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Editor’s note: The State Administration of Foreign Exchange (SAFE) recently conscientiously studied and implemented the spirit of the National Financial Work Conference, comprehensively summarized the practice of reform and development of foreign exchange administration during the past five years, and set forth the tasks for foreign exchange administration during the next period. During the last five years, the SAFE, under the strong leadership of the CPC Central Committee and the State Council, adhered to the theme of scientific development, the main line of accelerating the transformation of the pattern of economic development, and the essential financial requirements serving the real economy, closely focusing on the central task of promoting a basic equilibrium in the balance of payments, unswervingly carrying forward the reform of the foreign exchange administration system, energetically promoting the facilitation of trade and investment, sticking to the risk limits, establishing a system and mechanism for protection against the risks of cross-border capital flows, successfully dealing with the impact of the international financial crisis, effectively guarding against economic and financial risks, and effectively promoting the steady and rapid development of the national economy. In order to better implement the spirit of the National Financial Work Conference and to facilitate learning among various social circles about the progress in the reform and development of foreign exchange administrations, we will provide a detailed description of relevant information related to several special topics. Special Topic I An Interview with a Relevant Official of the State Administration of Foreign Exchange on Issues Concerning the Balance-of-Payments Situation Question 1: One of the current main targets of macro-control in China is to promote a basic equilibrium in the balance of payments. How much progress has been achieved in reaching this target? Answer: The CPC Central Committee and the State Council place high priority on the development of an internal and external equilibrium in the economy, treat the promotion of an equilibrium in the balance of payments as an important task to maintain macro-economic stabilization, and is actively “expanding domestic demand, adjusting the structure, reducing the surplus, and promoting a balance of payments.” In recent years, this work has gradually achieved results, and the balance of payments is approaching a basic equilibrium. In 2007, the proportion of the surplus in China ’s current account to GDP reached a historic high of 10.1 percent; in 2008, the proportion fell to about 9 percent; and in 2009 and 2010, the proportion fell to about 5 percent. In 2011 the proportion of China ’s current account surplus to GDP is expected to be about 3 percent, which is well within the internationally accepted reasonable range. Question 2: What is the main reason for the continuous improvement in China ’s balance-of-payments situation? Answer: There are internal reasons as well as external reasons, structural factors as well as cyclical factors, and the effect of the market as well as the influence of policy. First, accelerating the transformation of the pattern of economic development and adjusting the economic structure to substantially promote an improvement in the balance-of-payments situation. In recent years, the harmony and endogeneity of China ’s economic development have been further improved, and the growth of three major demands, investment, consumption, and exports, has become more balanced. In 2011, the contribution rate of domestic demand to China ’s economic growth was 106 percent, of which the contribution rate of final consumption increased from 37 percent in 2010 to 52 percent in 2011. Second, accelerating policy adjustments for the foreign economy, gradually eliminating the structural and institutional obstacles that affect the balance of payments equilibrium. In terms of trade policy, China has given full play to the role of imports in the macro-economic equilibrium and structural adjustment. Beginning from 2008, the import growth rate has exceeded the export growth rate. In 2011 the trade surplus decreased by 48 percent compared with 2008. In terms of foreign investment policy, China continuously accelerated implementation of the development strategy of “Going Out.” During the Eleventh Five-Year Plan period, the annual net outflow of China ’s overseas direct investments has been USD 39.1 billion, 8.7 times the figure during the Tenth Five-Year Plan period. In terms of foreign exchange administration policy, on the one hand, China strengthened monitoring of cross-border capital flows and intensified efforts to crack down on hot money inflows; on the other hand, China actively promoted facilitation of trade and investment and encouraged institutions and individuals to hold and use foreign exchange. Third, changes and developments in international economic and financial situations promoted an improvement in China ’s balance-of-payments situation. Beginning from 2008, world economic growth has been slowing down, the international financial turmoil has been becoming worse, and there has been a continuous trend of global deleveraging. On the one hand, this placed constraints on the growth of foreign demand and resulted in the narrowing of the surplus of trade in goods; on the other hand, this stimulated periodic outflows of arbitrage capital from China and intensified fluctuations in cross-border capital flows. Question 3: Specifically, in terms of promoting a basic equilibrium in the balance of payments, what measures are being taken by the foreign exchange authorities? Answer: In recent years, the foreign exchange authorities have been treating scientific development as the theme, and the acceleration of the