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Recently, the director-generals of the branches of the State Administration of Foreign Exchange (SAFE) attended a symposium in Nanchang, the capital of Jiangxi province. The participants earnestly studied and implemented the decisions and plans of the Party Central Committee and the State Council on economic work for the second half of this year, reviewed and summarized foreign exchange administration work in the first half of the year, conducted in-depth analyses of the current foreign exchange situation, and mapped out the management tasks for the latter half of the year. Mr. Yi Gang, administrator of the SAFE, delivered a work report. The deputy director-generals, chief economists, and chief accountants of the SAFE were also present at the meeting. It was pointed out at the meeting that during the first half of 2011, efforts were made by the foreign exchange authorities to accelerate the five transformations of the concepts and methods of foreign exchange administration, rigorously crack down on the inflows of hot moneyand other illegal and irregular funds, actively prevent the risks of cross-border capital flows, and constantly deepen the reform of the foreign exchange administration system so as to improve the operation and management of foreign exchange reserves and to make further progress in various tasks. Following the overall planning of the Party Central Committee and the State Council, and under the guidance of the Party Committee of the Peoples Bank of China (PBOC), such efforts focused on scientific development and the transformation of the mode of economic development. The progress can be demonstrated in the following eight respects: First, policy measures were introduced to strengthen the management of foreign exchange business and to curb irregular capital inflows. In 2011 efforts were made to reinforce administration of the position of the banks foreign exchange settlement and sales, foreign exchange collections from transit trade, advances on sales and deferred payments, and to further downsize the total scale of the short-term external debt quota of domestic financial institutions; Second, the foreign exchange authorities stepped up efforts to crack down on hot money and other illegal and irregular capital inflows. Efforts were made to carry out special inspections of major market player, such as financial institutions and large-scale enterprises, as well as of items such as foreign exchange settlement of capital funds and short-term external debt, to investigate and deal with serious violations, and to severely punish underground money shops, speculation in foreign currency via the Internet, and other criminal activities. During the first half of 2011, 1,865 relevant cases were closed, involving a total amount of over USD16 billion; Third, the SAFE strengthened the monitoring and management of cross-border capital flows. Efforts were made to advance the reform of supervision and control of foreign exchange entities in a steady manner and to integrate and comprehensively utilize the related managerial system and data. Examinations and verifications of the authenticity of cross-border capital flows were intensified. Meanwhile, the system of checking up on the banks execution of the foreign exchange administrative provisions was refined so as to encourage compliance of bank operations; Fourth, reform of foreign exchange administration of trade in goods was steadily promoted. Efforts were made to promote the policy of overseas deposits of export proceeds throughout the country, to popularize the reform of the verification and writing-off system of foreign exchange payments for imports with a down-to-earth attitude, and to take an initiative to study the reform of the verification and writing-off system of exchange collected from exports; Fifth, efforts were made to further facilitate foreign exchange receipts and payments of market entities, to adjust and streamline the management policies for some items under the capital account, to perfect the administration of foreign exchange settlements and sales for individuals via e-banking, and to launch RMB-foreign currency option trading to further satisfy the market demand for hedging the exchange rate; Sixth, investment and risk management of foreign exchange reserve assets was strengthened. Efforts were made to closely follow and analyze market changes, maintain diversified investment strategies, optimize the allocation of medium- and long-term currencies and assets, and continuously improve risk management; Seventh, the transparency of foreign exchange administration was constantly enhanced by releasing for the first time a monitoring report on Chinas cross-border capital flows to the public and announcing data on the position of international investments on a quarterly basis to spread thorough knowledge among the general public about cross-border capital flows; and Eighth, the fundamental work for foreign exchange administration was consolidated, Striving for Excellencecampaigns were intensively launched, and Party construction of the foreign exchange authorities and the building of ranks of cadres and honest and clean government were reinforced. It was put forward at the meeting that during the second half of 2011 Chinas foreign exchange receipts and payments may face pressures due to large net inflows. Therefore, it is imperative to fully recognize the seriousness and complexity of the current foreign exchange situation, to keep close track of the development of the economic situation both at home and abroad, to carry out in-depth assessments of market risks, to grasp the latest trends and changes in a timely manner, and to formulate effective response plans and measures. It was proposed at the meeting that the key points of foreign exchange administration for the second half of 2011 will follow the unified arrangements of the Party Central Committee and State Council, adapt to the new changes in domestic and overseas conditions, attach greater importance to slowing down the excessively growing surplus of banks foreign exchange settlement and sales, expedite the preventing and cracking down on inflows of hot moneyand making steady progress in the reform of the import and export verification and writing-off system, and vigorously carry out the various tasks of foreign exchange administration so as to promote the stable and relatively rapid growth of the national economy. Efforts should be made in two major respects as follows: First, rigorously fighting against the inflows of hot moneyand other illegal and irregular funds as well as cross-border arbitrage funds. Further unifying thinking, strengthening macro-awareness about the overall concepts, continuing to maintain high pressure to crack down on hot money,and seriously punishing illegal foreign exchange collections and settlement. Meanwhile, adopting positive measures to encourage and facilitate foreign exchange purchases and payments, restraining market entities from arbitrage in cross-border asset management, slowing down the excessive growth of the surplus in foreign exchange settlement and sales, and continuing to implement policies for the convenience of legitimate foreign exchange fund flows. Second, steadily boosting the reform of the import and export verification and writing-off system. Promoting progress in preparation of a pilot reform of the import and export verification and writing-off system and steadily moving ahead with the reform of the system. Further intensifying the joint coordination mechanism among the trade administrative departments in an effort to lay a foundation for the overall reform of the import and export verification and writing-off system. In addition, it is also imperative to proceed with various tasks in an orderly fashion in light of the work arrangements defined at the national work conference on foreign exchange administration at the beginning of this year, further perfect the operation and management of foreign exchange reserves, actively advance law-based administration and regularize the laws and regulations, thoroughly carry out Striving for Excellencecampaigns, enhance the construction of a clean and honest government, and continually improve the internal control system and the level of internal management. 2011-08-04/en/2011/0804/1009.html
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6. Some people hold the opinion that China's foreign exchange reserves are hard-won money-earned by thousands of domestic enterprises and Chinese individuals in exchange for actual goods, energy, and resources, and with implicit environmental costs. What is your comment about this? Answer: China's foreign exchange reserves are formed when the Peoples Bank of China puts in our base currency and purchases foreign currencies on the foreign exchange market. The home-currency capital used in these purchases directly adds to the liabilities of the Central Bank, whereas Chinas foreign exchange reserves, equal in amount to the liabilities, show up on the asset side of the Central Banks balance sheet. When buying foreign exchange, the Peoples Bank of China pays a corresponding amount of RMB to the original holder of the foreign exchange. In other words, in the formation of the foreign exchange reserves, businesses and individuals are not contributing their foreign exchange to the State for free, but they are selling it to the State in return for an equivalent amount of RMB. These transactions are voluntary in nature and equivalent in value. The economic interests of businesses and individuals have already materialized when they trade their foreign exchange for Renminbi. 