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Taking a Sensible Approach to the Changes in China's Foreign Exchange Reserves By Pan Gongsheng, Deputy Governor of the People's Bank of China and Administrator of the State Administration of Foreign Exchange Foreign exchange reserve is an objective indicator of the achievements in China's reform and opening-up and its development of foreign economy, and also the result of the functioning of the balance of payments. Since the 18th CPC National Congress, China's economic development has stepped into a new normal, with the balance of payments finding an equilibrium amid fluctuations, and foreign exchange reserves registering slower growth rather than high-speed growth as it previously did, and even falling in a certain period, which should be looked at and analyzed objectively and sensibly, rather than fretfully. Foreign exchange authorities are required to refine the foreign exchange administration system, and make use of the positive roles foreign exchange reserves play in serving the real economy and maintaining China's economic and financial security, in a bid to embrace the 19th CPC National Congress with excellent performance. First, foreign exchange reserves change as a result of robust macroeconomic performance In 1992 the reform target of building a socialist market economy was set at the 14th CPC National Congress; in 2001 we joined the WTO, which injected strong impetus for the fast development of China's economy and society. Since the outbreak of the global financial crisis in 2008, China has entered into a new normal of economic development along with the changes in environment and conditions internally and externally, and its foreign exchange reserves have declined from a high level after the long-term growth. But overall, China's foreign exchange reserves remain adequate and within a reasonable range. China has taken the top spot worldwide for years for high foreign exchange reserves. Along with the establishment of the socialist market economic system and the deepening of the opening-up strategy, China has adapted to the holistic development trends of the world economy, and actively participated in the international division of labor and cooperation. In the midst of expanding opening-up, China has borne witness to rapid economic growth for consecutive years, fast expansion in foreign trade, use of foreign capital and outbound investments, and continued surpluses in the balance of payments. As a result, China's foreign exchange reserves hiked from USD 21.7 billion in the beginning of 1992 to a historical high of USD 3.99 trillion in June 2014. Statistics show that the top 10 countries/regions by foreign exchange reserves as at the end of March 2017 include China, Japan, Switzerland, Saudi Arabia, Taiwan, Hong Kong, Brazil, South Korea, India and Russia. To be specific, China's foreign exchange reserves accounted for 28% of the world's total, far higher than those of the rest of the world. China's foreign exchange reserves are characterized by cyclical changes. Since the advent of this century, China has seen two stages in the changes of its foreign exchange reserves. In the first stage, which began in 2000 and ended in 2013, a tremendous amount of global capital flew into emerging economies and sent China's foreign exchange reserves surging, from USD 154.7 billion at the beginning of 2000 to USD 3.82 trillion in 2013, representing an annual increase of more than 26%. In the second stage that began in 2014, along with the outflows of global capital from emerging economies, China's foreign exchange reserves peaked in June 2014 and dropped afterwards. China's foreign exchange reserves are adequate. However, there is no universal metric on how much foreign exchange reserve a country holds should be reasonable. In the 1950s to 1960s, the widest used metric for foreign exchange adequacy ratio was the import for 3-6 months. Later as the demand for foreign exchange reserves expanded to guarding against the inadequate debt servicing capability, the widest used metric for the adequacy ratio became the 100% short-term debt. Since 2011, the International Monetary Fund (IMF) proposed the comprehensive standard for foreign exchange adequacy ratio, based on the capital demand of every country for guarding against crises. Foreign exchange reserve is a continuous variable that dynamically changes under the impact of various factors, and therefore, in measuring whether foreign exchange reserves are at a reasonable level, the macroeconomic conditions, level of economic liberalization, capability of using foreign capital and international financing, and maturity of the economic and financial systems of a country should be taken into full consideration. In China, no matter which metric is adopted, its foreign exchange reserves are adequate and help satisfy the demand for economic and financial development. Second, foreign exchange reserves are crucial to promoting China's economic development Since the 18th CPC National Congress was held, Secretary-general Xi Jinping has proposed the thoughts of building a community of shared future for mankind, achieving mutual benefit and seeking common development in promoting opening up in all respects, based on his understanding of the current international trends of peace, development, cooperation and win win. Based on in-depth study and their understanding of Secretary-general Xi Jinping's new thoughts on opening up, foreign exchange authorities have been active in innovating and improving the foreign exchange reserve management system and utilization mechanism, and played a critical role in adjusting macro policy, serving the national strategy and maintaining financial security. Foreign exchange reserves are key to ensuring the robust performance of China's macro-economy. For the moment, China adopts the well-organized floating foreign exchange rate system that is adjusted based on the supply-demand in the market with reference to a basket of currencies. As an important stabilizer of macroeconomic performance, foreign exchange reserves play a key role in maintaining the capability of international payment, guarding against financial risks, and withstanding the impact of crises. When the global liquidity is adequate, market participants will sell the redundant foreign exchange funds to promote the growth of foreign exchange reserves. When the global liquidity tightens, market participants will hold more foreign exchange assets and reduce overseas debt, leading to lower foreign exchange reserves. Foreign exchange reserves actually function like a reservoir that avoids significant inflows and outflows of cross-border capital and resulting deviation from the economic fundamentals, and makes room for economic restructuring and industrial transformation and upgrading. The adequate foreign exchange reserves also help China withstand the significant external impact from the Asian Financial Crisis of 1997 and the global financial crisis of 2008, safeguarding China's economic and financial security. Foreign exchange reserves have effectively served the opening-up strategy. Secretary-general Xi Jinping stressed that opening up is a must at the new stage of development, with focus on cooperation and mutual benefit. Following the opening-up strategy, foreign exchange authorities have coordinated big pictures in China and the rest of the world, and expanded diversified use of foreign exchange reserves in the principle of "ensuring paid use of foreign exchange reserves with higher benefits and effective regulation in compliance with laws and regulations", providing significant amount of funds for the economic development of China and the world. In recent years, foreign exchange authorities have developed and expanded various channels such as entrusted loans and equity investment to provide foreign exchange funds to financial institutions and physical economic sectors such as commercial banks and policy banks, establishing the mechanism for use of foreign exchange reserves featuring clearly defined roles and responsibilities, definite goals, multiple tiers, and diverse products, with focus on supporting the Belt and Road Initiative, international production capacity and outfit manufacturing cooperation, enterprises going global, and imports and exports in key areas, so as to serve the development of the real economy. As the world economy is recovering slowly, and economic and trade globalization are faced with serious challenges, diversified use of foreign exchange reserves will be favorable for Chinese companies to effectively use the domestic and overseas markets and resources, facilitate the organic integration of China into the international community, and promote international cooperation in economic affairs. Reasonable utilization of foreign exchange reserves has helped achieve the goal of "letting the public hold more foreign exchange". In the face of the demand of market participants for purchasing foreign exchange and their willingness to hold foreign exchange, foreign exchange authorities have deepened the foreign exchange administration reform, yielded policy dividends, and made exchange easier, which have boosted the endeavor to let the public hold more foreign exchange. As for the holders, China has diverse forms of outbound investors such as foreign exchange reserves, China Investment Corporation, social insurance funds, financial institutions and enterprises, indicating remarkable progress has been achieved in the diversification of foreign exchange holders. From the second quarter of 2014 to the end of 2016, foreign exchange reserves in China's International Investment Position fell by around USD 1 trillion, matching with residents' net foreign assets that rose by USD 0.9 trillion, which is a direct testimony to "letting the public hold more foreign exchange". For the private sector, the foreign exchange they held in the period was to fund ODI, servicing of foreign debt, travelling and studying abroad by domestic residents. For the government sector, as foreign exchange reserves on the asset side of the central bank drop, those on the liability side will fall accordingly, showing "letting the public hold more foreign exchange" does not displace the balance in the central bank's balance sheet that adopts the double-entry bookkeeping system. Horizontally, by the third quarter of 2016, China's foreign exchange reserves as a percentage of external assets are at a reasonable and medium level among major developing countries. Vertically, as at the end of 2016, the share of the external assets held by the private sector surpassed 50% for the first time, the highest level since China began to disseminate the data on international investment position in 2004; foreign exchange reserve assets accounted for 48%, down by nearly 20 percentage points from the level of the end of 2009. This shows that China's external economic and financial exchanges are shifting from the dominance of government investments to equal investments by the public and the private sectors. It should be emphasized that China is not interested in strengthening competitiveness through currency depreciation, and does not need to do so. The central bank provides the market with foreign exchange liquidity, avoiding exchange rate overshooting and the herd effect, and safeguarding stability in the market. China's endeavor to strike a balance between enhancing exchange rate