transformation in the pattern of economic development as the main line, and have actively cooperated with the macro-control by the state and have taken measures in different areas to control inflows, promote outflows, reduce the surplus, and promote the balance of payments. First, strengthening the monitoring and early warning system for the bidirectional flow of cross-border capital and the balanced management of outflows and inflows of cross-border capital; second, continuously enriching the tools for managing cross-border capital flows, improving the emergency response plan, and effectively guarding against the risks of massive cross-border capital flows; third, intensifying management of unusual capital inflows, emphasizing priorities, and rigorously cracking down on illegal and irregular capital inflows; fourth, promoting reform in key areas and key links of foreign exchange administration, expanding the channel for the utilization of foreign exchange funds, developing the foreign exchange market, and continuously improving the market mechanism and management system for the adjustment of the balance of payments. The above measures have achieved initial results. In 2011 the cross-border receipt and payment surplus and the foreign exchange settlement and sales surplus of the non-bank sector decreased by 9 percent and 8 percent respectively from the last year, and the increment in foreign exchange reserves (setting aside the changes in the exchange rate and asset prices) decreased 18 percent; a unilateral appreciation of the RMB was expected to fail, and there was an initial bidirectional fluctuating pattern in the RMB exchange rate. Question 4: In 2012, how will China ’s balance-of-payments situation develop and change? Answer: At the end of 2011, under the combined influence of domestic and foreign factors, market and policy factors, as well as other factors, fluctuations in China ’s cross-border capital flows intensified and pressures of capital outflows suddenly increased. It is expected that in 2012 China’s balance of payments will still maintain a surplus; however, the surplus will decrease amidst more fluctuations, and the balance of payments will further approach an equilibrium. The main reasons are as follows: First, due to the effects of the European sovereign debt crisis, the recovery of the world economy is very slow, and this will adversely affect China’s export growth; however, China’s structural problem whereby there are more savings than investments will be difficult to resolve in the short term; therefore, China’s current account, including trade in goods, will hopefully continue to maintain a surplus. Second, China accelerated the transformation of the pattern of economic development and actively implemented policies and measures to enlarge domestic consumption demand and promote imports; foreign trade development has become more balanced, and the receipts and payments under the current account are further approaching an equilibrium. Third, external impacts will not change the long-term trend whereby China ’s economy will maintain steady and rapid development, and international capital, in particular long-term capital, will continue to flow into China . Fourth, it will be difficult to resolve the structural problems of the developed countries in the short term, various contradictions will be intertwined with one another, and international economic and financial turmoil will continue; therefore, China may face the risk of frequent flows of cross-border capital, even periodic outflows of arbitrage capital. Question 5: In terms of promoting a basic equilibrium in the balance of payments, what measures will be taken by China in the future? Answer: Despite the fact that at the end of 2011, China ’s foreign exchange reserve growth had slowed down with the emergence of the pressure of capital outflows, the increment for the whole year was still significant. Furthermore, many fundamental factors that resulted in the balance of payments surplus have still not changed, and the external environment will continue to be subject to uncertainties; therefore, efforts to promote a basic equilibrium in the balance of payments cannot be reduced. The Twelfth Five-Year Plan has already established that one of the main targets of economic and social development for the next five years will be that “the balance of payments will approach a basic equilibrium.” From a macro perspective, through structural adjustments China will further enlarge domestic demand, in particular consumption demand, transform the economic growth mode from one mainly depending on investment and exports to one that is driven by consumption, investments, and exports; China will promote more balanced foreign trade, accelerate implementation of the “Going Out” strategy, and take various measures to promote a basic equilibrium in the balance of payments. Meanwhile, the foreign exchange authorities will further strengthen monitoring of unusual cross-border capital flows, establish a system and mechanism for guarding against the impact of bidirectional flows of cross-border capital, deepen the reform in key areas, steadily promote convertibility under the capital account, and cultivate and develop the foreign exchange market. 2012-03-26/en/2012/0326/1037.html