7. China has a huge stockpile of foreign exchange reserves that is regarded by the international community as a sovereign wealth fund, and relevant investment operations are often restricted by various factors, such as market capacity and politics. Is it possible for parts of the foreign exchange reserves to be entrusted to domestic professional financial institutions or international investment institutions and to be separately managed? Answer: Foreign exchange reserves, like sovereign wealth funds, professional asset management companies, and other types of institutional investors, are restricted by the international situation, market conditions, and regulatory rules. But unlike other institutional investors, foreign exchange reserves are very different in terms of fund sources, operational objectives, risk controls, and so forth. To ensure the safety of foreign exchange reserve assets, and to bring into full play the comparative advantages of massive operations in a mature investment market, China adheres to independent management of its foreign exchange reserves. Meanwhile, various effective methods have been explored to expand investment channels, including entrusted operations. Since 1996, the investment of a proportion of the foreign exchange reserves has been selectively entrusted to leading asset management institutions at home and abroad, all of which have a resounding reputation, a large amount of assets under their management, and an exceptionally successful performance record within the industry. Great importance has been attached to the risk management by these external managers, and their operations have been closely monitored as part of the overall risk management framework so as to ensure the safety of our foreign exchange assets. 8. Foreign exchange reserves should be from the people and for the people.If it is inappropriate to distribute foreign exchange reserves directly to the people, then is it possible to strip a part of the foreign exchange reserves and build a Sovereign Pension Fund in order to enhance Chinas social security system? Answer: Both suggestionseither directly distributing the foreign exchange reserves among the public, or using the reserves directly for social welfare programs such as pension insurance, medical care, and educationinvolve the same question: can the foreign exchange reserves be distributed and used without compensation? Unlike fiscal surpluses, foreign exchange reserves are created when the Central Bank purchases foreign currencies on the foreign exchange market; they represent foreign-exchange assets that correspond to the home-currency liabilities on the Central Banks balance sheet. To spend the foreign exchange reserves without compensation is to print money at will, and unchecked expansion of the issuance of money by the Central Bank will lead to dire consequences, such as inflation. Under the guidance of the management principle of compliance with the laws and regulations, utilization with compensation, increased efficiency, and effective regulation,efforts have been, and will continue to be made, to explore innovative channels for the management of foreign exchange reserves, so as to contribute to Chinas economic construction and to improving the peoples livelihood. 9. Currently, the foreign exchange position of domestic commercial banks is generally tight, thereby placing certain restrictions on their ability to support foreign trade and on the going globalpolicy of enterprises. Can we lend some of Chinas foreign exchange reserves to domestic commercial banks? Answer: China has sufficient foreign exchange reserves and convenient channels for foreign exchange purchases, which can fully satisfy the legitimate needs of commercial banks and enterprises to purchase foreign exchange. If banks and enterprises need foreign exchange for foreign trade and going global,they can purchase it with RMB funds at any time and without any policy barriers. The practice of simply lending foreign exchange reserves to domestic banks, however, will further reduce foreign exchange purchases and correspondingly exert more pressures on the foreign exchange purchases of the Peoples Bank of China (PBOC), which will not be advantageous to macro control. In recent years, taking into consideration the overall strategic situation of national development and based on the principle of compliance with the laws and regulations, utilization with compensation, increased efficiency, and effective regulation, the PBOC and SAFE have developed various channels to apply the foreign exchange reserves, effectively serving the needs to purchase foreign exchange by banks and enterprises and strongly supporting foreign trade and implementation of the going global strategy. 10. In recent years, on several occasions China has put maintained that it encourages foreign exchange to beheld by the people,but why is it difficult to realize this? Answer: In recent years, Chinas balance of payments has maintained a twin surplus,and especially after the global financial crisis, international liquidity has proliferated and large-scale foreign exchange net inflows have resulted in the continuous accumulation of foreign exchange reserves. At present, China actively supports residents to hold and use foreign exchange, and the nation has realized full convertibility under the current account and is able to fully satisfy the foreign exchange purchase needs of residents for trade in goods and trade in services as well as other purposes under the current account. Under the capital account, except for partial control over some high-risk balance of payments transactions, there are no policy barriers to either foreign direct investments by enterprises or investment in overseas capital markets by enterprises and individuals through qualified domestic institutional investors (QDII). However, due to an anticipated RMB appreciation as well as the interest margin and exchange rate difference between domestic and overseas markets, enterprises and individuals now have a strong desire to settle foreign exchange and they are generally unwilling to hold or retain foreign exchange. In other words, the barrier to foreign exchange to be held by the peoplelies not in policy, but in the willingness of the holders of the foreign exchange. 2011-07-25/en/2011/0725/1006.html
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In the first half of 2011, the foreign exchange authorities maintained tough measures against hot money, investigated 1,865 cases involving violations of foreign exchange laws and regulations, and imposed relevant penalties of more than USD16 billion, an increase of 26.2 percent and 26.9 percent respectively over the same period of the last year. With respect to the current key channels and typical methods of inflows and settlement of illegal and irregular foreign exchange funds, the foreign exchange authorities have further improved inspection methods, comprehensively promoted the use of an off-site foreign exchange inspection system, implemented multi-dimensional monitoring of the foreign exchange receipts and payments of various market players, and continually improved the accuracy of cracking down on activities in violation of the foreign exchange laws and regulations. In the first half of 2011, the foreign exchange authorities in different localities carried out special inspections of over 80 items, investigated a number of major cases occurring in Guangdong , Shanghai , Jiangsu , Shandong , Guangxi, and Hainan , and imposed relevant penalties. During the inspections, the foreign exchange authorities strictly carried out law-based administration, adhered to implementing legal procedures and imposing appropriate penalties, as well as energetically facilitated the legitimate operations of enterprises. As for the investigations and penalties, the total amount of administrative penalties and confiscations imposed by the foreign exchange authorities in the first half of the year was RMB260 million, exceeding that for all of the last year (RMB243 million). Among the penalized activities in violation of the regulations on foreign exchange administration of financial institutions, the following activities are relatively common: exceeding the short-term external debt quota, handling foreign exchange settlement and sales in violation of the regulations on foreign exchange administration, handling receipts and payments under the capital account in violation of the regulations on foreign exchange administration, and failing to carry out reasonable examinations and verifications of the authenticity of the receipt and payment instruments under the current account. The former three irregular activities involved a total of USD9.27 billion, accounting for 57.9 percent of the entire amount involved. Among the penalized activities of enterprises in violation of the regulations on foreign exchange administration, the following are the most common: first, changing without approval the use of foreign exchange or the RMB funds from foreign exchange settlement, second, activities in violation of the regulations on external debt administration, and third, activities such as remitting foreign exchange to China in violation of the regulations on foreign exchange administration or illegal foreign exchange settlement. The above three irregular activities involved a total of USD2.51 billion, accounting for 15.7 percent of the entire amount involved. Facing the complicated economic situations both at home and abroad, the foreign exchange authorities will continue to rigorously crack down on irregular cross-border capital flows, with special focus on seriously combating the inflows of hot money, further improving inspection methods, and intensifying the investigation and punishment of major cases. Furthermore, the foreign exchange authorities will strengthen coordination and cooperation with the relevant regulatory authorities, give full play to the role of the relevant coordination mechanisms, and create a synergy for dealing with and cracking down on hot money. 2011-08-16/en/2011/0816/1010.html