flexibility and maintaining exchange rate stability will be favorable for the international community, effectively avoiding the negative spillover effect due to the disorderly adjustment of the RMB exchange rate and the competitive depreciation among major currencies. Third, effectively use foreign exchange reserves to serve the reform and opening up, and international cooperation in economic affairs Reform and opening up is the necessary path towards national prosperity. Carrying out opening up in all respects is a key strategic step proposed by Secretary-general Xi Jinping at the new historical starting point. Foreign exchange authorities must develop the concepts of development that stress innovation, coordination, green, opening-up and sharing, with focus on accelerating the building of the new open economic system, and making full use of foreign exchange reserves' role in the construction of an open economy to make new contributions to realize the two centenary goals (namely, to complete the building of a moderately prosperous society in all respects when the Communist Party of China celebrates its centenary in 2021, and to turn China into a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious when the People's Republic of China celebrates its centenary in 2049) and the Chinese dream of the great renewal of the Chinese nation and the prosperity and development of the world economy. Foreign exchange reserves will be stabilized amid volatility. The economic and financial variables often fluctuate and develop in cycles, rather than taking the form of linear transformation. This holds true for the changes in foreign exchange reserves. Despite many uncertainties in external environment, China's economic and financial fundamentals will remain stable with strong momentum for growth in the long term, and cross-border capital flows will evolve towards an equilibrium. First, China's economy remains in the mid and high-speed growth range, and as the supply-side structural reform advances, the quality and efficiency of its economic development will be enhanced in the future. China's economic fundamentals will continue to ensure the stable position of the RMB in the global currency system, and the RMB exchange rate will remain stable at a reasonable and even level. Second, the external debt deleveraging has been basically completed and Chinese enterprises' use of external debt has rebounded since the second quarter of 2016. Third, the surplus under the current account in China has remained at the reasonable level. As anticipated by the IMF, China will continue to post surpluses under the current account in the coming five years, which will ensure the stable supply of foreign exchange in China. Fourth, as the RMB joins the SDR basket and the reform, opening-up and development of China's financial market are deepened, the RMB assets will become an important part of the global allocation of financial assets and attract foreign investors to invest in the Chinese market, and the foreign exchange under the financial account will be stably supplied. Fifth, the complementarity of currencies and asset prices in the international financial market, coupled with the diversified layout of China's foreign exchange reserves, will ensure sound diversification and be favorable for the stability of China's foreign exchange reserves. Overall, China's foreign exchange reserves will be stabilized in the midst of volatility going ahead. Further efforts shall be made to optimize the role of foreign exchange reserves in stabilizing the balance of payments. The general work guideline of making progress while maintaining stability is an important principle of the CPC in state governance and a methodology for ensuring sound economic performance. Following the logic of stable macro policy, foreign exchange authorities shall go all out to ensure stable growth and provide a favorable external environment for the stable and healthy development of the economy, and for the stability and harmony of society. In the complex and changing economic and financial environments, internally or externally, foreign exchange reserves need to recover the basic feature of maintaining the stability of the balance of payments, which is a necessary requirement for settling major contradictions and problems in China's economic development and for ensuring robust macroeconomic performance. The purpose of foreign exchange administration and utilization is to serve the economic development in China and the world, and therefore foreign exchange reserve administration and utilization shall be integrated into the big picture of the CPC and the state to align domestic development with opening up, and the domestic development with the world development, in a bid to promote common development. Following the work plans of the CPC and the State Council and the general work guideline of making progress while maintaining stability, foreign exchange authorities shall take up responsibilities and forceful measures to coordinate the diversified use of foreign exchange reserves, and invest its funds in the strategic areas that ensure the Belt and Road Initiative, international production capacity and outfit manufacturing cooperation, and to promote common development and prosperity between China and the rest of the world. The operation and administration of China's foreign exchange reserves shall be enhanced. In the principle of safety, liquidity, value preservation and growth, efforts shall be made to conduct prudent, standardized and professional investment and operation with regard to foreign exchange reserves, optimize and dynamically adjust investment portfolios and strategies, and show respect for rules and practices in international markets so as to maintain and promote the stability and development of the international financial market. (The original text is available in the 13th issue of Qiushi Journal for 2017.) 2017-07-07/en/2017/0707/1288.html
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Since the beginning of this year, the State Administration of Foreign Exchange (SAFE) has been committed to implementing the work plans and arrangements of the CPC Central Committee and the State Council. With a focus on serving the real economy, guarding against financial risks and deepening the financial reform, the SAFE has reinforced market regulation, investigated behaviors violating the laws and regulations, and cracked down on fabricated trading and frauds, thereby safeguarding the healthy and sound order in the foreign exchange market, and forestalling the systematic risks to maintain our bottom line. In accordance with the Regulations of the People’s Republic of China on the Disclosure of Government Information (Decree No. 492 of the State Council), a selection of typical cases of foreign exchange violations are announced as follows: Case 1: Evasion of foreign exchange by Guangzhou Changli Import and Export Co., Ltd. From May to July 2015, Guangzhou Changli Import and Export Co., Ltd fabricated its trading backgrounds and repeatedly used the import declarations to pay foreign exchange that amounted to USD 50.4868 million. Such behavior violated Article 12 of the Regulations of the People's Republic of China on Foreign Exchange Administration and was considered evasion of foreign exchange. Involving a large amount of money, the behavior disrupted the order of the foreign exchange market with serious consequences. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 9.5239 million on the company. Case 2: Evasion of foreign exchange by Ningbo High-tech Zone Gaoan Trading Co., Ltd. In August 2015, Ningbo High-tech Zone Gaoan Trading Co., Ltd. used the bill of lading already used by other companies to pay foreign exchange worth USD 23.69 million under false entrepot trade. Such behavior violated Articles 12 and 14 of the Regulations of the People's Republic of China on Foreign Exchange Administration and was considered evasion of foreign exchange that seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 5.87 million on the company. Case 3: Evasion of foreign exchange by LOUNIE Trade (Shanghai) Co., Ltd. In December 2015, LOUNIE Trade (Shanghai) Co., Ltd. massaged the bill of lading and illegally transferred USD 10.25 million abroad under false entrepot trade. Such behavior violated Articles 12 and 14 of the Regulations of the People's Republic of China on Foreign Exchange Administration and was considered evasion of foreign exchange that seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 3.31 million on the company. Case 4: Evasion of foreign exchange by Ningbo Duo Fu Man Chemicals Co., Ltd. From March 2015 to November 2016, Ningbo Duo Fu Man Chemicals Co., Ltd. borrowed the bill of lading of other companies to pay USD 19.2362 million in foreign exchange. Such behavior violated Articles 12 and 14 of the Regulations of the People's Republic of China on Foreign Exchange Administration and was considered evasion of foreign exchange that seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 3.793 million on the company. Case 5: Evasion of foreign exchange by Shandong Yongjia Group Co., Ltd. From June to September 2016, Shandong Yongjia Group Co., Ltd. fabricated bills of lading and paid USD 4.8975 million in foreign exchange. Such behavior violated Articles 12 and 14 of the Regulations of the People's Republic of China on Foreign Exchange Administration and was considered evasion of foreign exchange that seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 1.6227 million on the company. Case 6: Entrepot trade transaction handled by the Agricultural Bank of China Shanghai Branch Huangpu Sub-branch in violation of regulations From January to March 2016, the Agricultural Bank of China Shanghai Branch Huangpu Sub-branch didn't conduct the due diligence investigation into the authenticity of entrepot trade and handled the payment of foreign exchange under entrepot trade without the presentation of the effective ownership voucher by the company. Such behavior violated Article 12 of the Regulations of the People's Republic of China on Foreign Exchange Administration and seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 47 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE ordered the sub-branch for rectification within a prescribed time limit, and imposed a penalty of RMB 1 million on it. Case 7: Entrepot trade transaction handled by the Bank of China Zhoushan Branch in violation of regulations From May to July 2016, the Bank of China Zhoushan Branch didn't conduct the due diligence investigation into the authenticity of entrepot trade and handled the payment of foreign exchange under entrepot trade without the presentation of the ownership voucher by the company. Such behavior violated Article 12 of the Regulations of the People's Republic of China on Foreign Exchange Administration and seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 47 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE ordered the branch for rectification within a prescribed time limit, confiscated its illegal gains of RMB 216,000, imposed a penalty of RMB 1 million, and suspended its sales of foreign exchange to businesses for 6 months. Case 8: Overseas loans under domestic guarantees issued by China Minsheng Bank Quanzhou Branch in violation of regulations From September 2014 to June 2015, and from September 2015 to July 2016, China Minsheng Bank Quanzhou Branch handled foreign