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Special Topic II In recent years the foreign exchange authorities have firmly implemented the requirement put forward at the 17th National Party Congress to “institutionally give better play to the fundamental role of the market in resource allocation” and have accelerated the construction and development of China’s foreign exchange market; consequently, there have been increasing varieties of trade in the foreign exchange market , the group of trade participants has expanded continuously, the trading mechanism has improved, and the foundation and capability of the foreign exchange market to serve the real economy and allocate financial resources have been further improved. Increasing the varieties of trade to meet the diversified demands of market players to hedge against exchange-rate risks. Currency swap transactions were introduced to the inter-bank foreign exchange market and the bank-to-client market in August 2007 and March 2011, respectively, and foreign exchange options trading was introduced to the inter-bank foreign exchange market and the bank-to-client market in April 2011. By that time, China ’s foreign exchange market system already covered the basic products in the international foreign exchange market. Furthermore, in order to reduce currency conversion costs for cross-border trade and investment and to enhance the banks’ risk management capabilities, since 2010 trading of the RMB against the Malaysian Ringgit, Russian Ruble, Australian Dollar, and Canadian Dollar has been gradually introduced and there are now nine tradable currencies from the developed economies and the new emerging market economies. Expanding market entities and building a multi-tiered market structure. While the group of bank market players continuously expanded, qualified non-bank financial institutions and non-financial enterprises were permitted to participate in trade in the inter-bank foreign exchange market to increase the diversity of foreign exchange supply and demand. At present, there are twenty-six finance companies of enterprise groups participating in inter-bank spot trade, and Shanghai Automotive Group Finance Co., Ltd. is the first company to carry out inter-bank forward trade. This plays an active role in supporting the enterprises to “Go Out” and reduces foreign exchange conversion costs. Perfecting market operational mechanisms and increasing the autonomy and flexibility of transactions. In order to give full play to the important role of the market in the selection of market makers and to adapt to the new situation whereby trade product categories on the inter-bank foreign exchange market are increasing and commercial banks’ market positioning is becoming more segmented, the market-maker system was further improved in August 2010; a trial market-maker business was introduced to the inter-bank foreign exchange market, and the access threshold for non-market-makers to engage in market-making competition was lowered. According to the Circular, a system for the grading of market-makers was established, and the liquidity and trading efficiency of derivative markets, including the forward-swap market, was improved. The appraisal mechanism for selecting superior market-makers and eliminating inferior market-makers has been perfected and the initiative of market-makers in participating in market-making has been enhanced. In accordance with voluntary and merit-based principles, as of the end of 2011, 26 spot market-makers and 20 forward swap market-makers had been approved, 8 commercial banks had been approved as spot market-makers, and 10 commercial banks had been approved as forward swap market-makers. As the foreign exchange market developed, in order to further improve its liquidity and trading efficiency, in October 2008 currency brokerage companies were regulated and encouraged to carry out foreign exchange brokerage business in the inter-bank foreign exchange market to save the market participants’ time spent on inquiries, to facilitate anonymous quotes and to introduce new trading means, and to form a favorable supplementary and interactive mechanism among market participants, the China Foreign Exchange Trading System, and the currency brokerage companies. As of the end of 2011, Shanghai CFETS-ICAP International Money Broking Co., Ltd., Tullett Prebon SITICO ( China ) Ltd., and Ping An Tradition International Money Broking Company Ltd provided brokerage services for RMB-against-foreign exchange derivatives trade. Improving market infrastructure and guaranteeing sound development of the foreign exchange market. First, improving the foreign exchange trading system. In accordance with the objective needs for the development of China’s foreign exchange market, and on the basis of the utilization of advanced international experience, in 2007 the foreign exchange authorities provided the China Foreign Exchange Trading System with guidance on research and development and on online operations of a new generation of the foreign exchange trading system which reached then advanced level of mainstream international trading platforms. Second, improving capability to guard against risks. The foreign exchange authorities conformed to the needs for the development of the RMB-against-foreign exchange derivatives market, and in August 2007 promulgated China’s Master Agreement on RMB-against-Foreign Exchange OTC Derivatives, the first in China to put forward innovations such as the single agreement principle, netting settlement, and bilateral agreements, effectively reduced the credit risk of derivatives trading, provided trade participants with an effective guarantee on their market activities to guard against exchange-rate risks, and laid a foundation for the development and promulgation of the China Inter-bank Market Financial Derivative Transactions Master Agreement. Third, improving the foreign exchange trading settlement system. In order to adapt to the demands of the foreign exchange market for a more efficient and safer settlement arrangement, in June 2009 net settlement business was introduced to spot inquiry trade in the inter-bank foreign exchange market, and the domestic foreign exchange market began to implement a central counter-party system that is based on multilateral net settlement, which is beneficial to reduce credit risks and settlement risks of foreign exchange trade, to improve the capability to guard against systematic risks, and