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The SAFE recently released preliminary data on China ’s Balance of Payments Statement for the second quarter and the first half of 2011. The current account and the capital and financial account (including net errors and omissions) posted a "twin surplus" in Q2 of 2011, and international reserves maintained their growing momentum. In Q2, the surplus under the current account reached USD69.6 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods, income, and current transfers reached USD68.5 billion, USD4.4 billion, and USD7.5 billion, respectively, whereas the deficit in trade in services amounted to USD10.8 billion. Meanwhile, China ’s surplus under the capital and financial account (including net errors and omissions) totaled USD67 billion. In particular, net inflows of direct investments amounted to USD40.2 billion. International reserve assets posted an increase of USD136.5 billion. Specifically, transactions in foreign exchange reserve assets registered an increase of USD136.9 billion (exclusive of the influence of non-transaction changes in value such as exchange rates and prices) and the reserve position in the IMF registered a decrease of USD200 million. In H1 of 2011 the surplus under the current account was USD98.4 billion and that under the capital and financial account (including net errors and omissions) was USD179.3 billion, whereas international reserves registered an increase of USD277.7 billion. 2011-08-16/en/2011/0816/1011.html
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In the first half of 2011 , the foreign exchange administrative departments and the public security organs worked closely to launch a series of special campaigns to crack down on illegal cross-border fund flows in Guangdong, Fujian, Shenzhen, and other provinces and cities, uncovering 10 cases of underground money shops and online speculation in foreign exchange involving a total amount of over RMB10 billion, destroying 16 illegal trading nests, arresting 37 foreign exchange criminal suspects, collecting cash equivalent to RMB5.3 million, freezing 200-odd bank cards and passbook accounts with capital equivalent to RMB13 million, and seizing a number of tools for committing crimes, such as cars and computers. These campaigns effectively cracked down on underground money shops and other foreign exchange-related illegal activities and played a significant role in containing irregular flows of cross-border funds and deterring inflows of “hot money.” During the next stage, based on the principle of “simultaneous dredging and blocking,” the SAFE will coordinate with the public security organs and other relevant departments to maintain the tough measures to combat the underground money shops and other crimes and to step up the extended checkup of the sources and directions of upstream and downstream funds to these shops so as to curb the space for such criminal activities. 2011-08-27/en/2011/0827/1012.html
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The SAFE recently released Chinas International Investment Position (IIP) as of the end of March 2011. This is the first time that China has released its quarterly IIP statistical data. The statistics reveal that at the end of March 2011, China's external financial assets hit USD4394.8 billion, a rise of 17 percent over the end of 2010; external financial liabilities reached USD2460.8 billion, a rise of 5 percent; and external net financial assets totaled USD1934 billion, a rise of 8 percent. Among the external financial assets, direct investments abroad totaled USD317.4 billion, portfolio investments totaled USD263.5 billion, other investments totaled USD698.3 billion, and reserve assets reached USD3115.6 billion, accounting for 7 percent, 6 percent, 16 percent, and 71 percent of external financial assets respectively. In terms of external financial liabilities, foreign direct investments totaled USD1526 billion, portfolio investments USD223.1 billion, and other investments USD711.7 billion, accounting for 62 percent, 9 percent, and 29 percent of external financial liabilities respectively. The IIP is a statistical statement that reflects at a specific point the stocks of financial assets and liabilities of one country or region to other countries or regions in the world; together with the trade flows and the international balance of payments, it reflects the complete international accounts system of the country or region. 2011-07-26/en/2011/0726/1007.html
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Foreign exchange reserves exceed the optimal level “In all circumstances (no matter how serious the impact will be), foreign exchange reserves of USD 3.7 trillion are enough” Caixin: China saw its foreign exchange reserves reach approximately USD 3.7 trillion at the end of the third quarter. Is this beyond the optimal level? Yi Gang: Yes, I think so. There are those who are preparing for events that will be even more disastrous than the 1997 Asian financial crisis and the collapse of Lehman Brothers. But in my opinion, the USD 3.7 trillion in foreign exchange reserves is enough for any scenario. Massive foreign exchange reserves can reflect China’s strong national power, improve confidence, and deter speculators from assaulting China. With these benefits, massive foreign exchange reserves offer guarantees for financial and economic security. But the reserves need to be capped. Too much reserves will lead to fewer benefits and higher costs. It will not be cost-effective if the foreign exchange reserves exceed an equilibrium that lies between the marginal cost and the marginal benefits curves. The marginal costs include the heavy pressures on resources and the environment imposed by the vast exports and the interest paid by the central bank to hedge against the excess liquidity that results as it acquires US dollars and increases the monetary base. Further, it is not an optimal choice if the central bank intervenes in the market; instead it is the market that should play a decisive role. Caixin: Where does China sit on the curve now? YG: For sure, China has exceeded the intersection of the two curves. But it is still uncertain how far it is from that equilibrium point. What is the optimal level for foreign exchange reserves? Some say the reserves should be large enough to address several months’ needs for payments for imports, or to account for a certain part of the external debt, or they should be measured by the trade volume, investment volume, or even by stress tests that are designed to measure the volume of foreign exchange reserves required in cases of the most serious assaults. Passing all these measurements indicates that our foreign exchange reserves are already high enough. Caixin: What are your ideas about diversifying foreign exchange reserves investments? Hasn’t there been talk about launching several funds for this purpose? YG: Everyone is welcome to make suggestions regarding foreign exchange reserves investments but the suggestions must be conducive to sustainable development and beneficial for the nation and its people. The adoption of suggestions will depend on their performance. Foreign exchange reserves that the central bank bought through market interventions correspond to the bank's liabilities on the balance sheet. These assets must be managed well or there will be grave macroeconomic consequences. So suggestions are encouraged and appreciated. The establishment of the China Investment Corp. (CIC), for example, proved to be a good solution. Thereafter, the China Reform Holdings Corp., dubbed CIC II, was also set up. Both firms have their own unique characteristics. Investments by the SAFE using foreign exchange reserves have also proved fruitful. These investments can be compared across the board. In general, assets should match liabilities, which should be the case also for rights and obligations. We cannot have the kind of power that comes with no obligations. This means that if we are to manage an asset, we must take responsibility. If performance is poor, many would challenge any further adoption of such an approach. Given the fact that a relatively long period is needed to prove the results and the asset quality of an investment, assets should not be quickly transferred, otherwise it will be difficult to know which investments are fruitful. Therefore, efforts should be made at the institutional level to make sure assets are matched with liabilities and rights are matched with obligations, encouraging full incentives and proper competition. Any further advice will be deeply appreciated provided it clearly states the responsibilities. But please make sure the mechanism and the tactics have the ability to yield good results. The only solution is to pursue balanced international payments "The market plays a decisive role in balancing international payments. In addition, the RMB exchange rate also matters—international payments will automatically be balanced when the RMB exchange rate reaches an equilibrium" Caixin: How can we curb the further growth of the foreign exchange reserves? It seems that the reserves are still growing, which is partially due to the decision of the Fed to delay the QE tapering. YG: The only solution is to achieve an equilibrium for international payments, with more spending on imports, travel, and services, as well as more outbound investments. As international payments become more balanced, the foreign exchange reserves will stop growing. This is the simplest solution. Caixin: What did you mean when you said at a SAFE meeting, in conveying the spirit of the Third Plenary Session of the 18th CPC Central Committee, that China should "accelerate development of a market-based mechanism and institutions that promote an equilibrium in the balance of international payments?" YG: Policy-wise, we can put more emphasis on the importance of imports to promote a balance of international payments. In fact, imports can create a lot of jobs and imports of key raw materials and energy resources are critically important to China. Many imported commodities in the past that were in high demand by the middle classes were mistaken as luxuries and these imports were discouraged. Currently, as income is increasing rapidly, a large middle-income group has emerged. What they need, for instance, is imported commodities like apparel, notebooks, and cosmetics. It is necessary that we attach priority to these imports in terms of taxes and distribution channels, with the aim of bridging the wide pricing gaps. The pricing gaps between the domestic market and foreign markets can only be narrowed after the distribution channels are liberalized and tariffs are properly adjusted. Some people blame