exchange payments without the due diligence investigation into the qualification of the debtor, sources of guarantee funds, the purposes of funds under guarantees, sources of funds for the planned repayment of borrowings, and backgrounds of related transactions in terms of signing and performing the contracts for overseas loans under domestic guarantees. Such behaviors violated Articles 12 and 28 of the Regulations on Foreign Exchange Administration for Cross-border Guarantees, and seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 47 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE ordered the branch for rectification within a prescribed time limit, confiscated its illegal gains of RMB 3.041 million, and imposed a penalty of RMB 8 million on it. Case 9: Overseas loans under domestic guarantees issued by Xiamen International Bank Zhuhai Branch in violation of regulations From August 2014 to August 2015, Xiamen International Bank Zhuhai Branch handled foreign exchange purchases and payments without the due diligence investigation into the solvency of overseas debtors and the sources of funds for their repayment of borrowings, or the continuous monitoring and tracking of the purposes of the loans in terms of the signing and performance of the contracts for overseas loans under domestic guarantees. Such behaviors violated Articles 12 and 28 of the Regulations on Foreign Exchange Administration for Cross-border Guarantees, and seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 47 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE confiscated its illegal gains of RMB 816,000, imposed a penalty of RMB 1 million and suspended its sales of foreign exchange to businesses for 3 months. Case 10: Overseas loans under domestic guarantees issued by OCBC Wing Hang Bank (China) Limited Beijing Branch in violation of regulations From September to October 2015 and in September 2016, OCBC Wing Hang Bank (China) Limited Beijing Branch handled foreign exchange purchases and payments without the due diligence investigation into the borrowing contracts, expected sources of funds for the repayment of borrowings, and related transaction backgrounds in terms of the signing and performance of the contracts for overseas loans under domestic guarantees. Such behaviors violated Articles 12 and 28 of the Regulations on Foreign Exchange Administration for Cross-border Guarantees, and seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 47 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE ordered the branch for rectification within a prescribed time limit, confiscated its illegal gains of RMB 3.879 million, imposed a penalty of RMB 4 million and suspended its sales of foreign exchange to businesses for 3 months. Case 11: Overseas loans under domestic guarantees issued by the Industrial Bank of Korea (China) Limited Shenzhen Branch in violation of regulations From September to November 2014, and from October to November 2016, the Industrial Bank of Korea (China) Limited Shenzhen Branch handled foreign exchange purchases and payments without the due diligence investigation into the expected sources of funds for the debtors' repayment of borrowings, the likelihood of performing the guarantee contracts and related transaction backgrounds, or the continuous monitoring and tracking of the purposes of the loans in terms of the signing and performance of the contracts for overseas loans under domestic guarantees, in spite of the inconsistency between the beneficiary of the bill of lading and the buyer/seller of the trade in the documents submitted by the company. Such behaviors violated Articles 12 and 28 of the Regulations on Foreign Exchange Administration for Cross-border Guarantees, and seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 47 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE ordered the branch for rectification within a prescribed time limit, confiscated its illegal gains of RMB 229,000, and imposed a penalty of RMB 2 million. Case 12: Transfer of QDII quotas by Haitong Asset Management Co., Ltd. in violation of regulations From January 2015 to June 2016, Haitong Asset Management Co., Ltd. provided investment quotas to companies without the investment qualifications for QDII in violation of the foreign exchange administration regulations on QDII investment that involved net outward remittance of USD 16.28 million. Even worse, the company submitted inauthentic evidencing materials to the foreign exchange authority. Such behavior violated Article 6 of the Regulations on Foreign Exchange Administration for Overseas Securities Investments by Qualified Domestic Institutional Investors, and seriously disrupted the order of the foreign exchange market with severe consequences. In accordance with Article 44 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE warned the company and imposed a penalty of RMB 7.75 million. Case 13: Illegal arbitrage by Lion Fund Management Co., Ltd. In October 2015, Lion Fund Management Co., Ltd. purchased and remitted out USD 2.987 million in foreign exchange under investment by QDII and then had the money remitted back after overseas settlement on the same day, in order to gain the spread in interest rates between CNY and CNH. Such behavior violated Articles 2 and 16 of the Regulations on Foreign Exchange Administration for Overseas Securities Investments by Qualified Domestic Institutional Investors, seriously disrupting the order of the foreign exchange market. In accordance with Article 40 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 950,000 on the company. Case 14: Illegal trading of foreign exchange by a Mr. Chu from Henan Between September and October 2016, in order to transfer assets overseas against the laws, Chu transferred a total of RMB 30 million in three times into a domestic account controlled by an underground bank, and remitted a total of CAD 5.91 million into his account in Canada after having the money exchanged into foreign exchange through the underground bank. Such behavior violated Article 30 of the Measures for the Administration of Individual Foreign Exchange, and was considered illegal trading of foreign exchange. In accordance with Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 1.95 million on Chu. Case 15: Illegal trading of foreign exchange by a Mr. Liu from Shandong From February to August 2015, in order to transfer assets overseas against the laws, Chu transferred from his account a total of RMB 13.551 million in seven times into a domestic account controlled by an underground bank, and had his relative collect the illegal foreign exchange proceeds of AUD 2.5645 million after the remittances were exchanged through the underground bank. Such behavior violated Article 30 of the Measures for the Administration of Individual Foreign Exchange, and was considered illegal trading of foreign exchange. In accordance with Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 970,000 on Liu. Case 16: Illegal trading of foreign exchange by a Mr. Zhong from Jiangxi From January to May 2016, Zhong exchanged USD 1.1533 million into RMB 7.5776 million via an underground bank and transferred the money into his domestic account. Such behavior violated Article 30 of the Measures for the Administration of Individual Foreign Exchange, and was considered illegal trading of foreign exchange. In accordance with Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE warned Zhong and imposed a penalty of RMB 530,300 on him. Case 17: Illegal trading of foreign exchange by a Mr. Zheng from Macau From February 2013 to July 2015, Zheng made payments or collected receipts in RMB through his domestic personal account and collected receipts or made payments in HKD of equal value through his foreign account to convert foreign exchange for others against the laws. 33 such transactions were conducted, involving a total of RMB 65.0157 million. Such behavior violated Article 30 of the Measures for the Administration of Individual Foreign Exchange, and was considered illegal trading of foreign exchange, seriously disrupting the order of the foreign exchange market. In accordance with Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE warned Zheng, and imposed a penalty of RMB 3.2508 million on him. Case 18: Illegal trading of foreign exchange by a Mr. Zang from Jiangsu From April to May 2016, Zang exchanged the RMB into the banknotes of the Hong Kong dollar by making payments in RMB through the POS at a currency exchange store in Macau, which involved a total of RMB 11.746 million. Such behavior violated Article 30 of the Measures for the Administration of Individual Foreign Exchange, and was considered illegal trading of foreign exchange. In accordance with Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE warned Zang, and imposed a penalty of RMB 939,700 on him. Case 19: Evasion of foreign exchange by a Mr. Song from Inner Mongolia through split purchases of foreign exchange From July 2015 to December 2016, to illegally transfer his assets, Song used the annual quotas for individual purchases of foreign exchange of 54 persons including his family and friends to purchase foreign exchange in a split way for the fabricated purposes of studying abroad, seeking medical advice overseas and overseas trips, and then transferred the foreign exchange into his overseas account, which involved a total of USD 3.4927 million. Such behavior violated Article 7 of the Measures for the Administration of Individual Foreign Exchange, and was considered evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 683,000 on him. Case 20: Evasion of foreign exchange by a Mr. Jiang from Henan through split purchases of foreign exchange From January to April 2017, to illegally transfer his assets overseas, Jiang used the annual quotas of 55 persons for the purchases of foreign exchange to purchase foreign exchange in a split way for the fabricated purpose of overseas trips at his own expense, and then transferred the foreign exchange into his account in Hong Kong, which involved a total of USD 2.6938 million. Such behavior violated Article 7 of the Measures for the Administration of Individual Foreign Exchange, and was considered evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a penalty of RMB 389,700 on him. 2017-12-01/en/2017/1201/1383.html