to promote the long-term development of the foreign exchange market, in particular, the derivatives market. Fourth, cultivating an honest and energetic environment for the development of the foreign exchange market. Since 2008, the foreign exchange authorities have been providing the China Foreign Exchange Trading System with guidance on selecting excellent market-makers in the inter-bank foreign exchange market, focusing on guiding the market-makers to improve their market-making services and cultivating an honest and energetic market environment. As of the end of 2011, 319 designated foreign exchange banks provide enterprises and individuals with domestic and foreign currency exchange business and 318 financial institutions participate in trade in the inter-bank foreign exchange market. From 2007 to 2011, the volume of trade on China’s foreign exchange market increased annually 40.3 percent, reaching USD 14.2 trillion (with the volume of daily trading at USD 58.1 billion), a fourfold increase from 2006. In 2012, the foreign exchange authorities will deeply implement the spirit of the Central Economic Work Conference and the National Financial Work Conference, grasp well the general emphasis on the work of “Steady Development,” continue to steadily promote the construction and development of the domestic foreign exchange market, and promote the steady and rapid development of the economy. 2012-03-26/en/2012/0326/1038.html
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According to statistical data released by the State Administration of Foreign Exchange (SAFE), in November 2011 the amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD128.9 billion and USD129.7 billion, respectively. The deficit in foreign exchange settlement and sales by banks on behalf of clients amounted to USD800 million. For the first eleven months of 2011, the cumulative amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD1455.3 billion and USD1072.2 billion respectively. The surplus of foreign exchange settlement and sales was USD383.1 billion. In November 2011, foreign-related receipts and payments by domestic banks on behalf of clients amounted to USD210.8 billion and USD192.9 billion, respectively, and the surplus of foreign-related receipts and payments reached USD17.9 billion. For the first eleven months of 2011, the cumulative foreign-related receipts and payments by banks on behalf of clients amounted to USD2107.5 billion and USD1830.7 billion respectively; and the surplus of the cumulative foreign-related receipts and payments reached USD276.8 billion. Annex: Glossary and relevant definitions The Balance of Payments refers to all economic transactions occurring between residents and non-residents in China, including all financial transactions and barter transactions resulting in changes in the assets and liabilities of the residents and non-residents. Foreign exchange settlement and sales by banks on behalf of clients refers to the business of foreign exchange settlement and sales conducted by designated foreign exchange banks for their clients, excluding data on foreign exchange settlement and sales conducted by designated foreign exchange banks on their own behalf or data on inter-bank foreign exchange market transactions. The time when the conversion between the Renminbi and the foreign currency occurs is regarded as the time point for the statistics. Specifically, foreign exchange settlement refers to the sale of foreign exchange to designated foreign exchange banks by owners of foreign exchange; foreign exchange sales refer to the sale of foreign exchange by designated foreign exchange banks to users of foreign exchange. The differences between the foreign exchange settlement and sales are regarded as an offset balance, which will be balanced by the banks through transactions on the inter-bank foreign exchange market. This is the major reason for changes in the amount of foreign exchange reserves, which is not equivalent to the net change in foreign exchange reserves during the same period. The principles for transactions between residents and non-residents do not apply to the preparation of statistics on foreign exchange settlement and sales by banks on behalf of clients, and such statistics only cover transactions of RMB and foreign currencies between the banks and their clients, namely, exchange transactions between RMB and foreign currencies that fall outside the category of the balance-of-payments statistics. Foreign-related collections and payments by banks on behalf of their clients refers to the collections and payments between domestic non-bank resident institutions/individuals (collectively called the “non-bank section”) and non-resident institutions/individuals through domestic banks, exclusive of the collections and payments in cash or the foreign-related collections and payments by the banks themselves -- in particular, cross-border receipts and payments between non-bank sectors and non-residents through domestic banks (including RMB and foreign exchange), and domestic receipts and payments between non-bank sectors and non-residents through domestic banks (currently including receipts and payments in foreign exchange and receipts and payments in RMB under the RMB settlement item for cross-border trade). The statistics are collected at the time when the clients conduct the foreign-related receipts and payments at the domestic banks. Specifically, foreign-related receipts of banks on behalf of clients refer to funds collected by non-bank sectors from non-residents via domestic banks; external payments by banks on behalf of clients refers to funds paid by non-bank sectors to non-residents via domestic banks. Although foreign-related receipts and payments of banks on behalf of clients are an integral part of the balance-of-payments statistics, the accounting method for the statistics, different from the accrual basis of the accounting required for the balance-of- payments statistics, is based on a cash basis. In addition, it merely reflects fund flows between the non-bank sectors and non-residents and does not include barter transactions and foreign transactions conducted by the banks themselves. Furthermore, the scope of the statistics on the foreign-related receipts and payments by banks on behalf of clients is smaller than the scope of the balance-of-payments statistics. 2012-03-26/en/2012/0326/1032.html