the pricing gaps with foreign brands that intentionally jack up prices in China. This is a bit absurd. But I believe that slightly higher prices are acceptable provided there is enough competition. Caixin: The year 2012 witnessed a substitution of the capital and financial account deficit and the current account surplus for the double surpluses in China's balance of payments that began in 1999, indicating that the balance of payments has finally started to move in a self-regulating and self-balancing direction. But why did the double surpluses reappear this year? YG: On the one hand, they are associated with cross-border capital flows. Most developed countries have been pursuing loose monetary policies, putting tremendous pressures on China. The United States, for example, has introduced a quantitative easing (QE) policy. Japanhas loosened its monetary policies both quantitatively and qualitatively. The European Central Bank has prudently protected its fragile economic recovery. For example, earlier this year, it showed deep concern about strengthening the euro. After the interest rate was cut on October 7, the euro fell by 1 percent. On the other hand, China's surplus in trade in goods is higher than it was last year, and it has exceeded USD 200 billion over the past 10 months. In addition, expectations of yuan trends among individuals and firms on the Mainland and in Hong Kong are important factors. Taking these factors into consideration, this year we are facing relatively stronger pressures from capital inflows. Caixin: Abnormal cross-border capital flows have risen recently, resulting in increased volatility, especially in terms of the capital and financial account. How can we strengthen our ability to monitor and analyze cross-border capital flows and improve the early-warning system? YG: The State Administration of Foreign Exchange (SAFE) has in place a comprehensive response plan that will be triggered when capital inflows reach a certain threshold. Rather than being tabled, this plan has been initiated three times and since its introduction in 2010 it has proven to be efficient. In my opinion, administrative controls over capital flows usually have limited and temporary effects. A new measure to regulate capital flows usually proves to be very effective within the first three months but it becomes less effective later on as people discover countermeasures, in the same way that a virus becomes resistant to drugs. The ultimate solution, as highlighted at the Third Plenary Session of the 18th CPC Central Committee, is to have the market play a decisive role in allocating resources, that is, leaving the market to play a decisive role in balancing international payments. In addition, the RMB exchange rate also matters—international payments will automatically be balanced when the RMB exchange rate reaches an equilibrium. The market-based mechanism for setting the yuan exchange rate should be improved. “In my opinion, the exchange rate is very close to an equilibrium level. But I hope that the mechanism will be more flexible and resilient" Caixin: The Decision on Major Issues Concerning Comprehensively Deepening the Reforms (hereafter “the Decision”), deliberated and approved at the Third Plenary Session of the 18th CPC Central Committee, highlights that China will improve its market-based exchange-rate formation mechanisms for the yuan. What is your interpretation of this? YG: Above all, a market-based exchange-rate formation mechanism for the yuan means that the RMB exchange rate will be decided by market supply and demand, which is the fundamental feature of the mechanism. From this, there are three key takeaways. First, develop markets, making market access and market transactions more convenient by requiring fewer administrative approvals, and developing hedging products according to market demand. As there is still a long way to go in terms of deepening the foreign exchange market with more diversified products in China, it is necessary to develop the market. Second, increase the flexibility of the RMB exchange rate and allow it to fluctuate in both directions. The volatility range for the RMB exchange rate against the USD can be expanded as at present it is the narrowest of all major currencies, whereas interest rates in China are high, leading to almost no costs for conducting interest arbitrage. An expanded range of volatility can push up the costs of interest arbitrage but will not have a serious impact on companies. Third, it is hoped that the RMB exchange rate will remain stable at an equilibrium level and will not, as was the case in the past, be fixed based only on the USD. These three key takeaways indicate our future work priorities. Put simply, China will continue to follow the marketization path while remaining stable. Caixin: You said common people will benefit from a stronger yuan. But many exporters suffer when the yuan appreciates. How do you account for the yuan's highs and lows over the past years? YG: The impact of the RMB exchange rate over the past few years needs to be viewed holistically. We know RMB appreciations hurt exporters. Now there has been talk about the yuan "being forced to appreciate" and that will have a very negative impact. But we also need to see the other side, that is, the benefits of a more market-based RMB exchange rate. First, China's economic strength has improved significantly, with last year’s GDP exceeding USD 8 trillion. Second, there are material benefits for the general public. Last year, for example, China imported more than 58 million tons of soybeans, more than 270 million tons of oil, and more than 700 million tons of iron ore. Had the yuan not appreciated, the soybean oil and bean pulp used for animal fodder would have been much more expensive. The more than 80 million people traveling abroad and those studying overseas could do so at lower costs. Why do so many people criticize an RMB appreciation? Because export companies speak with loud voices, while common people and those who benefit indirectly are the silent majority. But an RMB appreciation needs to be capped. I do not wish to see the yuan appreciate more than it should; an appropriate, balanced, and largely stable level is preferable. An important criterion for assessing whether an exchange rate is appropriate is the balance of international payments. As the balance of international payments reaches an equilibrium, the exchange rate will also be balanced. Overall, the RMB exchange rate has been stable. According to the Bank for International Settlements, from 2000 to 2013 the RMB exchange rate against a basket of 52 currencies rose 17.3 percent and 21.9 percent in terms of the nominal effective exchange rate and the real effective exchange rate respectively. This was an average appreciation of more than 1 percent every year. This is absolutely in line with improvements inChina's productivity and its economic development. So the yuan was not forced to appreciate and the appreciation did not hurt the economy. The fact that China has been posting "double surpluses" in most years for more than a decade also shows that the yuan is not over-appreciated. Caixin: What do you think of the trends in the RMB exchange rate? Will the yuan continue to appreciate? YG: In my opinion, the exchange rate is now very close to an equilibrium level. But I hope the mechanism can be more flexible and resilient. Caixin: Does the reform aim to allow the yuan to freely float? Is a sound exchange-rate formation system the same as a free-floating exchange rate? YG: It would be free-floating in most cases. The Third Plenary Session of the 14th CPC Central Committee set the goal of gradually making the yuan convertible. Basically, that means making it a free-floating currency as determined by the market. But this is not mutually exclusive with demands for the central bank to take actions that comply with and respect market rules in cases when a crisis or a special event might occur. In other words, free-floating does not mean the central bank cannot intervene under any circumstances. Getting this straight may dispel the concerns of most people. Caixin: How far are we from free-floating? YG: We are now very close to a free-floating level. In 2012, for example, most of the time the central bank did not intervene in the market. Caixin: Even when we have a free-floating exchange rate in the future, will it be easy for the central bank to intervene in the market? YG: Any intervention will have to be rule-based. That means the personal judgment of any official cannot be used to justify an intervention. There needs to be a certain set of rules that clearly states the preconditions, means, and extent of any intervention, with clear terms and conditions in place so that power remains in a transparent cage. Rule-based intervention stresses the role of the market in orientation and decision making, with the aim of improving market transparency and boosting market confidence. It is hoped that the market can be simple, ruled by law and fully competitive, with clear regulations and transparent information. Caixin: Is the timing of the reform also a concern? YG: There is indeed an argument for this. But if public opinion and ideas do not change, all that work will have been for nothing. Even if we pick the best time, things will change. In 2008, for example, when we hosted the Olympics, an appreciation [of the RMB] was put on hold for a year and a half because of public pressures—many people considered the Olympics a top priority and did not want anything to go wrong. In the future, however, will an RMB appreciation be put on hold again if there is to be another Lehman Brothers crisis or if exports weaken? In fact, weak exports are more of a reason not to stop a RMB appreciation because the yuan will depreciate when exports are weak. Exports will soon see a turnaround due to a depreciation of the yuan. Whenever something unexpected occurs, people's first reaction has always been to call for suspending the RMB exchange-rate reform. This is not a problem regarding determination to reform but a problem of philosophy. It is very difficult to guide public opinion as by habit