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The State Administration of Foreign Exchange (SAFE) has recently held the 2017 High-level Seminar for Branch Directors to implement the gist of the National Financial Work Conference, and analyze the economic and financial conditions both at home and abroad and the foreign exchange situations in China, based on the priorities of foreign exchange administration for the second half. Pan Gongsheng, secretary of the CPC Leadership and administrator of the SAFE made systematic arrangements for the implementation of the gist of the National Financial Work Conference and for the Seminar for Presidents of Branches and Sub-Branches of the People's Bank of China. Attendees include deputy directors, chief accountants, and heads of the branches of the SAFE (foreign exchange administrative departments), as well as heads of the organs and units directly under the SAFE. It was unanimously agreed at the meeting that under the leadership of the CPC Central Committee with Comrade Xi Jinping at its core, China has achieved significant accomplishments in China's financial development and reform advancement since the 18th CPC National Congress. This national financial work conference, an important meeting held in the run-up to the 19th CPC National Congress, shows the CPC Central Committee's emphasis of the financial work. In his speech, Secretary-general Xi Jinping took a big-picture approach to analyzing the current financial situation and elaborating on the guidelines, rules and tasks for financial work under the new normal of economic development, based on the laws of financial development. He gave a comprehensive account of many key issues such as how to enhance the efficiency and level of financial services supporting the real economy, guard against systematic financial risks, be determined to deepen the financial reform and further liberalize the financial market, and refine the CPC's leadership in financial work. Therefore, this conference is an instruction and guide for ensuring a good performance in financial work, and promoting the benign circulation and healthy development of the economy and finance under the new circumstances. Premier Li Keqiang made arrangements for financial work in the new era and raised clear requirements. Deputy Premier Ma Kai made specific arrangements for implementing the gist of the National Financial Work Conference. The officials and staff in the foreign exchange administration system are required to carefully learn to develop a right and thorough understanding of the gist and arrangements and be determined to implement them. According to the conference, in the face of complicated economic and financial conditions both at home and abroad since the beginning of 2017, foreign exchange authorities have adhered to the general work guideline of making progress while maintaining stability and adapted to the new normal of foreign exchange administration under the leadership of the CPC Central Committee and the State Council as well as the CPC Committee of the People's Bank of China. They are committed to balancing the relations between facilitation and risk mitigation, effectively guarding against risks associated with cross-border capital flows while enhancing the level of foreign exchange administration serving the real economy, and therefore effectively safeguard the national economic and financial security. By deepening the reform of delegation, regulation and service, foreign exchange authorities support the stable development of foreign trade, and the two-way opening up of the financial markets. By adhering to the bottom line of foreign exchange administration in guarding against risks, they are dedicated to strengthening their capabilities in ongoing and ex-post administration, intensifying authenticity and compliance management, and cracking down against foreign exchange irregularities to ensure the health and stability of the foreign exchange market. They devote themselves to optimizing the operation and management of foreign exchange reserves to ensure the security, liquidity, value preservation and growth of foreign exchange reserves. They also enhance and improve CPC building to implement the "two responsibilities" in strengthening the Party's self-discipline in an all-round way. New achievements have been made in all respects. It was pointed out at the meeting that since the 19th CPC National Congress will be held in the second half, delivering a good performance in foreign exchange administration is of great significance. Foreign exchange authorities shall align their thoughts and actions with the judgments, decisions and arrangements of the CPC Central Committee on economic and financial conditions to strengthen their sense of responsibility, mission and urgency in foreign exchange administration. They are required to step up the implementation with a focus on serving the real economy, guarding against financial risks and deepening financial reforms. First, further promoting cross-border trade and investment facilitation to enhance the efficiency and level of foreign exchange administration serving the real economy. Foreign exchange authorities are required to duly support and ensure authentic international payments and transfers under the current account in compliance with regulations to support the development of new trading formats. They also shall support capable Chinese enterprises that meet conditions to make authentic outward investments in line with regulations, and optimize foreign exchange administration services for FDI, to create a fairer, more open and convenient business environment for both Chinese and foreign enterprises. Second, building the macro-prudential management and micro market monitoring system for cross-border capital flows. Efforts shall be made to intensify ongoing and ex-post regulation, crack down on foreign exchange irregularities such as underground banks, and guard against risks associated with cross-border capital flows to safeguard a healthy and stable foreign exchange market and China's financial stability and economic security. Third, further deepening the foreign exchange administration reform to systematically push for the two-way opening up of the financial market and convertibility under the capital account. A favorable policy environment for foreign exchange administration shall be built to better support the Belt and Road Initiative. Fourth, enhancing the operations and management of foreign exchange reserves to maintain and grow the value of foreign exchange reserves while ensuring the security and liquidity of foreign exchange reserves. According to the meeting, foreign exchange authorities must uphold the centralized and uniform leadership and the authority of the CPC Central Committee, and implement the policies, guidelines, decisions and arrangements made by the CPC Central Committee on financial work, to ensure the accurate orientation of the financial reform and development. They shall study the gist of Secretary-general Xi Jinping's speeches and his new philosophy, concepts and strategies on state governance, and strengthen their consciousness of the need to maintain political integrity, think in big-picture terms, uphold the leadership core, and keep in alignment. They also shall implement the requirements on strengthening the CPC's self-discipline, enhance education on dreams and beliefs, the spirit of the CPC, and the discipline, clean up undesirable work styles and uphold integrity, and comply with political discipline and regulations. Versatile financial talents with strong political consciousness shall be cultivated, selected and used to provide talent guarantee for the reform and development of foreign exchange administration. Officials and staff in the foreign exchange administration system are required to gather around the CPC Central Committee with comrade Xi Jinping at its core, and work hard with more courage and determination as well as a strong sense of responsibility, in an attempt to ensure sound foreign exchange administration under the new circumstances and embrace the 19th CPC National Congress with outstanding performance. 2017-07-28/en/2017/0728/1290.html
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On the afternoon of September 28, 2017, the Theory Study Central Team of the CPC Leadership of the State Administration of Foreign Exchange (SAFE) got the opportunity of celebrating the 80th anniversary since On Practice and On Contradiction were published to organize the study on philosophy and its use, along with the implementation of the gist of the National Financial Work Conference and of the speech delivered by Secretary General Xi Jinping on July 26, as well as his remarks on Party governance based on systems and regulations and intra-Party regulations and systems. At the study, which was chaired by Pan Gongsheng, Secretary of the CPC Leadership and Administrator of the SAFE, members of the CPC Leadership had in-depth discussions and exchanges concerning foreign exchange administration and thinking. Attendees of the study included officials from relevant departments of the SAFE Head Office. At the study, comprehensive and in-depth learning and discussions were held on the theoretical contributions and contemporary value of Marxist philosophy against the background of the production of On Practice and On Contradiction. The CPC Leadership of the SAFE believes that On Practice and On Contradiction by Mao Zedong are great accomplishments based on China's revolution and traditional philosophy, provide a significant philosophical basis for Marxist philosophy with Chinese characteristics, and help CPC members build a scientific worldview and methodology, playing a significant part in the history of Chinese revolution, or even in the history of the CPC, and therefore will serve a guiding role in building a socialist economy with Chinese characteristics. Since the 18th National Congress of the Communist Party of China, the CPC Central Committee with Comrade Xi Jinping at its core has focused on pressing ahead with the supply-side structural reform, and enriched and refined the new concepts, ideas and strategies on governing China, achieving remarkable progress that is of great practical and historical importance in reform, development, and stability, internal politics, diplomacy and national defense, and governance of the CPC, the country and its military forces, and making breakthroughs in reforms in key areas and links. These new practices that integrate Marxism with China's reality give a full display of the strong vitality of On Practice and On Contradiction in modern times. The SAFE's CPC Leadership stresses that CPC organizations and leaders at various levels develop a full understanding of the practical significance of studying philosophy and its use, and study classics such as On Practice and On Contradiction, to raise their awareness, sum up experience and make innovations. They shall have an in-depth understanding of the theoretical principles of Marxist epistemology and material dialectics, and of the underlying meanings of "seeking truth from facts"," proceeding from reality in all things we do", "no investigation, no right to speak", and "analysis of contradictions", to base their beliefs and convictions on the rational recognition of sciences and theories. They shall also have a profound knowledge of the rationales, basic views and methodology of Marxist philosophy, and further their understanding and grasp of the gist of important speeches by Secretary General Xi Jinping and the stance, views and methodology of Marxism laid out in the new philosophy, thinking and strategies on state governance by the CPC Central Committee. By following the experience of integrating Marxism with China's reality, they shall study and use philosophy, become more conscious of emancipating their minds and seeking truth from facts, and more ready to do things with critical thinking, and integrate Marxist stances, views and methodology with the theories, directions, guidelines and policies of the CPC and implement them in foreign exchange administration. They shall study and implement the gist of the National Financial Work Conference and understand the accomplishments in financial reform and developments in China. With a focus on "serving the real economy, guarding against financial risks and deepening financial reform", they shall analyze and understand the current economic and financial conditions, capture the principal contradictions and principal aspects of contradictions in social and economic