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TA national foreign exchange administration work conference was recently held in Beijing. The conference conveyed the spirit of the Sixth Plenary Session of the Seventeenth CPC Central Committee, the Central Economic Work Conference, and the Fourth National Financial Work Conference, providing an overall summary of work related to foreign exchange administration in 2011 and, based on an in-depth analysis of the current situation with respect to the economy, finance, and the balance of payments, setting forth the tasks for foreign exchange administration in 2012. At the conference Yi Gang, Vice President of the People’s Bank of China and Administrator of the State Administration of Foreign Exchange, delivered a report on foreign exchange administration work. Deputy Administrators Deng Xianhong, Fang Shangpu, Wang Xiaoyi, and Li Chao, Discipline Inspection Group Leader Yang Guozhong, and relevant responsible comrades in the branches (offices), divisions, and overseas offices of the SAFE attended the conference. It was pointed out at the conference that in 2011 the foreign exchange authorities did a relatively good job in accomplishing the main work objectives and tasks set forth at the beginning of the year, in accordance with the overall arrangements of the CPC Central Committee and the State Council, deeply implementing the scientific outlook on development and accelerating transformation of the concepts and methods of foreign exchange administration, while promoting the facilitation of trade and investment, effectively attaching more priority to slowing down the excessively rapid increase in the surplus of foreign exchange settlement and sales by banks, actively guarding against and cracking down on irregular inflows of hot money, steadily promoting the reform of the verification and writing-off system, and improving the operation and management of foreign exchange reserves. It was stressed that 2012 would be an important year as a connecting link between the 11th and 12th Five-Year Plans. Facing newly emerging situations, features, opportunities, and challenges in the economy both at home and abroad, the foreign exchange authorities should comprehensively implement the spirit of the 17th National Party Congress, the 3rd, 4th, 5th, and 6th Plenary Sessions of the 17th CPC Central Committee, the Central Economic Work Conference, and the 4th National Financial Work Conference, follow the guidance of Deng Xiaoping Theory and the important thought of the Three Represents, and deeply implement the scientific outlook on development; in accordance with the uniform arrangements of the CPC Central Committee and the State Council, they should accelerate the “Five Kinds of Transformations” of the concepts and methods of foreign exchange administration, strengthen the monitoring and management of cross-border capital flows, deepen the reform in key areas, and promote the steady and rapid development of the domestic economy. The conference set forth the key tasks for foreign exchange administration in 2012: first, sticking to the risk limits and constructing a system and mechanism for protection against the impact of cross-border capital flows; second, accelerating promotion of the reform in key areas of foreign exchange administration, doing a solid job in the work related to the pilot reform of the verification and writing-off for imports and exports and in the promotion of the said reform, gradually promoting convertibility under capital account, and accelerating the development of the foreign exchange market; third, further transforming the management methods and promoting the facilitation of trade and investment; fourth, improving the management system and mechanisms, and realizing the security, flow, and maintenance and appreciation of value in foreign exchange reserve assets; fifth, improving the regulatory system and the balance of payments statistical system, strictly adhering to law-based administration, and promoting the basic work of foreign exchange administration to a new level; sixth, further strengthening work related to Party building, clean government, cadre teams, and internal management. 2012-03-26/en/2012/0326/1035.html
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In 2011, in the face of the complicated economic and financial situations both at home and abroad, the State Administration of Foreign Exchange (SAFE) actively implemented the decisions and arrangements of the CPC Central Committee and the State Council, emphasizing priorities, improving methods, and rigorously cracking down on cross-border flows of hot money. In 2011 the results of the phase of cracking down on hot money were achieved, with a total of 3,488 cases of activities in violation of the regulations on foreign exchange administration handled and investigated, with the amount of penalties and confiscations reaching RMB 503 million, more than twice the amount of the last year. In 2011 the SAFE’s main tasks in cracking down on hot money included: First, striking a heavy blow, investigating, and handling major cases of activities in violation of the laws on foreign exchange administration in key areas. In 2011, seventeen major typical case involving a huge amount of money were investigated and punished; and cross-regional operations and irregular capital