everyone always thinks exchange-rate flotation needs to be suspended whenever something uncalled for occurs. Caixin: Making the yuan float freely is a step-by-step process. Is it possible to first allow that to occur in the Shanghai Free Trade Zone (FTZ)? YG: Many people think in this same way. I think that in theory this assumption is flawed as China is but one market. If the Shanghai FTZ's policy has the front line open but the second line is under control, the assumption may work. But if it has the front line open and the second line is under control throughout the country, it would make the FTZ an offshore market with no direct connection to the mainland market. This makes no sense for the Shanghai FTZ, since we already have Hong Kong as an offshore market. If we cannot have the second line under control, we cannot make such an assumption work in the Shanghai FTZ, as capital moves freely between the FTZ and the rest of the mainland. This means the market in the entire country is free. This is where it becomes difficult. Orderly capital account convertibility "Capital account convertibility is designed to further protect and expand people's property rights" Caixin: The Third Plenary Session of the 18thCPC Central Committee highlighted that capital account convertibility should be accelerated. What is the next step? YG: Capital account convertibility was elaborated upon in the Decision. There was one sentence on interest rates and RMB exchange rates, but an entire paragraph on capital account convertibility. It reads: "Push ahead a two-way opening of the capital market, increase the convertibility of cross-border capital and financial transactions in an orderly way, build and fine-tune a system to manage foreign debts and capital flows under the framework of macro-prudential management, and accelerate capital account convertibility for the Renminbi." This shows how much significance the CPC Central Committee has attached to capital account convertibility. China achieved current account convertibility in 1996 and joined the WTO (the World Trade Organization) in 2001. These two events made China a major trade power—the world's largest exporter and the world’s second-largest importer. These are the changes that current account convertibility has brought to China. In fact, capital account convertibility is designed to further protect and expand people's property rights. For instance, under the planned economy urban residents were not allowed to buy housing. Later it became their right to choose whether or not to buy a home. This change protects their property rights and expands their rights to choose. In addition, in the past it was difficult for people to travel abroad for personal affairs, but now overseas tourism has become very convenient and part of their rights. The allocation of assets both at home and abroad has become an economic agent's right, while making the capital account convertible recognizes and expands such a right. Efforts shall be made to drive capital account convertibility. The two-way opening of the capital market will make China an overseas investment power as well as a major destination for overseas investments. This definitely will be good for China. Caixin: But many worry about outflows of capital and external shocks. How do you respond to this? YG: Some worry that if we open up, capital will flee and China's stock market will crash. In fact, once we liberalize the market, a lot of capital will vie to come in. Another worry is that an open capital account will leaveChinavulnerable to external shocks. It is said that it was due to the capital controls that China was not affected too much by the Asian financial crisis. This actually should not be attributed to the capital controls, but it is difficult to convey this idea to people and to convince them. The biggest worry is that many people interpret convertibility as an open door for hot money to freely flow in and out of China. That's unnecessary. This worry has been addressed in the Decision, which states that "efforts need to be made to create and fine-tune a system to manage foreign debts and capital flows under the framework of macro-prudential management.” In fact, we have already achieved a lot of progress toward this goal. China's system for balance-of- payments statistics is the most advanced in the world. While other countries base their statistics on sample payments, China counts each and every payment. Caixin: Does capital account convertibility mean no control? YG: A macro-prudential management framework must conform to the laws and market rules. Within these boundaries, capital can flow freely. What is macro-prudential management? It means you have a clear idea about capital inflows and outflows, understanding previous cases such as George Soros' attack on the British pound or on the Thai currency. Analyzing these cases, you should understand what has happened in the market and what kind of rules can be created to protect most investors and prevent cut-throat competition. This is the core philosophy of macro-prudential management. In addition, mechanisms for anti-money laundering, anti-terrorism financing, and anti-tax havens will be maintained. An IMF working paper once reported that imposing temporary controls on some capital accounts is possible under some special circumstances. Caixin: Can the pilot program for capital account convertibility come into force immediately in the Shanghai FTZ? Is the scheme almost completed? YG: Yes, the scheme is almost finished. The Shanghai FTZ will see a lot of progress in this regard, and some substantial and experimental steps will be taken. As it has been said, there are still major questions about the connections between the Shanghai FTZ and the rest of the Chinese market. Caixin: The Decision highlights that efforts should be made to push ahead with a two-way opening of the capital market. Has any progress been achieved in the Qualified Domestic Individual Investors (QDII2) program? YG: The scheme is being developed. Being prudential at the macro level to prevent risks "In this way, economic and financial security can be ensured and firms and individuals can enjoy maximum freedoms and conveniences. Those are the desirable outcomes of regulation" Caixin: The State Administration of Foreign Exchange (SAFE) has launched measures to manage the banks’ synthetic position in foreign exchange settlements and sales, linking the limits of the consolidated position floors for foreign exchange settlements and sales to the foreign exchange loan-deposit ratio as a tool for macro-prudential management. Can you elaborate on the content and policy tools for macro-prudential management? YG: In macro-prudential management, one should be prudent and watch out for risks. Take a maturity mismatch for example. If many firms focus on short-term growth, they will be warned. If they focus too heavily on short-term growth and market liquidity is reversed, they will be at risk. A currency mismatch is also something to watch out for. If the exchange rate changes drastically, there will be damage to a sound balance sheet. Linking the banks' consolidated positions to foreign exchange loans, which was initiated in May, is a typical macro-prudential management approach, as foreign exchange loans involve the source of capital for foreign currency loans and matching the loan terms with currencies. When maturity and currency mismatches reach certain thresholds, limitations should be imposed on banks. The minimum requirement to avoid a currency mismatch is to require banks to sustain consolidated positions, while coupling their consolidated positions with loans to achieve balanced development and to make sure maturities and currencies are well matched. Caixin: The revised Procedures for Reporting the Balance of Payments (hereafter Procedures) will come into force on January 1, 2014. I am wondering how the new procedures will facilitate enhanced monitoring of cross-border capital flows. YG: The release of the Procedures will make monitoring much more sound. Our philosophy is that a strong statistical system for the balance of international payments should be in place while power should be in a transparent cage so as to ensure a sound monitoring of the statistics on the balance of international payments and cross-border capital flows while leaving monitoring transparent to the absolute majority of persons who obey the law. In this way, economic and financial security can be ensured and firms and individuals can enjoy the maximum possible freedoms and conveniences. Those are the desirable outcomes of regulation. Caixin: RMB foreign debts, including trade financing, direct investments, and bonds, have gradually increased over the past two years. I am wondering how to manage these debts, and whether these debts should be incorporated into the foreign debt statistics. YG: According to the rules of the balance-of-payments statistics, foreign debts should be incorporated into the scope of the statistics, regardless of the currency. In the US, for example, foreign debts are denominated in US dollars, which does not have an impact on the country's statistics on foreign debts. In other words, the country's foreign debts have not been offset by the use of the home currency. This is justified both in theory and in practice. So far, the foreign debts published by the Chinese government have not included RMB foreign debts in order to maintain the old statistical methodology. However, this issue has been addressed in theory, that is, foreign debts should include all the liabilities between Chinese and foreign economic agents. Cultivating a new benchmark for a market-based interest rate "The conditions should include: 1. The benchmark interest rate adopted by the central bank has been replaced by the market-based interest rate; 2. Banks carry out their internal accounting based on the market-based interest rate" Caixin: What is the next step in accelerating liberalization of the deposit interest rate? YG: Currently interest rates of bonds and financial products have been liberalized, as have loan interest rates, whereas deposit interest rates still remain a big concern. They