billion. 2010-09-28/en/2010/0928/953.html
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Since the beginning of 2011, the State Administration of Foreign Exchange has actively implemented the decisions and arrangements of the CPC Central Committee and the State Council, has maintained tough measures against hot money, and has continuously improved the accuracy of cracking down on activities in violation of the foreign exchange laws and regulations, such as hot money, in particular by further improving the inspection methods and actively using the Off-site Foreign Exchange Inspection System. Recently, the Deputy Administrator of the State Administration of Foreign Exchange, Deng Xianhong, accepted an interview with journalists on issues concerning dealing with and cracking down on illegal and irregular capital flows such as hot money. Question 1: What are the results of the foreign exchange authorities’ cracking down on illegal and irregular capital flows such as the hot money since the beginning of this year? Answer: Since the beginning of this year, in order to effectively prevent financial risks, the foreign exchange authorities have maintained tough measures against hot money in accordance with the decisions and arrangements of the CPC Central Committee and the State Council, and have achieved notable results. In the first half of 2011, the foreign exchange authorities investigated 1,865 cases of activities in violation of foreign exchange laws and regulations, involving an amount in excess of USD16 billion, an increase of 26.2% and 26.9% respectively over the same period of the last year; the total amount of administrative penalties and confiscations imposed by the foreign exchange authorities was RMB260 million, whereas the total amount for all of 2010 was RMB243 million. In the first half of 2011, the foreign exchange authorities cooperated closely with the public security bodies to carry out a series of special actions to crack down on irregular cross-border capital flows, exposed 10 cases involving illegal banks and on-line foreign exchange speculation in an amount exceeding RMB10 billion, destroyed 16 illegal trade markets, and, consequently, effectively curbed and deterred illegal and crime activities related to foreign exchange and effectively curbed the increasingly active momentum in illegal and irregular capital flows such as hot money. Question 2: Since the beginning of this year, there was a breakthrough increase in the number of cases involving illegal and irregular capital such as hot money investigated by the foreign exchange authorities. What is the mean reason for this? Answer: In recent years, as the foreign economy of China has continuously developed, illegal and irregular capital flows such as hot money have become more complicated and secretive. The foreign exchange authorities have always rigorously cracked down on irregular cross-border capital flows, carrying out special actions to deal with and crack down on illegal and irregular capital inflows such as hot money, specifically investigating illegal and irregular funds of key participants and channels and rigorously cracking down on illegal and irregular transactions such as illegal banks. In particular, the foreign exchange authorities searched extensively for clues about illegal and irregular capital flows such as hot money through multiple channels, connected and coordinated with the on-site inspections in a timely manner, and consequently improved the accuracy and effectiveness of the crackdown on hot money. Generally, the key channels for the foreign exchange authorities to obtain clues on irregular flows of foreign exchange include: first, the handling of business and the on-site inspections by the foreign exchange authorities; second, the receipt of reports; third, the receipt of clues handed over by the public security bodies, audit offices, customs, tax authorities, and other departments. In particular, a maximum amount of RMB 100,000 on the basis of his or her contributions will be rewarded to those who proactively report on clues about activities in violation of the foreign exchange laws and regulations. The reward may also be increased for those who make special contributions. In order to strengthen the monitoring and early warning on illegal and irregular capital flows such as hot money, the foreign exchange authorities have energetically elevated and improved the off-site inspection methods. In 2010, the foreign exchange authorities developed and promoted nationwide the Off-site Foreign Exchange Inspection System. The operation of the system enhances the capability of the foreign exchange authorities to carry out extensive searches for clues about illegal and irregular capital flows, and plays an important role in improving the accuracy, initiative, and effectiveness of cracking down on activities in violation of the foreign exchange laws and regulations. Question 3: Could you briefly introduce the Off-site Foreign Exchange Inspection System? Answer: The Off-site Foreign Exchange Inspection System is mainly used to find clues about illegal and irregular capital flows such as hot money. In recent years, the means and methods of illegal and irregular cross-border capital flows have become more complicated, posing a great challenge to the inspections by the foreign exchange administration. It is difficult to adapt to the needs of situation if the foreign exchange authorities only rely on daily supervision or on-site inspections to discover clues about illegal and irregular activities. In order for the foreign exchange inspections to cover the foreign exchange collection and payment activities of various market players, after years of investigation, the foreign exchange authorities designed and developed the Off-site Foreign Exchange Inspection System. The characteristics of the system are as follows: First, wide coverage. The system covers various foreign exchange-related subjects, such as banks, non-bank financial institutions, enterprises, and individuals, and monitors almost all the information on foreign exchange transactions under the current account and the capital account. Second, strong capability to search for information. It may screen suspicious and irregular transactions from a vast amount of foreign exchange transaction data, sketch the entire track