inflows to the real estate and financial markets, involving RMB 19.3 billion, and administrative penalties were imposed in eight such cases and fines were collected in the amount of RMB 187 million. Second, jointly handling and investigating the cases, rigorously cracking down on illegal and criminal activities with respect to foreign exchange, such as illegal banks. As of the end of November 2011, the SAFE and the public security departments had jointly exposed eighteen cases involving illegal banks, twenty cases involving the illegal sale and purchase of foreign exchange, and one case involving online foreign exchange speculation in the amount of RMB 71.7 billion, with 198 suspects caught red-handed and64 suspects thereof being prosecuted. The number of cases exposed and the number of suspects apprehended hit a record high. Third, emphasizing priorities. The SAFE, with a focus on financial institutions and large-scale enterprises, carried out special inspections in the areas of foreign exchange settlement of capital and short-term external debt, and rigorously punished enterprises, financial institutions, and individuals that borrowed external debt and carried out foreign exchange settlement in violation of the regulations on foreign exchange administration. In 2012 the SAFE will abide by the risk limits, construct a system and mechanism for protection against the impact of cross-border capital flows, strictly implement law-based administration, further improve the methods and means of foreign exchange inspections, rigorously crack down on various activities in violation of the foreign exchange laws and regulations, guard against the risks of unusual flows of foreign exchange funds, and safeguard the economic and financial security of China. 2012-03-26/en/2012/0326/1036.html
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Yi Gang, administrator of the State Administration of Foreign Exchange (SAFE), and his group recently visited Hubei for investigation and research on the pilot reform on the foreign exchange administration system for trade in goods. During the investigation and research, Administrator Yi Gang listened to the work report of the Hubei branch, visited and conveyed greetings to the first-line staff of the branch, conducted a field study on the integration of the foreign exchange business system portal at the bank end, held informal discussions with representatives of some banks and enterprises, and heard comments and suggestions on the pilot reform on the foreign exchange administration system for trade in goods. The comrades participating at the meeting unanimously confirmed that the reform of the foreign exchange administration system for trade in goods simplified business handling procedures, significantly reduced operation costs, enhanced the banks’ sense of responsibility to conduct examinations on the authenticity and awareness of enterprises to strengthen internal management, and established a new administrative mode combining trade facilitation and risk management. Administrator Yi Gang pointed out that the reform of the foreign exchange administration system for trade in goods is a major move on the part of the foreign exchange authorities to proactively adapt to developments and changes in the situation, to accelerate the transformation of foreign exchange administration concepts and methods, and to timely adjust management methods, and it is an important embodiment of the implementation of the concept of putting people first and running government for the people. The branches carrying out the pilot reform should earnestly study and solve the problems and suggestions put forward by the enterprises and banks in order to lay a foundation for comprehensively promoting the reform of the foreign exchange administration system for trade in goods. The foreign exchange administration should serve the market players, such as the financial institutions and the enterprises and safeguard the financial security of China . The foreign exchange authorities should further accelerate the transformation of administration methods, gradually transfer from focusing on ex-ante supervision to emphasizing ex-post management and from supervision based on trading activities and the nature of the business to management based on the individual economic entity, in order to effectively guard against the impact of cross-border capital flows and to realize the organic unity of serving the development of the foreign economy and improving supervisory efficiency, while also facilitating to the utmost foreign trade and overseas investments by the market players. 2012-02-15/en/2012/0215/1031.html
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The SAFE recently released China ’s Balance of Payments Statements for the third quarter and the first three quarters of 2011. In Q3 of 2011 the current account and the capital and financial account continued to post a “twin surplus” and international reserves maintained a growing momentum. The surplus under the current account totaled USD53.4 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods and current transfers reached USD85.3 billion and USD4.9 billion, respectively, whereas the deficit in trade in services and income amounted to USD20.3 billion and USD16.4 billion, respectively. Meanwhile, China ’s surplus under the capital and financial account (excluding net errors and omissions) totaled USD66.2 billion. In particular, net inflows of direct investments, portfolio investments, and other investments amounted to USD28.7 billion, USD9.9 billion, and USD26.2 billion, respectively. International reserves registered an increase of USD91.7 billion (exclusive of changes in the value of non-transaction factors such as exchange rates and prices). Specifically, foreign exchange reserve assets posted an increase of USD92.1 billion. In the first three quarters of 2011, the surplus under the current account was USD141.2 billion and that under the capital and financial account (excluding net errors and omissions) was USD250.1 billion. China ’s international reserve assets posted an increase of USD375.4 billion. FILE: attachment 1：Balance of Payments, Third Quarter of 2011 FILE: attachment2：Balance of Payments, First Three Quarters of 2011 2012-03-26/en/2012/0326/1033.html