will gradually be liberalized as the conditions are met. Instead of being low, China’s deposit interest rates are actually well in excess of those of the HKD, USD, YEN, and EUR. The one-year deposit interest rate is 3.25 percent, and the yuan is stable and appreciating. What other currency has such an interest rate? Caixin: Will the deposit interest rate drop after liberalization? YG: Most people believe that the deposit interest rate will rise after liberalization, but they need to consider the related problems if the deposit interest rate is to rise again. Caixin: What do you mean by saying “when conditions are met”? YG: There are two conditions: 1. The benchmark interest rate launched by the central bank has been replaced by the market-based interest rate; 2. Banks carry out their internal accounting based on the market-based interest rate. The Shanghai interbank offered rate (Shibor), for example, might replace the current benchmark interest rate. If banks price their products and verify deposits and loans, and capital transactions between parent banks and branches are based on the Shibor rather than the deposit interest rate, then that will be a signal for liberalization. The Shibor is just an example—the repo rate might be more important in the future. If a mature market-based benchmark rate can be identified to largely replace the benchmark rate launched by the central bank, it will be time to liberalize the deposit interest rate. But we worry that the market will become chaotic if the deposit interest rate is liberalized and no new benchmark interest rate has been found to replace the current benchmark. Caixin: Is it possible that the deposit interest rate will be liberalized first in selected regions, such as the Shanghai FTZ, Wenzhou, or Qianhai? YG: We encourage regions to implement the pilot program for deposit interest rate liberalization within the possible scope and we believe considerable innovations can be made. But any region that wants to liberalize the deposit interest rate must first satisfy two requirements: one, it must prove logically that it is ready in theory; and two, it must make sure that the market will remain stable and orderly when the pilot program is implemented and that the liberalization of the deposit interest rate is in the public interest. Caixin: What are your ideas about the recent financial strains in the bond market? YG: Certain volatilities in the market are normal since we want to allow the market to play a decisive role in allocating resources. We should be more tolerant of such volatility, but the central bank will not allow such volatility to reach a point whereby economic activities are impacted. But just as the interest rate is decided by market demand and supply, the bond price is decided by the demand and supply of bonds and we need to be poised to tackle the consequences of ups and downs in the interest rate. In principle, we should respect the market's role in allocating resources. (Originally published in issue no. 26 of Century Weekly by caixin.com, 2013.) 2013-12-02/en/2013/1202/1091.html
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The Decision on Major Issues Concerning Comprehensively Deepening the Reforms (hereafter, the Decision), deliberated and adopted at the Third Plenum of the 18th CPC Central Committee, makes significant arrangements for the next phase of China’s market-oriented financial reform. What is new about the reform? How will the reform be advanced? A reporter from Xinhua News Agency recently interviewed Yi Gang, deputy governor of the People’s Bank of China (PBC) and administrator of the State Administration of Foreign Exchange (SAFE). Accelerating liberalization of interest rates and deregulating deposit interest rates when conditions are met. Xinhua Reporter: How do you understand the change in the expression from “steadily push ahead with” to “accelerate” with respect to interest-rate liberalization in the Decision? How will we accelerate? Yi Gang: Interest-rate liberalization is a key to China’s market-oriented reform. As highlighted by the Decision, China will allow the market to play a decisive role in allocating resources, which will require the introduction of interest-rate liberalization, thus leading to the new expression in the Decision. Interest rates include deposit interest rates, loan interest rates, as well as interest rates for bonds and financial products. The interest rates for bonds and financial products have been liberalized for many years and loan interest rates have also been fully liberalized. Only the deposit interest rate is yet to be liberalized, but we will push ahead with marketization of the deposit interest rate when conditions are met. “Conditions are met” means replacing the current deposit interest rate adopted by the central bank possibly by the Shanghai interbank offered rate (the Shibor) or the 7-day repo rate. When commercial banks are fully accustomed to fixing prices by adding or deducting basis points based on the Shibor or when commercial banks verify internal capital based on the market benchmark, it will be time to liberalize deposit interest rates. Since deposit interest rates affect everyone, we will be very prudent in terms of their liberalization. Instead of being low, China’s deposit interest rates are actually well in excess of those in many external currencies, such as the HKD, USD, EUR, YEN, and GBP. The liberalization of deposit interest rates will be instrumental for allowing markets to play a better role in resource allocations, thus benefiting the public, financial institutions, and SMEs, and it will be favorable for the development of financial products. Accelerating capital account convertibility to improve the global competitiveness of the Chinese economy Xinhua: Regarding capital account convertibility, what does the substitution of the new expression “accelerate” to replace “gradually achieve” in the Decision indicate? Is there a timetable for this? YG: China achieved current account convertibility for the Renminbi in 1996, contributing to the rapid development of its foreign trade. Since China’s external investments and foreign investments in China do not match China’s economic conditions, it is necessary to achieve capital account convertibility. If the capital account is convertible, China will become a power with external investments and also a place that will be most attractive to global capital. With such an internally and externally liberalized capital market, China will see substantial improvements both in productivity and competitiveness. But there are worries that capital account convertibility will mean full liberalization and the free flow of hot money into and out of China. These worries are unnecessary. As stated in the Decision, efforts will be made to improve the external debt and capital flow management system under a macro-prudential framework, suggesting that we should monitor capital to make it easy to convert and that we should deepen the monitoring of the balance of payments statistics and the cross-border capital flows. When the capital account is convertible, mechanisms for anti-money laundering, anti-terrorism financing, and anti-tax havens will be maintained. This will be a step-by-step and orderly process rather than allowing free flows of hot money without management. Xinhua: As highlighted in the Decision, efforts should be made to push ahead with a two-way opening of the capital market. Can we interpret a two-way opening to mean Chinese residents will buy foreign stocks and foreign investors will buy A-shares? YG: A two-way opening of the capital market with respect to liberalization of the capital market as well as the bond market and other derivatives markets has multiple indications and will be advanced step by step. It means that Chinese investors can use two kinds of resources and two markets to optimize resource allocations on a broader scale. With more options, higher efficiency, and a broader horizon, China’s economic agents will have wider freedoms. Steadily accelerating capital account liberalization will be conducive to outbound investments by Chinese firms, including direct investments, co-financing, greenfield investments, equity investments, and M&A investments. We need to address the multiple needs of firms. However, worries about more outflows than inflows are unnecessary. Since China is the largest emerging market, managers of global assets can be expected to deploy their assets to China and to show great confidence in China. If the market is opened up further, offering more conveniences to global investors to access the Chinese market with respect to assets allocations and investments, China will become more attractive to the world. Allowing private capital to set up banks and quickly building a deposit insurance system Xinhua: As stated in the Decision, qualified private capital will be allowed to set up financial institutions, such as small- and medium-sized banks. I am wondering what measures will be taken in this regard? YG: This is a very important decision. Allowing qualified private capital to initiate banks is undoubtedly a further step in opening up the domestic market. This move will make sure that public capital, the non-public economy, and private capital will move into the banking sector on an equal basis to deliver easy and efficient financial services to the society, ultimately benefiting micro and small businesses as well as the general public. Xinhua: The Decision highlights that a deposit insurance system will be established. What will this consideration be based on? Does this indicate that people’s bank deposits will be safe? YG: Responsible departments are actively preparing schemes related to the deposit insurance system and will launch the system in the near future. There are three priorities in the deposit insurance system. First, this system is designed to protect depositors’ interests and rights for the benefit of the absolute majority of depositors. Second, unlike what has been done in the past—i.e., protecting the deposits of the public more actively than protecting the deposits of firms—this system will benefit SMEs. Third, the