of capital operations by participants in suspicious and irregular transactions, and consequently promptly and accurately investigate the subjects in violation of the laws and regulations and their specific activities in violation of laws and regulations. Therefore, it basically realizes all-dimensional foreign exchange supervision, investigation of all illegal and irregular activities and precise guidance for case investigations. Question 4: What are the actual effects of the Off-site Foreign Exchange Inspection System? Answer: The Off-site Foreign Exchange Inspection System has obvious advantages in terms of finding and investigating clues about activities in violation of the foreign exchange laws and regulations, and is becoming a powerful weapon of the foreign exchange authorities to crack down precisely on irregular cross-border capital flows. In the first half of this year, the number of cases filed and closed and the amount of penalties and confiscations far exceeded those in the corresponding period of the last year, and the Off-site Foreign Exchange Inspection System has played an important role therein. Currently, the Off-site Foreign Exchange Inspection System comprehensively covers the key transaction methods and channels of illegal and irregular cross-border capital flows such as hot money by establishing 19 supervisory and analytical indicators in six categories. In particular, in the first half of this year, through the Off-site Foreign Exchange Inspection System, the foreign exchange authorities carried out nationwide screening and investigation of clues related to cross-border inflows and foreign exchange settlements of illegal and irregular funds over the past two years, and found 821 clues about suspected irregular cross-border capital flows and 16,945 transactions involving USD16.703 billion suspected to be in violation of the regulations on foreign exchange administration. In particular, the verification rates of clues in the Jiangsu branch, Shanghai branch, and Zhejiang branch were 62.5%, 70%, and 76.7% respectively. Question 5: Could you introduce several cases involving activities in violation of the regulations on foreign exchange administration found through the Off-site Foreign Exchange Inspection System？ Answer: The Off-site Foreign Exchange Inspection System can flexibly set screening conditions and search methods based upon the inspection experience and targets, and can discover clues about illegal and irregular capital flows in a timely manner. For example, in general, payments of goods in normal transactions do not appear in integer form. In consideration of this behavioral characteristic, certain sub-branches of the foreign exchange authorities regularly monitored foreign exchange transactions in which RMB funds from the foreign exchange settlement were used toward payment of goods and appeared in integer form, and successfully found one case in which the enterprise completed the foreign exchange settlement procedures for external debt through false trade contracts and applied the funds from the settlement toward repayment of a domestic RMB loan. An investigation determined that the enterprise changed the purpose of the funds from foreign exchange settlement of external debt and it was punished by the local foreign exchange authority in accordance with the relevant regulations. As another example, a certain branch of the foreign exchange authorities set special indicators in the Off-site Foreign Exchange Inspection System to screen large amounts and rapid foreign exchange settlements in the name of payments of land prices by newly established foreign-invested enterprises and followed the flows of RMB funds from the foreign exchange settlement. The branch screened 15 suspicious enterprises and carried out on-site inspection thereof. The inspections found that 9 enterprises had applied the RMB funds from the foreign exchange settlement for purposes other than the payment of the land prices as previously declared. Presently, the 9 enterprises have been punished by the local foreign exchange authorities. Question 6: How do the foreign exchange authorities verify violations after finding clues about illegal and irregular cross-border capital flows such as hot money? What kinds of administrative penalties do violators face? Answer: The foreign exchange authorities will specifically carry out on-site inspections, investigations, and collections of evidence on relevant suspected violators after finding and investigating suspected violators and related transactions through the Off-site Foreign Exchange Inspection System. According to Article 33 of the newly amended in 2008 Regulations on the Foreign Exchange Administration of the People’s Republic of China, the foreign exchange authorities may enter the facilities of foreign exchange operations and places of suspected foreign exchange violations to conduct on-site inspections and investigations and to collect evidence; the foreign exchange authorities have the right to require an explanation of the matters under investigation from the relevant institutions and individuals, and have the right to inquire about the accounts of the entities and individuals directly relevant to cases of foreign exchange violations; where necessary, the foreign exchange authorities may apply to a people’s court to freeze or seal the illegal funds or other involved property. After an on-site inspection, investigation, or collection of evidence, where the activities in violation of the laws and regulations on foreign exchange are verified, the foreign exchange authorities will impose administrative penalties in accordance with the law. When it is suspected that a crime has been committed, the case will be handed over to the judicial authorities and criminal liability will be pursued in accordance with the law. In particular, with respect to institutions and individuals involved in illegal and irregular cross-border capital flows such as hot money, the foreign exchange authorities will order that corrections be made, will confiscate the illegal gains, and will impose a fine of no more than 30 percent of the amount involved; where the circumstances are serious, a fine of no less than 30 percent of the amount involved but no more than the amount involved may be imposed. Where the activities of the financial