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Recently, in order to actively carry out the work related to the pilot program of domestic securities investments by RMB qualified foreign institutional investors (hereinafter referred to as the “RQFII”), in accordance with the Measures for the Pilot Program of Domestic Securities Investments by Fund Management Companies and Securities Companies as RMB Qualified Foreign Institutional Investors (Decree No. 76 of the China Securities Regulatory Commission, the People’s Bank of China, and the State Administration of Foreign Exchange) and the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning the Pilot Program of Domestic Securities Investments by Fund Management Companies and Securities Companies as RMB Qualified Foreign Institutional Investors (HuiFa No.50 [2011]), the State Administration of Foreign Exchange (SAFE) convened a meeting on the investment quota of qualified institutional investors in order to review such matters as the allocation of the quota of domestic securities investments by RQFII. The meeting discussed and adopted the basic principles for the allocation of the quota for domestic securities investments by RQFIIs, i.e., approximately equal allocations between fund-based and securities-based RQFIIs, and relative control of the scale of private equity products. This time, a total investment quota of RMB 10.7 billion for the RQFIIs (see the Annex) was approved for 10 RQFIIs that had submitted their complete application materials through the trustee banks. The SAFE will continue, in a timely manner, accepting applications for investment quotas submitted by qualified RQFIIs, and will examine and approve the applications in accordance with uniform rules and procedures. FILE: attachment：download 2012-03-26/en/2012/0326/1034.html
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The State Administration of Foreign Exchange (SAFE) recently issued the Circular Concerning the Issuance of Provisions on Foreign Exchange Management for Cross-border Guarantees (HuiFa [2014] No. 29) and a person-in-charge at the SAFE accepted an interview with the media on the Provisions on Foreign Exchange Management for Cross-border Guarantees (hereafter referred to as the “Provisions”). I. What is the background to the promulgation of the Provisions? The previous regulations regarding foreign exchange management pf cross-border guarantees included: the Administrative Measures on External Guarantees by Domestic Institutions (YinFa [1996] No. 302), the Rules for Implementation of the Administrative Measures on External Guarantees by Domestic Institutions ([97] HuiZhengFaZi No. 10), the Circular Concerning Issues related to the Management of External Guarantees by Domestic Institutions (HuiFa [2010] No. 39), and the Circular of the State Administration of Foreign Exchange on the Issuance of Administrative Measures for Registration of Foreign Debt (HuiFa [2010] No. 19). During the initial stage after the release of these regulations, they played a positive role in terms of promoting economic and technological cooperation with foreign countries, supporting foreign trade development, facilitating the export of labor services, introducing advanced foreign technologies, equipment, and capital, and smoothly conducting foreign-related financial activities, standardizing the behavior of the external guarantees, and strengthening management of the external guarantees . With the rapid development of China’s foreign-related economy and the ever-expanding scale of transactions in the balance of payments, the behavior of cross-border guarantees has become increasingly diversified and complex. However, the above regulations only cover external guarantees and domestic loans with offshore guarantees and they fail to include other types of cross-border guarantees, so they cannot satisfy our current requirements for market development. Meanwhile, with regard to the relevant guarantee management policies that have been clarified, the relevant approval and verification procedures are complex, and lag behind in terms of the management mode relative to the market requirements and result in relatively high management costs. Therefore, under the guidance of the “Five Transformations,” the SAFE adjusted its thinking about management, promoted the streamlining of administration and delegation of power to lower levels as well as the transformation of functions, and promulgated the Provisions in good time based on adequate investigations and solicitation of opinions at an early stage in order to facilitate cross-border guarantee activities and to promote capital account convertibility under the guarantee item. II. What is the main idea behind this reform in terms of the approach to cross-border guarantee management? The Provisions mainly reflect the following ideas about management: Firstly, streamlining administration and delegating power to lower levels. Cancelling or substantially cutting back on the scope of control over quantity and the scope of registration of cross-border guarantees, with only the part of “partial cross-border guarantees that generate new liabilities or claims by residents to non-residents upon the compliance of the guarantees” subject to registration on a case-by-case basis. Meanwhile, the laws and regulations have been clarified and consolidated, and twelve normative documents related to cross-border guarantees have been abolished. Second, functions are