systemic mechanism will be positive and encouraging, thus preventing moral risks in economic terms. With such a mechanism in place, banks will become more prudential and will comply more fully with the laws and regulations, thus decreasing the premiums and risks and enhancing their reputation. Banks with better reputations will have better images. This system is a very important part of the infrastructure in China’s financial market and a cornerstone to China’s financial stability. Globally, the deposit insurance system is very mature. The system has played a significant role, especially during the financial crisis and the European debt crisis. It increases financial stability and allows society’s expectations for the financial sector to be more transparent. With such a system in place, our bank deposits will be more secure. As deposit insurance premiums are paid by financial institutions, the public will perceive no difference. The premium rate, measured by the risk exposure, will be low compared with global levels. There will be no charge for the premium as they reach a certain level. Improving the market-based exchange-rate formation mechanism for the Renminbi to enhance the resilience of the exchange rate Xinhua: The Decision states that efforts should be made to improve the market-based exchange-rate formation mechanism. I am wondering how we can make further improvements? What are your ideas about an RMB appreciation? YG: First, accelerate market construction. As it is not very convenient in terms of some products and transactions, more products need to be offered to provide firms with tools for hedging and risk prevention. Second, enhance the resilience of RMB exchange rates by establishing a fully resilient, two-way floating and market-based exchange-rate formation mechanism. Third, in improving the mechanism, efforts must be made to make sure RMB exchange rates remain stable at a rational and balanced level. Xinhua: Since the exchange-rate reform was first inaugurated, the RMB exchange rate has risen by more than 34 percent. Is this a balanced level? What is your idea of a balanced level? YG: Currently RMB exchange rates are very close to a balanced level. To understand the RMB exchange rates, one must analyze the pressures and benefits from a RMB appreciation. Despite the fact that a RMB appreciation imposes pressures on export businesses, it greatly benefits the public: first, it has enhanced overall national strength; second, the prices of imported goods that are closely related to people’s livelihood, such as beans and crude oil, have been reduced; third, shopping, studying, and traveling abroad have become cheaper. Since the kick-off of the exchange-rate reform in 2005, the nominal exchange rate of the RMB against a package of other currencies has risen 17 percent; in other words, the RMB has appreciated less than 2 percent per year. This pace indicates that China’s labor productivity and economic efficiency have improved, and China’s economic competitiveness has gradually been enhanced since the reform and opening up. (Originally released at http://www.xinhuanet.com on November 26, 2013.) 2013-12-02/en/2013/1202/1092.html
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Han Jian Member of the Balance-of-Payments Statistical Committee of the IMF BOP statistics is a statistical system that fully reflects the foreign-related economic development of a country. It is one of the so-called four primary accounts of the macro-economy (the other three are the System of National Accounts, the Monetary and Financial Statistics, and the Fiscal Statistics). In 1995, upon approval of the State Council, the People’s Bank of China (PBOC) promulgated the Measures for the Declaration of Balance-of-Payments Statistics (hereinafter referred to as the “Measures”), laying a legal foundation for China’s implementation of BOP statistics. With the constant expansion of China’s foreign-related transactions, a number of new challenges have arisen from the BOP statistics. The State Council recently decided to amend the Measures; the changes will come into force as of January 1, 2014. The amendments to the Measures mark an important move to improve the country’s BOP statistical system as required by the latest IMF standards. In the following, we present interpretation of the Measures in six respects: I. The BOP statistics not only include transactions, but they also cover the stock of external assets and liabilities. In the past, countries throughout the world, including China, focused on cross-border capital flows and placed less emphasis on the stock of external assets and liabilities. The lessons learned from the financial crises over the several years highlight the importance of reliable statistics on external assets and liabilities, which is a foundation for the formulation of scientific macro-economic policies and wise decisions for routine supervisions and for tackling potential crises. In 2009 the IMF published the 6th edition of The Balance of Payments and International Investment Position Manual, with a special emphasis on the statistical requirements for the stock of external assets and liabilities. Correspondingly, with respect to the scope of BOP statistics, special emphasis was placed on the amendment to the statistics on the stock of external financial assets and liabilities held by Chinese residents. Thus far the declaration of BOP statistics not only includes economic transactions between Chinese residents and non-Chinese residents, but also covers external financial assets and liabilities of Chinese residents. II. Both Chinese and non-Chinese residents are responsible for issuing statistical declarations. The Balance of Payments and International Investment Position Manual (sixth edition) not only specifies the BOP statistical requirements of residents, but also specifies the statistical requirements for non-residents. Prior to the amendments, the Measures only specified the declaration obligations of Chinese residents. With the expansion of China’s foreign-related economy, an increasing number of non-residents have begun to carry out foreign-related transactions through domestic financial institutions. For a complete understanding of China’s BOP status, non-Chinese residents carrying out economic transactions within the territory of China are now incorporated into the scope of the declaration entities, as required by the revised Measures. According to the revised Measures, both Chinese residents and non-Chinese residents carrying out economic transactions within the territory of China are required to declare their BOP information. It should be noted that only non-Chinese residents who carry out economic transactions within the territory of China are required to make statistical declarations. Non-Chinese residents with no economic transactions in China or with economic transactions outside the territory of China are not subject to a statistical declaration. Economic transactions between Chinese residents and non-Chinese residents are primarily declared by the Chinese residents. Non-Chinese residents shall only declare data that do not meet the BOP statistical requirements or are not acquired through the declarations by Chinese residents. The State Administration of Foreign Exchange (SAFE) will specify the time-points, aspects, and channels of declaration by non-Chinese residents in light of the actual circumstances. Furthermore, “residents” as specified in the Measures are residents in statistical terms, including both institutions and individuals. III. Not only entities directly involved in the transactions are obligated to make declarations, but intermediaries, such as registration, settlement, and trusteeship agencies, also must make such declarations. In the past, the entities subject to the BOP statistical declarations were primarily that participated directly in the transactions. As foreign-related transactions have become more diversified in terms of the types and methods of transactions, new products and businesses, such as cross-border portfolio investments, financial derivatives, and bank cards, have come to the fore. In view of the large number of entities involved in making declarations, data collection through intermediaries engaging in services such as registration, settlement, and trusteeship will help facilitate data acquisition, increase the accuracy of the relevant data, reduce social costs, and relieve the burdens on the declaration entities to submit the relevant data. The previous version of the Measures only specified the declaration obligations of entities directly involved in transactions and securities registration agencies. According to the Measures, institutions that provide services such as registration, settlement, and trusteeship are also subject to the declaration. IV. Both institutions and individuals are subject to the declarations As China is moving ahead in its opening-up drive, the stock of external financial assets and liabilities of individual Chinese residents is also increasing. However, these data, which should be incorporated into the scope of the statistics and monitoring to complete the BOP statistical data, cannot be fully collected by financial institutions. According to the amended Measures, “Resident Chinese individuals who hold external financial assets and liabilities shall declare the conditions of their external financial assets and liabilities according to the regulations of the SAFE.” This is a supplementary provision of the Measures. Thus far, the SAFE has not worked out any regulations on the specific measures for individuals’ declarations of external assets and liabilities. Resident individuals holding external assets and liabilities above a certain amount may be required to submit the relevant information to the authorities, according to detailed rules that are expected to be formulated based on the actual circumstances. V. Both BOP statisticians and other personnel involved with statistics, such as bank staff, are obligated to keep the relevant information confidential. In order to relieve the concerns of the declaration entities regarding breaches of data and to reduce the work