developments, and strengthen critical and strategic thinking, to adapt to the new normal of foreign exchange administration and be poised for the upcoming 19th National Congress of the Communist Party of China with excellent performance. As emphasized by the CPC Leadership of the SAFE, the remarks of Secretary General Xi Jinping on Party governance based on systems and regulations address major issues regarding the building of intra-Party regulations and systems under the new circumstances, and show the progress of the building of intra-Party regulations and systems, key measures adopted, accomplishments already made and fresh experience accumulated by the CPC Central Committee with Comrade Xi Jinping at its core. These remarks enrich and develop the Marxist theory of Party building and provide a significant reference for enhancing the building of intra-Party regulations and systems. Party organizations of the SAFE at various levels and all Party members shall develop a comprehensive and systematic understanding of the thoughts of Xi Jinping on governing the CPC based on systems and regulations, and of the significant impact of intra-Party regulations and systems on governing the CPC based on systems and regulations, enhance the study and promotion of intra-Party regulations and systems, and boost the effective implementation of intra-Party regulations and systems so as to deepen the comprehensive and strict governance of the CPC. According to Pan Gongsheng, in the run-up to the 19th National Congress of the Communist Party of China, foreign exchange authorities shall act in strict compliance with the political discipline and norms, and raise the "four awareness" to become highly aligned with the CPC Central Committee with Comrade Xi Jinping at its core in thoughts, politics and action, and firmly uphold the authority of the CPC Central Committee. They shall intensify monitoring and analysis of foreign exchange markets and cross-border capital flows to maintain the stable performance of foreign exchange markets. They shall also keep strict confidentiality, ensure national security, and pay attention to safe production to safeguard stable operation of all business systems for foreign exchange. They shall pay close attention to market expectation management to effectively keep market confidence stable. Persistent efforts shall be made to clean up undesirable work styles, uphold integrity, combat corruption, and keep alert to corruption. The leaders shall strictly perform their responsibilities in shift work and leading teams on different shifts, to ensure efficient operation of the emergency mechanism. Moreover, a prior plan shall be made to get well prepared for the in-depth study and implementation of the gist of the 19th National Congress of the Communist Party of China. 2017-09-29/en/2017/0929/1335.html
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On August 17, the State Administration of Foreign Exchange (SAFE) held the 2017 seminar with banks and financial companies in Beijing to implement the gist of the National Financial Work Conference, analyze the current state of foreign exchange markets, and announce recent foreign exchange irregularities among banks. Pan Gongsheng, secretary of the CPC Leadership and administrator of the SAFE, delivered a speech and Yang Guozhong, deputy administrator of the SAFE, chaired the meeting, with attendees including heads of the bodies of the SAFE, policy banks, state-owned commercial banks, joint-stock commercial banks and a selection of urban commercial banks as well as financial companies. The participants in the meeting unanimously agreed that the National Financial Work Conference is a significant meeting in the run-up to the 19th CPC National Congress, and shows that the CPC Central Committee attaches great importance to financial work. In his speech, Secretary-general Xi Jinping took a holistic view to analyze the current financial conditions based on the laws of financial development, and describe the guidelines, principles and priorities of financial work under the new normal of economic development. He also gave a full account of how to enhance the efficiency and level of finance serving the real economy, proactively prevent and address systematic financial risks, be determined to deepen the financial reform and expand the liberalization of finance, and strengthen and improve the leadership of the Party in financial affairs. This speech is a key reference and guideline for how to ensure financial work, and promote benign circulation and healthy development of the economy and finance under the new circumstances. The meeting required that efforts should be made to study and implement the decisions and plans of the CPC Central Committee with Comrade Xi Jinping at its core on financial work, strengthen the consciousness of the need to maintain political integrity, think in big-picture terms, uphold the leadership core, and keep in alignment, and integrate the thoughts into the judgment of the CPC Central Committee on financial conditions. The policies and guidelines formulated by the CPC Central Committee shall be unswervingly implemented, and three tasks, namely, serving the real economy, prevention and control of financial risks and deepening the financial reform, shall be carried out, so as to create a favorable environment for the 19th CPC National Congress. According to Pan Gongsheng, China's economy has developed steadily with a more remarkable momentum for growth and market expectations have been further stabilized since the beginning of this year, boosting the strong recovery of China's foreign exchange markets, and the stability of China's cross-border capital flows. As the 19th CPC National Congress draws near, which is to be convened in the second half of this year, foreign exchange authorities will focus on serving the real economy and China's reform and opening up to further enhance cross-border trade and investment facilitation amid its efforts to serve the real economy, prevent and control financial risks and deepen the financial reform. They will also be committed to guarding against cross-border capital flow risks and safeguarding the stability of foreign exchange markets, in a bid to create a healthy, benign and stable market environment for the reform and opening up. The policy for foreign exchange administration will be focused on: first, upholding reform and opening up and refining the foreign exchange policy framework; second, boosting capital account convertibility prudentially and systematically; third, establishing a system for macro-prudential administration of cross-border capital flows and for micro market regulation; fourth, improving the RMB exchange rate formation mechanism to enhance the elasticity of the exchange rate. Pan Gongsheng stressed that, banks and financial companies, the first-line service windows for foreign exchange business and a bond for the conduction mechanism of foreign exchange policy, are crucial to sustaining the healthy development of foreign exchange markets. They are required to enhance the efficiency and level of their endeavor to serve the real economy in all respects, make the most of their roles in the allocation of foreign exchange resources, serve and support the country's opening-up strategy, and facilitate market participants' use of both domestic and foreign markets to satisfy customers' reasonable requirements for trade and investment. By following the foreign exchange administration policies, they shall refine the self-discipline mechanism for foreign exchange markets, implement the operation requirements of foreign exchange business and rationally guide market expectations. They shall also raise their awareness of internal controls, with a focus on strengthening the education on the code of internal professional ethics and on laws and regulations, intensifying management of foreign exchange workforce, performing the responsibilities for authenticity and compliance review, and work with regulators to crack down on and contain foreign exchange irregularities, in an attempt to maintain the equilibrium of the balance of payments and boost the benign circulation and healthy development of the economy and finance. Representatives of banks and financial companies present said they would work hard and be responsible to better serve the real economy, and maintain the health and stability of foreign exchange markets and the country's economic and financial security to embrace the 19th CPC National Congress with remarkable accomplishments. Following the gist of the National Financial Work Conference, Administrator Pan Gongsheng comprehensively analyzed the trends of foreign exchange markets at present and in the near future, especially the policy orientation of foreign exchange administration, namely, two directions and four connotations with a focus on foreign exchange issues in eight aspects that banks and financial companies shall pay attention to, and raised requirements on relevant tasks. With a clear orientation and specific requirements, Pan's speech shall be carefully studied and implemented. In particular, operation shall be standardized to effectively communicate foreign exchange administration policies and rationally guide market expectations. Banks and financial companies shall also work hard and discharge their responsibilities to maintain the health and stability of foreign exchange markets and China's economic and financial security, so as to be poised for the upcoming 19th CPC National Congress with significant achievements. 2017-08-17/en/2017/0817/1295.html
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On December 30, 2017, Zhou Xiaochuan, secretary of the CPC Committee and governor of the People's Bank of China (PBC), visited the Investment Center of the State Administration of Foreign Exchange (SAFE) to meet with officials for the operation and management of foreign exchange reserves, accompanied by Yi Gang, deputy secretary of the CPC Committee and deputy governor of the People's Bank of China, Pan Gongsheng, member of the CPC Committee and deputy governor of the PBC and administrator of the SAFE, and Yin Yong, member of the CPC Committee and deputy governor of the PBC, and Lu Lei, deputy administrator of the SAFE. On behalf of the CPC Committee of the PBC, Zhou Xiaochuan showed his care for every official involved in the operation and management of foreign exchange reserves and confirmed the accomplishments already achieved in this regard. According to Zhou Xiaochuan, the year 2017 was key to the implementation of the 13th Five-year Plan and also witnessed the deepening of the supply-side structural reform. In the face of complex reform tasks and economic and financial conditions both at home and abroad, the Investment Center was committed to the implementation of the gist of the 19th CPC National Congress, the National Financial Work Conference and the Central Economic Work Conference under the leadership of the Central Committee and the State Council. By focusing on serving the real economy, guarding against financial risks and deepening the financial reform, the Investment Center pushed forward the operation and management efforts and ensured the security, flows and preservation and maintenance of the value of assets, making great contribution to serving the national development strategy and safeguarding economic and financial security. Zhou emphasized that the year 2018 marks the first year to implement the gist of the 19th CPC National Congress and the 40th anniversary of the reform and opening up, and is crucial to the building of a moderately prosperous society in all respects. Following the gist of the 19th CPC National Congress and Xi Jinping thought on socialism with Chinese characteristics for a new era, officials involved in the operation and management of foreign exchange reserves shall keep in mind their mission and purpose and forge ahead in a down-to-earth manner to promote the operation and management of foreign exchange reserves to a new high, better serve the real economy and the new pattern of reform and opening up and strive for the fulfillment of the Chinese dream of great national rejuvenation. 2017-12-30/en/2017/1230/1392.html