institutions in violation of the laws and regulations on foreign exchange are verified, the foreign exchange authorities may order termination of the relevant business operations of such financial institutions and also issue a warning and impose an administrative fine on the person in charge or any other person with relevant accountability. In the first half of this year, the foreign exchange authorities imposed penalties and confiscated a total amount of RMB202 million with respect to three kinds of irregular activities closely related to the flow of hot money, such as the illegal use of foreign exchange, the remittance of foreign exchange into the territory of the People’s Republic of China in violation of the provisions or illegal foreign exchange settlements, and violations of the regulations on external debt administration, for which the penalty in a number of major cases exceeded RMB10 million. This reveals the strength and determination of the foreign exchange authorities to crack down on illegal and irregular cross-border capital flows such as hot money. Question 7: What about future prospects for dealing with and cracking down on hot money? Answer: Facing the complicated economic situations both at home and abroad, the foreign exchange authorities will continue to rigorously crack down on irregular cross-border capital flows, with a special focus on seriously combating the inflows of hot money, further improving the inspection methods, and intensifying the investigation and punishment of major cases. We will continuously improve the Off-site Foreign Exchange Inspection System, expand the data sources, optimize the indicators for monitoring and analysis, and adjust the monitoring indicators in a timely manner in accordance with changes in the foreign exchange receipts and payments situation. We will further strengthen off-site inspections of unusual capital outflows and effectively prevent and resolve the financial risks of unusual capital inflows and outflows while also strengthening the off-site monitoring of unusual capital inflows of enterprises, banks, and individuals. In summary, the foreign exchange authorities have the capability, means, and confidence to firmly crack down on illegal and irregular capital flows such as hot money, and any activities that disrupt the order in the foreign exchange market and violate the regulations on foreign exchange administration will be punished in accordance with the law. 2012-01-18/en/2012/0118/1025.html
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In September 2011 the State Administration of Foreign Exchange (SAFE), the State Administration of Taxation (SAT), and the General Administration of Customs (GAC) jointly issued an announcement in which they decided to implement a pilot reform of the foreign exchange administration system for trade in goods in seven provinces (cities), such as Jiangsu and Shandong, beginning from December 1, 2011. Recently, an official from the SAFE accepted an interview by journalists on relevant issues. I. Under the current situation, what are the main concerns of the three departments such as the SAFE for introducing the pilot reform of the foreign exchange administration system for trade in goods? Answer: Before the reform of the foreign exchange administration system for trade in goods, the core of the foreign exchange administration for trade in goods consisted of the verification and writing-off management for imports and exports. The verification and writing-off management system, since its establishment in the early 1990s, involved the matching of the macro-economic situation and the balance of payments status. This played an important role in promoting the balance of payments equilibrium and guarding against the risks of cross-border capital flows. In recent years, the foreign economy of China has developed rapidly and the scale, method, and participants in foreign trade have changed greatly, therefore, the verification and writing-off management method based on a “one-to-one correspondence, case-by-case examination” needed to be changed. For this purpose, the SAFE actively adapted to the changes in the situation, transformed the concepts and methods of foreign exchange administration, and on the basis of adequate investigation and research, introduced the pilot reform of the foreign exchange administration system for trade in goods jointly with the SAT and the GAC to establish a new management mode featuring aggregate screening, dynamic monitoring, and classified management, and made relevant adjustments to the management method for export rebates and export custom declarations. The reform of foreign exchange administration system for trade in goods is helpful to further enhance the level of trade facilitation, to improve the means of foreign exchange administration, and to guard against the risks from foreign exchange receipts and payments. II. How should one understand the new administration mode combining facilitation and risk management established by the pilot reform of the foreign exchange administration system for trade in goods? Answer: The so-called combination of facilitation and risk management means simplifying the formalities and business handling procedures for receipts and payments of foreign exchange from trade and guiding and encouraging enterprises to operate their businesses according to the law, as well as improving the means for foreign exchange administration for trade in goods and guarding against risks from foreign exchange receipts and payments. The reform of the foreign exchange administration system for trade in goods, on the basis of confirmation by the enterprises of the knowledge of the relevant policies and regulations as well as the related rights and obligations, simplified the management procedures and implemented convenient policies with respect to the handling of the foreign exchange receipts and payments for trade in goods for most enterprises. This included further simplifying the requirements on document examination of foreign exchange payments for imports, cancelling the procedures for the verification and writing-off of foreign exchange collections from exports and online inspections of foreign exchange collections and settlements from exports, and significantly reducing the number of administrative licensing items under trade