by the declaration entities in fulfilling their declaration obligations, the previous version of the Measures specified that BOP statisticians are obligated to keep the data declared by the relevant entities confidential. The amended Measures again underscore the confidentiality obligations from the perspective of the complete data-acquisition process, requiring that banks, dealers, and institutions that provide services such as registration, settlement, and trusteeship when dealing with the relevant businesses shall keep strictly confidential all data known to them that are declared by the relevant entities. VI. Not only will violations of the foreign exchange administration regulations be punished, but violations of the BOP statistical regulations will also be punished. In practice, institutions and individuals attach great importance to complying with the regulations on the administration of foreign exchange under the current account and the capital account and the administration of foreign exchange business, but they tend to neglect their statistical obligations as provided by the law. According to the Measures, Chinese and non-Chinese residents who fail to make BOP statistical declarations as required by the regulations shall be punished in accordance with Article 48 of the Regulations on Foreign Exchange Administration of the People’s Republic of China (hereafter, the Regulations) of the SAFE and its branches or sub-branches. In order to facilitate implementation, the amended Measures delete all inapplicable penalty clauses specified in the previous version and simplify the wording to maintain consistency between the Measures and the Regulations. Entities that fail to make BOP statistical declarations in accordance with the regulations will be subject to penalties. The foreign exchange administration authorities may order the relevant entities to make corrections and the authorities may issue warnings to the relevant entities. Institutions that act in violation of the relevant regulations may be fined no more than RMB 300,000. Individuals who act in violation of the relevant regulations may be subject to a fine of no more than RMB 50,000. 2013-11-22/en/2013/1122/1088.html
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Premier Li Keqiang recently signed Decree No. 642 of the State Council on promulgation of the Resolution of the State Council on the Amendments to the Measures for the Declaration of Balance-of-Payments Statistics (hereafter, the Resolution), which will come into effect on January 1, 2014. Experts at some relevant research institutes and government departments were interviewed in order to grasp a deeper understanding of the amendments. In 1995, the People’s Bank of China (PBOC) promulgated the Measures for the Declaration of Balance-of-Payments Statistics (hereafter, the Measures) upon approval of the State Council. The Measures were formulated to obtain a comprehensive understanding of China’s foreign economic situation, which could provide an important basis for macro-economic decision-making. The Measures have played an active role in China’s Balance of Payments (BOP) statistics during the past 20 years. What was the reason for this important amendment at this time? Ding Zhijie (dean of the School of Finance of the University of International Business and Economics): The past 20 years witnessed the burgeoning development of China’s foreign economy. The amendments were implemented to adapt to the new circumstances, tackle new challenges, and meet the new requirements. With respect to the new circumstances, in recent years there has been a constant expansion of China’s BOP transactions, a growing diversity of transactions in terms of content, type, and mode, development of new products, such as cross-border portfolio investments and financial derivatives, and the emergence of new businesses, such as e-banking and international bank cards, thus calling for new methods to monitor, analyze, and provide early warnings for the BOP statistics. As for the new challenges, in recent years there have been increasing uncertainties regarding BOP operations, a growing severity of abnormal inflows of cross-border capital, and greater difficulties in supervising them. This has made it necessary that monitoring and analysis of cross-border capital flows be strengthened and that early-warning capability be enhanced by improving the current BOP statistical and declaration systems. As for the new requirements, in 2009 the IMF published the Balance of Payments and International Investment Position Manual (hereafter, the Manual, sixth edition), specifying the universal international standards for the compilation of BOP statistical statements. The revised Manual refined the existing system in terms of its principles, scope, and classification and framework of the statistics and enhanced the statistics on the stock of the BOP positions. These changes subjected China’s BOP statistical data and methods to higher standards and created good opportunities for China to improve its BOP statistical system so that it is consistent with the latest international standards. The amendments reflect the most recent requirements as a result of the rapid changes in the BOP situation and macro-economic monitoring and analysis. What are the highlights of the amended measures as compared with the previous measures? Zhao Qingming (expert on international finance): Five areas are highlighted in the amendments. First, the current statistical declaration system (scope, object, and so forth) has been comprehensively revised based on the latest international standards for BOP statistics. Second, some key areas were revised, such as BOP stock statistics and the declaration obligations of non-Chinese residents. Third, the Measures have been supplemented by some content that was missing from the previous version and by those vulnerable aspects of the BOP statistics, including stock statistics and the obligations of the declaration entities, such as Chinese and non-Chinese residents. Fourth, the amendments optimize the channels and specify the obligations of registration, settlement, and trusteeship agencies in terms of submitting portfolio investment data in a more convenient and accurate manner, thus easing the burdens on the declaration entities and increasing the efficiency and accuracy of the submitted data. Fifth, the statistical obligations of declaration entities and the statisticians, as well as the penalties for violation of the regulations, are specified. Guan Tao (director of the BOP Department of the SAFE): The amended Measures cover six areas. First, external financial assets and liabilities of Chinese residents are incorporated into the statistics. Second, non-Chinese entities are treated as declaration entities so as to acquire more comprehensive and accurate data on BOP transactions, especially transactions with non-Chinese residents that take place within China. Third, a series of new declaration requirements for agencies that provide services, such as registration, settlement, and trusteeship, have been added due to the development and administration of e-banking, international bank cards, and the securities market. Fourth, the declaration obligations of Chinese residents who have external financial assets and liabilities have been added. Fifth, the confidentiality obligations of the above entities have been added based on the revision of the declaration entities. Sixth, it is explicitly specified that penalties shall be imposed on the relevant entities in accordance with the Regulations on Foreign Exchange Administration of the People’s Republic of China, and the penalties set forth in the previous Measures are hereby abolished. All in all, for the present and for the foreseeable future, the revised version will meet the requirements for BOP statistics and monitoring. The amendments also introduce some new requirements for China’s current BOP statistical system. Suggestions and opinions from experts were solicited regarding implementation of the new version. The BOP Department of the SAFE, as the entity responsible for implementing the Measures, has also been making preparations for their implementation. Zhang Bin, director of the Global Macro-economy Research Office of the Research Institute on the World Economy and Politics at the Chinese Academy of Social Sciences, has suggested that the relevant systems be improved and that the statistics on China’s external financial assets, liabilities, and transactions be strengthened so as to provide an important basis for macro-economic control. Current statistical methods should be further improved to meet the new requirements in the Measures and to fulfill the obligations in the amendments. Efforts should be intensified to disseminate information about the relevant policies in order to enhance awareness among the declaration entities as well as the general public regarding their declaration obligations. Guan Tao described three new initiatives for implementing the Measures. The first is to revise and publish national standards for the Statistical System for External Financial Assets and Liabilities and Transactions and the Classification and Coding of BOP Transactions as required by the Balance of Payments and International Investment Position Manual (sixth edition). The second is to improve the direct declaration and statistical systems for external financial assets, liabilities, and so forth, to refine the statistical content of the BOP sampling survey, and to explore the estimation and statistical methods so as to reduce the social costs and to streamline the procedures for the declaration entities while maintaining the quality of the statistical data. The third is to intensify training efforts on the BOP statistics by increasing the frequency of training classes, enhancing face-to-face communications with the data submission agencies such as the banks, carrying out training and dissemination campaigns at various levels, and compiling brochures that interpret the BOP statistics so as to impart the relevant knowledge to both the general public and the declaration entities. 2013-11-22/en/2013/1122/1089.html