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It is our mission to boost the reform and opening up of China's financial market, and enhance facilitation of cross-border trade and investment to serve the real economy, while guarding against the excessive impact from cross-border capital flows and safeguarding the stability of China's financial market in a complex and changing world. Dynamic Evolution of Cross-border Capital Flows across the World Cross-border capital flows, the natural products of economic globalization, help boost the effective allocation of capital around the world and drive the spread and flows of advanced technologies and management experience to promote global economic growth. At the same time, since cross-border capital flows are profit-seeking, pro-cyclical and easy to overshoot, the large-scale disorderly fluctuations of capital in the short term may impact the economy and finance. Historically, emerging economies had witnessed tremendous inflows and outflows of cross-border capital many times, which triggered systematic financial risks. When a huge amount of capital flows in, the operation room of the monetary policy in an emerging economy will be squeezed, and asset prices will be pushed up, thereby dampening the momentum of emerging economies for driving economic reforms and structural adjustment. In comparison, the massive capital outflows may lead to currency depreciation, violent volatilities in the financial market and heightened fragility of the financial system, and consequently trigger systematic financial risks. Since the advent of this century, global cross-border capital flows have weathered through two stages. In the first stage, which began in 2000 and ended in 2013, a tremendous amount of global capital flew into emerging economies. Before the 2008 global financial crisis, the inflows were attributable to the rapid economic developments and high returns on invested capital in emerging economies. After the global financial crisis, the inflows were a result of rampant liquidity in global markets due to the adoption of QE policies in major developed economies. In the second stage that began in 2014, global capital began to flow out of emerging economies. This change of course is chiefly because along with the economic slowdowns of emerging economies, developed countries adopted divergent monetary policies, especially the Fed's exit of QE policy and kick-starting of interest rate hikes. The global economy is still faced with heavy uncertainties at the moment. Major countries are struggling with many risk factors. The global financial markets are in volatility, cross-border capital flows are uncertain, and the volume, speed, direction and structure of cross-border capital flows are changing dynamically. After the financial crisis, the international community has reached a consensus that the global macroeconomic and macro prudential policy cooperation are of great significance. When adjusting policies, major economies should take into full consideration the spillovers to the global economy so as to jointly safeguard financial stability. Christine Lagarde, IMF Managing Director, noted rightly in her speech at the China Development Forum 2016 that "increased global integration brings with it greater potential for spillovers — through trade, finance or confidence effects. As integration continues, effective co-operation is critical to the functioning of the international monetary system. This requires collective action from all countries." In recent years, the international community has also begun to promote coordination and cooperation under the frameworks of the G20, IMF and FSB. Under such circumstances, fragile economies should be committed to boosting structural reform, optimizing the economic and foreign trade structures, and promoting the equilibrium of the balance of payments to achieve sustainable economic growth. The policy authorities of every country should implement proper macro-prudential policies to make macro and countercyclical adjustments to the pro-cyclical fluctuations and cross-market risk communication and to guard against systematic risks. Features and changes in China's cross-border capital flows Impacted by the changes in the landscape of global capital flows, China's cross-border capital flows have been divided into two phases since the beginning of this century. The first phase was between 2000 and the first half of 2014 when China posted the twin surpluses under the current and capital accounts, foreign exchange reserves rose rapidly and global capital flooded into China. Before the global financial crisis, massive direct investments flowed into China, and in the wake of the crisis, the share of other investment funds such as portfolio investments and external debt began to rise. The second phase began with the second half of 2014. China's current account has registered surplus but capital account, deficit, and the deficit has begun to overtake the surplus, cross-border capital has also begun to flow out, leaving foreign exchange reserves to turn from increase to decrease. In terms of time and direction, China is consistent with the global landscape of cross-border capital flows. Two changes should be noted: first, external assets of market participants have risen rapidly. Previously almost all of China's external assets were official foreign exchange reserves. When the official foreign exchange reserves reached its peak, China's external assets accounted for more than 70%. In recent years, China's external assets have been restructured, with official foreign exchange reserves dropping and external assets held by market participants rising. As at the end of 2016, foreign exchange assets held by the government and by market participants accounted for 50% respectively. Second, the external debt of market participants has declined. A few years ago as the Fed adopted the QE monetary policy, the interest costs of the US dollars were low and Chinese enterprises borrowed heavy external debt. In the past two years, as the Fed gradually exited from the QE policy and raised interest rates, the interest rates of the US dollars have climbed and the USD exchange rate, strengthened. At the same time, the RMB interest rate has declined. Under this circumstance, it becomes easier for Chinese enterprises to raise funds in China and they have begun to quicken its step to service external debt in the US dollars, so as to reduce the risks arising from high-lever operation and currency mismatch. In the first quarter of 2016, Chinese enterprises' full-scale external debt in domestic and foreign currencies fell to USD 1.4 trillion from USD 1.8 trillion at the end of 2014. In particular, the external debt in foreign currencies declined from USD 900 billion to USD 750 billion. Since the second quarter of 2016, China's external debt has rebounded as the deleveraging of Chinese companies' external debt came to a halt. China's cross-border capital inflows and outflows are currently developing towards an equilibrium. The trends of the foreign exchange market can be reflected from foreign exchange reserves, banks' sales and settlement of foreign exchange, balance of cross-border receipts and payments, and US dollar index. In December 2015, the Fed raised interest rates for the first time and in the fourth quarter of the year, the US dollar index went up by 2.4%, and from December 2015 to January 2016, China's foreign exchange market went through significantly heightened volatilities. In the fourth quarter of 2016, as expectations of Fed's interest rate hikes were strengthened, coupled with the presidential election in the US, the US dollar index climbed by 7.1%, but China's foreign exchange market experienced remarkably less fluctuation compared with the fourth quarter of 2015. Since January 2017, China's foreign exchange market has stayed stable. With foreign exchange reserves going up in February and March, the balance of cross-border receipts and payments became positive after a 17-month-long deficit, suggesting that China's cross-border capital inflows and outflows are moving towards an equilibrium. Going forward, the balance of cross-border receipts and payments will boast a sound and robust foundation: first, China's economy is in a high-speed growth range, and as the supply-side structural reform is deepened, China will witness better and more efficient economic growth. Second, the surplus under the current account remains in the reasonable range, with the balance for 2016 accounting for 1.8% of GDP. Third, China will continue to be one of the most attractive and competitive investment destinations for overseas long-term capital. Fourth, China has adequate foreign exchange reserves. China's ODI and FDI China's outbound direct investments (ODI) China has witnessed rapid growth in ODI in recent years, with that of 2016 exceeding 40%. Such fast growth is a testimony to the enhanced overall national strength, the higher level of opening up, and the stable advancement of the Belt and Road Initiative, the international production capacity cooperation, and administration streamlining and power delegation, which are favorable for boosting China's economic transformation, and the economic growth worldwide and in host countries to achieve mutual benefit and common development. However, there are also unreasonable and unusual investing behaviors in China's ODI, such as large-scale investments in industries beyond the main business, "small parent company and large subsidiaries", and "quick investment and quick exit". Heavily indebted though, some enterprises still borrow a large amount of money for overseas M&As, and some even are involved in illegal asset transfers in the guise of ODI. The Chinese government has always encouraged enterprises to participate in international economic competition and cooperation, the Belt and Road Initiative and international production capacity cooperation, so as to promote domestic economic transformation and upgrading and deepen the mutually beneficial cooperation between China and the rest of the world, by following the outbound investment management principle that "under the guidance of the government, enterprises will play a dominant role based on the market orientation and international practices". Foreign exchange administration also encourages capable domestic enterprises that meet the conditions to engage in real outbound investing activities in compliance with regulations. Given the lessons and experience of Japan in fast growth in outbound investments in the 1980's, making outbound investments quickly doesn't justify smooth investments by Chinese enterprises going