in goods. Furthermore, the SAFE will implement comprehensive inspections and the classified management in terms of foreign exchange receipts and payments from trade in goods, classify the enterprises in accordance with their business compliance and make dynamic adjustments to the classification, screen out the very few unusual and suspicious economic entities, and focus the supervision thereon to change the institutional arrangements of the past, i.e., “feeding the medicine to all in the case of only one being sick”. III. The reform of the foreign exchange administration system for trade in goods will be beneficial for foreign exchange held individuals. However, will it weaken state control of hot money? Answer: The reform of the foreign exchange administration system for trade in goods represents a major move by the SAFE to proactively adapt to developments and changes in the situation, to accelerate the transformation of the concepts and methods of foreign exchange administration, and to timely adjust the management methods. The reform, while providing facilitation for the market players such as enterprises and banks, further improves management and strengthens supervision of the risks of foreign exchange receipts and payments, by such means as improving the management methods, the efficiency of on-site verifications and dynamic classified management, and strengthening information sharing and regulatory cooperation among departments. This is mainly embodied in the following areas: First, the regulatory departments such as the foreign exchange authorities will have timely and comprehensive knowledge of the data on the flow of imported and exported goods and the flow of capital from receipts and payments of foreign exchange by enterprises. Second, the foreign exchange authorities will carry out fully covered monitoring to match the flows of goods and the flows of capital from the foreign trade of enterprises, will screen out through technical means those enterprises with suspicious and irregular activities, and will carry out on-site verifications. Third, the foreign exchange authorities will strengthen supervision of the enterprises with suspicious and irregular activities by examining the documents from receipts and payments, the business types, the modes of settlement and the handling procedures. Fourth, the foreign exchange authorities will carry out dynamic classified management of the enterprises, and may make adjustments to the classification of the enterprises based on their compliance. IV. It has been reported that the reform of the foreign exchange administration system for trade in goods will significantly reduce the burdens on enterprises and will simplify examination of the daily business of banks. How will this be carried out? Answer: This mainly involves the following: First, the enterprises’ foreign exchange collections from exports will not be required to be inspected online, the foreign exchange refunds for exports will not be required to undergo prior approval procedures on a case-by-case basis, and the documents required to be submitted to the banks for examination with respect to foreign exchange payments for imports will be significantly simplified; furthermore, the paper Export Verification Form for Foreign Exchange Collections will not be required in the application to the tax authorities for export rebates. Second, the verification and writing-off procedures will not be required to be handled by the foreign exchange authorities after the enterprises’ foreign exchange collections from exports. Third, real-time information interaction platforms will be established between the enterprises and the foreign exchange authorities, and most of the information submission and business reports of the enterprises will be handled online. Fourth, the verification system for the collection and payment of foreign exchange from trade and the online inspection system for foreign exchange collections and settlements from exports will be integrated into the Foreign Exchange Monitoring System for Trade in Goods, in order to facilitate bank business operations. Fifth, the number of administrative licensing items will be reduced from 6 to 2, i.e., list registration and registration administration of Category-C enterprises. V. We note that the Announcement on the Pilot Reform of the Foreign Exchange Administration System for Trade in Goods provides that enterprises are classified into A, B, and Categories based on dynamic classified management. What are the issues involved? What should the enterprises do in order to benefit from this policy? Answer: After the pilot reform, the foreign exchange authorities will carry out classified management of the imports and exports of enterprises. According to past experience of foreign exchange supervision of trade in goods, most of the import and export enterprises operate according to the law. Therefore, the foreign exchange authorities will classify the enterprises with normal and lawful operations into Category A, which will enjoy the facilitation policies and measures. Meanwhile, the foreign exchange authorities, by comprehensively realizing the off-site monitoring and on-site verifications and investigations, will classify the enterprises with suspicious and irregular activities into Category B or C, and will focus their supervision thereon. In this way, the limited supervision resources of the foreign exchange authorities will be focused on a few management targets. Strict management of a few enterprises will serve as a deterrent to guide and encourage the enterprises to operate their businesses according to the law. After the reform of the foreign exchange administration system for trade in goods, most enterprises operating according to the law will enjoy maximum facilitation when handling foreign exchange receipts and payments for trade in goods. As long as the enterprises have authentic and lawful trade bases for their foreign trade activities, can provide necessary evidentiary materials in accordance with the requirements of the relevant regulations, and report any trade which may result in a mismatch between the foreign exchange receipts and payments and the imports and exports in a timely manner, they will fully enjoy the benefits of the policy brought about by the reform. 2012-01-18/en/2012/0118/1028.html