global, but stable investments may ensure smoothness. Outbound investments and M&As are just like a bunch of thorny roses, which are beautiful and fragrant but may pierce your hands. Sometimes they are like sand on the beach, which it seems that you may hold a handful of them but finally they slip from your hands. Over the past few months, alongside the adjustments and implementation of the macro-prudential policies, China's outbound investments have slowed down, indicating market participants are becoming more reasonable. China's foreign direct investments (FDI) In 2016, China was ranked No. 3 worldwide and No. 1 among emerging economies by the size of foreign capital attracted. Its foreign investment structure was improved and upgraded, with the foreign capital continuing to go into high value-added service industry and the high-tech manufacturing industry. Given China's economic growth, advancement of the structural reform and immense market potential, China will remain one of the investment destinations that are attractive to long-term capital. Using foreign capital is a basic national policy for opening up and a key component of the open economic system. In his keynote speech to the World Economic Forum in Davos in 2017, President Xi Jinping pointed out that "China will actively build a loose and orderly investment environment". As for foreign exchange administration policy, FDI will be basically convertible, and foreign exchange capital will be settled discretionarily, and the authentic capital exchanges and payments in compliance with regulations such as capital increase and decrease, share transfer and investment withdrawal will be subject to no restrictions. The outward remittances of the profits of foreign-invested enterprises, an item under the current account, are convertible. A foreign-invested enterprise can either use its profits to make further investments or remit them out freely. An outward remittance of profits should be authentic and comply with relevant regulations including the Company Law in China. Where the losses of the previous years should be offset, the profit distribution resolution of the Board of Directors, the audited financial report and the tax clearance certificate in China should be presented. The four conditions are not newly introduced, but have been in existence for a long time and are reasonable. Policy framework and orientation of foreign exchange administration in China In formulating and implementing the foreign exchange administration policies, China has observed the following two principles: first, reform and opening up should be adhered to by supporting and boosting the two-way liberalization of the financial market, to further enhance the cross-border trade and investment facilitation and the real economy. Second, efforts should be made to guard against the risks arising from cross-border capital flows and the impact from disorderly flows of cross-border capital on the macro economy and financial stability, so as to maintain the stability of the foreign exchange market and create a sound market environment for reform and opening up. Based on the above principles, China's foreign exchange administration policies show the following connotations: First, an "open window" will not be closed again. Foreign exchange administration will not turn back onto the old path of capital controls. At the end of last century, we achieved full convertibility under the current account. Since the beginning of this century, we have also enhanced the convertibility under the capital account and achieved basic convertibility under the direct investment. What's more, we have smoothly pressed ahead with convertibility under portfolio investment by opening channels such as QFII, RQFII, QDII, RQDII, Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect. These open-up policies will not be eliminated. Second, China's capital account shall be opened up in a prudential and orderly manner. In 2016, China' efforts to liberalize the capital account had many highlights, such as macro-prudential management of full-scale cross-border financing, further liberalizing and facilitating investment in the inter-bank bond and foreign exchange markets by foreign institutions, optimizing the policies for Shanghai-Hong Kong Connect and kicking-start the pilot program for Shenzhen-Hong Kong Connect, and deepening the QFII reform and reducing quota restrictions and lock-up constraints. However, reform needs both objectives and the strategies to achieve the objectives. The progress of liberalizing the capital account shall be aligned with the stage of economic development, the situation of financial markets and financial stability. At different stages, the internal and external factors shall be taken into full consideration to identify the priorities, cadences and steps in liberalizing the capital account. Third, a macro-prudential management and micro market regulation system for cross-border capital flows shall be established. Efforts shall be made to build the macro-prudential management system of cross-border capital flows, refine the early warning and response mechanism for cross-border capital flows, and further diversify the macro-prudential management toolkit for cross-border capital flows. Foreign exchange authorities shall intensify regulation of the foreign exchange market, conduct market regulation and market law enforcement in accordance with the existing laws and regulations and foreign exchange administration policies, and crack down on irregularities in the foreign exchange market to safeguard the solemnness of China's laws and regulations and its foreign exchange administration policies, and the healthy, stable and benign order in the foreign exchange market. Fourth, the exchange rate formation mechanism shall be improved to enhance the elasticity of the RMB exchange rate. Recently the RMB exchange rate has found a basic equilibrium amid the two-way fluctuations, fluctuated slightly against a basket of currencies and gone through ups and downs against the US dollar. Next, foreign exchange authorities shall stably advance the reform of the RMB exchange rate formation mechanism, make exchange rate policies more standardized and transparent, and guide market expectations to make sure that the RMB exchange rate finds an equilibrium at a reasonable and balanced level. Moreover, the exchange rate elasticity will be enhanced based on the changes in the supply-demand relation in the foreign exchange market to maintain the role of exchange rate in adjusting the equilibrium of the balance of payments. Operation and management of foreign exchange reserves in China Over the past two years, impacted by multiple factors both at home and abroad, China's foreign exchange market and cross-border capital flows have weathered through strong impacts and severe test. Since the beginning of this year, China's foreign exchange market has stayed stable, and cross-border capital flows have developed towards an equilibrium. As at the end of March, China registered foreign exchange reserves of RMB 3.01 trillion, accounting for nearly 30% of the world's total, which made it No. 1 among major economies and left the No. 2 far behind. How many foreign exchange reserves a country should hold to hit a reasonable level? There are no common standard for that both at home and abroad. It is actually dependent on a country's macroeconomic conditions, level of economic openness, capabilities of using foreign capital and financing abroad, as well as sophistication of its economic and financial systems. China boasts adequate foreign exchange reserves, measured either by traditional indicators or by aggregative indicators proposed by the IMF economists. China's foreign exchange reserves are impacted by three factors: first, exchange rate conversion and changes in asset prices. China's foreign exchange reserves are denominated and reported in the US dollars. When non-USD foreign exchange reserves are converted into the USD, the exchange rate will influence the changes of reserves, and the prices of bonds and stocks invested with foreign exchange reserves are changing every month and therefore become the key influencers to the changes in foreign exchange reserves. Second, diversified use of foreign exchange reserves. For example, when used to invest in the Silk Road Fund, the China-Latin America Production Capacity Cooperation Fund, and China-Africa Industrial Capacity Cooperation Fund, this part of foreign exchange reserves needs to be deducted from the foreign exchange reserves data. Third, the operation by the People's Bank of China in the foreign exchange market. Under the principle of security, flows, value preservation and growth, China's foreign exchange reserves are used to make prudential, standardized and professional investments, optimize and dynamically adjust investment portfolios and strategies to safeguard and promote the stability and development of the international financial markets, with respects for the international market rules and practices. China has no intention to strengthen its competitiveness by depreciating its currency. We do not have such a desire, nor have the necessity. The People's Bank of China provides foreign exchange liquidity to the market, in a bid to guard against overshooting of foreign exchange rate and the herd effect, and to maintain market stability. China's endeavor to strike a balance between enhancing the elasticity and maintaining stability of the foreign exchange rate is conducive to the international community, and can effectively avoid the negative spillovers from disorderly adjustment of the RMB exchange rate and the competitive depreciation of major currencies. (The original text is available in the May 2017 issue of the Modern Bankers) 2017-05-08/en/2017/0508/1266.html
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Following the work plans of the CPC Central Committee and the State Council, the State Administration of Foreign Exchange (SAFE) was committed to clearing up market disorder, cracking down on violating behaviors and imposing strict penalties on foreign exchange irregularities in 2016. In accordance with the Regulations of the People’s Republic of China on the Disclosure of Government Information (Decree No. 492 of the State Council), the typical cases of enterprises and individuals violating foreign exchange regulations are notified as follows, in a bid to promote market players to raise their awareness of carrying out foreign exchange activities in compliance with regulations, and sustain the healthy and benign order in the foreign exchange market. I. Cases of enterprises violating foreign exchange regulations Case No. 1: Wuhan Yanzhi Property Management Co., Ltd. helped domestic individuals illegally transfer funds overseas under the guise of outbound investment From September 2014 to December 2015, Wuhan Yanzhi Property Management Co., Ltd. illegally transferred funds overseas for domestic individuals many times under the guise of outbound investment. It charged 22 domestic individuals RMB 71.9249 million in total. Then it bought foreign exchange worth a total of RMB 67.3817 million in 23 transactions to help individuals illegally transfer the money overseas under the guise of outbound investment. The company obtained RMB 4.5432 million from the deals. Such behavior violates Article 2 and 4 of the Regulations for Foreign Exchange Administration of Overseas Direct Investments by Domestic Institutions (Huifa No. 30 [2009]) and is considered an evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 3.369 million upon the company as an administrative penalty. Case No. 2: Evasion of Foreign Exchange by Jiangxi Ganzhou Sichuang Trading Co., Ltd. On April 2, 2015, Jiangxi Ganzhou Sichuang Trading Co., Ltd. applied to the bank for USD 9.6249 million in a working capital loan due within one year. Then the company counterfeited contracts and business invoices, altered the information on the bill of lading without permission, and even fabricated entrepot trade, based on which the company remitted all the loan to Hong Kong under "payments for entrepot trade". This behavior violates Article 14 of the Regulations of the People's Republic of China on Foreign Exchange Administration, and Article 3 of the Guidance on Foreign Exchange Administration under Trade in Goods (Huifa No. 38 [2012]) and is considered an evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 650,000 upon the said company as an administrative penalty. Case No. 3: Evasion of Foreign Exchange by Guangxi Qinzhou Yongjiashun Trading Co., Ltd. Between June and July 2015, Guangxi Qinzhou Yongjiashun Trading Co., Ltd. handled payments of foreign exchange worth USD 10.3688 million in 11 transactions with a bank, by presenting its import contracts and the Customs list of entry records, and did so with another bank through repeated presentation of the same instruments. This behavior violates Article 12 of the Regulations of the People's Republic of China on Foreign Exchange Administration, and Article 3 of the Guidance on Foreign Exchange Administration under Trade in Goods (Huifa No. 38 [2012]) and is considered an evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 1.2996 million upon the said company as an administrative penalty. Case No. 4: Evasion of Foreign Exchange by Shandong Longyang Chemical Co., Ltd. Between June and August 2015, Shandong Longyang Chemical Co., Ltd. fabricated import deals many times. By counterfeiting or altering import contracts, invoices, bills of lading and Customs Declaration Forms of Imported Goods, the company handled 4 transactions for the payment of foreign exchange of USD 4.0765 million in total with 3 banks, thus illegally transferring the funds overseas. This behavior violates Article 12 of the Regulations of the People's Republic of China on Foreign Exchange Administration, and is considered an evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 282,000 upon the said company as an administrative penalty. II. Cases of individuals violating foreign exchange regulations Case No. 1: A Mr. Wu illegally traded foreign exchange through underground banks From March to December 2014, a Mr. Wu, native of Zhejiang, transferred a total of USD 30.4337 million for 118 times through an offshore account (OSA) it controlled to an offshore USD account controlled by an underground bank in accordance with the order of a Mr. Ji, owner of the underground bank, so as to obtain illegal interests. Such behavior violates Article 32 of the Regulations for the Administration of Settlement and Sales of and Payment in Foreign Exchange (Yinfa No. 210 [1996]) and is considered illegal trading of foreign exchange. In accordance with Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 2.125 million upon Mr. Wu as an administrative penalty. Case No. 2: A Mr. Su evaded foreign exchange through split-out Between July and August 2015, a Mr. Su, native of Tianjin, remitted RMB 11.8811 million in total into 39 individual accounts in a split-out way and purchased foreign exchange worth CAD 2.4675 million on an ATM using the bank cards of the 39 individuals. Later he remitted CAD 2.4675 million into a Hong Kong account he controlled using the ID cards and bank cards of the 39 individuals under study abroad, thus illegally transferring the money overseas. Such behavior violates Article 7 of the Measures for the Administration of Individual Foreign Exchange (Decree No. 3 [2006] of the People's Bank of China) and Article 1 of the Circular of the State Administration of Foreign Exchange on Further Perfecting the Administration of Foreign Exchange Settlement and Sales for Individuals (Huifa No. 56 [2009]) and is considered an evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 120,000 upon Mr. Su as an administrative penalty. Case No. 3: A Mr. Wang evaded foreign exchange through split-out From July to August 2015, a Mr. Wang, native of Shanxi, transferred his funds into the accounts of 30 employees of his company，who then purchased foreign exchange under study abroad and remitted the money totaling the equivalent of USD 1.4463 million into Wang's overseas individual account in 30 transactions. Such behavior violates Article 7 of the Measures for the Administration of Individual Foreign Exchange (Decree No. 3 [2006] of the People's Bank of China) and is considered an evasion of foreign exchange. In accordance with Article 39 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 90,000 upon Mr. Wang as an administrative penalty. Case No. 4: A Mr. Huang illegally traded foreign exchange through an underground bank On November 17, 2016, a Mr. Huang, native of Guangdong, contacted a Mr. Ruan, owner of an underground bank, to illegally exchange RMB for the equivalent of HKD 140,000 for overseas gambling. Such behavior violates Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration and is considered illegal trading of foreign exchange. In accordance with Article 45 of the Regulations of the People's Republic of China on Foreign Exchange Administration, the SAFE imposed a fine of RMB 25,000 upon Mr. Huang as an administrative penalty. 2017-04-24/en/2017/0424/1260.html
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On June 22, 2017, Pan Gongsheng, administrator of the State Administration of Foreign Exchange (SAFE), headed a delegation to Shenzhen for Inspections and held a seminar there to listen to the ideas, opinons and suggestions of relevant institutions on the conditions of China's foreign exchange market and the foreign exchange administration policies. According to Pan, since the beginning of this year, along with the accelerated upgrading and transformation of the economic structural adjustment, and in-depth advances of the supply-side reform, China has borne witness to steady and promisig economic growth at a mid-to-high speed. The foreign exchange market has performed stably, market expectations have remained stable, while foreign exchange reserves and RMB exchange rate have stayed steady, and cross-border capital flows and supply and demand in the foreign exchange maket have found a basic equilibrium. The cross-border trade and investment facilitation shall be further enhanced to better serve the real economy and openign up, Pan emphasized. Under the principle of the current account convertibility, efforts shall be made to duly support and ensure authentic and complying international payments and transfers under the current account, in a bid to enhance cross-border trade facilitation. The two-way liberalization of the finanical market shall be boosted in a stable and orderly manner, and the capable enterprises who meet the conditions shall be supported to be invovled in autheitc outward investments in compliance with regulations, so as to support Chinese enterprises to go global. The sound foreign exchange administration policy environment shall be built to support Chinese enterprieses to participate in the Belt and Road Initiative. Foreign exchange authorities are required to further deepen the foreign exchange administration reform and strengthen the building of their regulatory capabilities, according to Pan. The macro-prudential administration of cross-border capital flows and micro-market regulatory system shall be established to intensify ongoing and ex-post regulation. The monitoring and early warning of cross-border capital flows shall be refined and irregularities such as underground banks shall be cracked down on to safeguard the health and stability of the foreign exchange market and China's economic and financial security. As the frontier of China's reform and opening up, Shenzhen boasts a vibrant market, with market participants sensitive to policies and market signs. It is Pan's wish that Shenzhen Branch of the SAFE and participants in the foreign exchange market could break new ground and make innovations to continue to play a leading role in the new round of the reform and openning up and deliver reproducible and promotable experience with regard to the deepening of foreign exchange administration reform and the optimization of services. 2017-06-22/en/2017/0622/1319.html
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The General Administration of Customs (GAC), the State Administration of Taxation (SAT) and the State Administration of Foreign Exchange (SAFE) have recently signed the Framework Agreement on Cooperation Mechanism for Joint Regulation Based on Information Sharing (the Framework Agreement) in Beijing. On the same day, the GAC signed with SAT and SAFE the MOU on Advancing Joint Regulation Based on Information Sharing between the General Administration of Customs and the State Administration of Taxation, and the MOU on Advancing Joint Regulation Based on Information Sharing between the General Administration of Customs and the State Administration of Foreign Exchange respectively, as the implementation mechanisms of the Framework Agreement. According to the Framework Agreement, the three parties agree that they will accelerate the cross-department mutual information exchange, mutual regulation recognition, and mutual help in law enforcement, in a bid to improve ongoing and ex-post regulation, enhance management efficiency, and reduce management costs while guarding against and cracking down on smuggling, defrauding of export tax refunds, tax frauds and evasion, so as to ensure the national Customs, taxation and foreign exchange policies are effectively carried out. The three parties have defined their areas of cooperation and roles and responsibilities by signing the MOUs on advancing joint regulation based on information sharing. By stepping up information sharing, the three parties will be committed to improving the ongoing and ex-post regulatory system, pressing ahead with comprehensive law enforcement and enhancing management efficiency. They will push forward with comprehensive cooperation through inspection and feedback, and joint regulation among their branches and sub-branches to jointly implement incentives and punishments. Enhancing information sharing and performing joint regulation among the three authorities are the significant measures to implement theReformPlan of Implementing "Three Mutuals" to Advance Customs Clearance,which was issued by the State Council, and the bases and levers for joint governance among them and therefore have great implications for better guarding against and cracking down on smuggling, defrauding of export tax refunds, tax frauds and evasion. Going forward, the customs, taxation and foreign exchange authorities will continue to strengthen cooperation, and further improve the regulation of law enforcement within their respective jurisdiction to create management synergies, so that they can better serve the building of the social credit system and the healthy and sustainable economic development in China. 2017-04-21/en/2017/0421/1257.html