transformed. The boundary between foreign exchange management and regulatory responsibilities for cross-border guarantees is now rationally defined. Based on the objectives and responsibilities of foreign exchange management, the scope of foreign exchange management of cross-border guarantees is rationally defined and cross-border guarantees integrated into foreign exchange management shall have the following features: conforming to the requirements in terms of the forms in a legal sense, guaranteeing compliance with payment methods, determining the relative amount in the balance of payments, and so forth. Meanwhile, by giving due regard to higher law, international practices, and market demand, foreign exchange management shall be disconnected from judgments about the effectiveness of contracts on cross-border guarantee transactions. Foreign exchange registration conducted by the foreign exchange authorities in line with their statutory duties for the balance-of-payments statistics is different from the confirmation registration performed by the relevant authorities of the industry in terms of both purpose and effectiveness, and it cannot be used as collateral or for going against a third party. Third, ex-ante approval is changed to ex-post regulation. All ex-anti approvals have been cancelled and registration has become the major management approach. The ex-ante review and approval procedures for the conclusion and compliance of the guarantee contracts have been cancelled and have been replaced by proportional self- registration management; and most of the business qualification limits have been abolished. Fourth, risk prevention is strengthened. In parallel with streamlining administration and delegating power to lower levels, efforts are made to prevent cross-border guarantees from becoming a channel for abnormal capital flows by means of support systems and regulatory approaches. The monitoring and analysis responsibilities of the foreign exchange authorities are clarified to emphasize off-site verifications, monitoring, and inspections, and to strengthen investigations of violation responsibilities. III. What is the content of this reform in terms of foreign exchange management of external loans with domestic guarantees? In the Provisions, the major content of the management of external loans with domestic guarantees includes: 1. Cancelling the quantity controls for external loans with domestic guarantees. Cancelling the ex-ante approvals or indicator verifications for financing or non-financing of external loans with domestic guarantees of domestic institutions. 2. Cancelling unnecessary qualification limits. Except for general restrictive clauses (e.g., on the use of guarantee funds) universally applicable to all institutions, qualification limits are abolished for specific entities (the requirement of the asset and liabilities ratio of the guarantor and the guarantee, or of related-party relationships) or for specific transactions (e.g., non-financing guarantees). 3. Registration is the major mode of management. Statistics and monitoring shall be conducted on external loans with domestic guarantees within the existing capital account information system. 4. Approvals for the compliance of guarantees are cancelled. Banks can handle the compliance of external guarantees on their own, and non-banking financial institutions and enterprises can handle compliance procedures with the banks based on the registration certificate for the guarantee. 5. Where external claims are generated upon the compliance of the guarantee, registration of external claims shall be handled as per the relevant requirements. IV. What is the content of this reform in terms of foreign exchange management of domestic loans with offshore guarantees? In the Provisions, the major content with respect to management of domestic loans with offshore guarantees includes: 1. Clarifying the business qualifications. The creditors shall be domestic financial institutions, the debtors shall be non-financial institutions, and the guaranteed liabilities can only be common loans or credit lines in the home currency or in foreign currency. 2. Centralized registration of the creditors. The creditors (i.e., domestic financial institutions) shall handle the filing of the statistics with the foreign exchange authorities via the capital account information system in a centralized manner. 3. The creditors shall handle collection of the payment for the compliance of the guarantees on their own. Domestic financial institutions can handle collection of the payment for the compliance of the guarantees directly with the overseas guarantors. 4. Debtors shall handle the external debt registration upon the compliance of the guarantee. Where external debts are generated upon the compliance of the guarantee, external debt registration shall be carried out, but it will not be subject to the quota for common external debts. With regard to external debts incurred by the compliance of domestic loans with offshore guarantees, the balance of the outstanding principal shall not exceed one time the value of the debtor’s net assets. V. According to the Provisions, in addition to external loans with domestic guarantees and domestic loans with offshore guarantees, how shall other cross-border guarantee contracts signed by domestic institutions be managed? According to the Provisions, with the exception of the necessary foreign exchange registration procedures that shall be performed and the certain qualification limits that shall be maintained for external loans with domestic guarantees and for domestic loans with offshore guarantees, domestic institutions can conclude cross-border guarantee contracts in other forms on their own. It should be emphasized that for cross-border guarantee contracts in other forms, the Provisions only abolish the limits on the conclusion of the guarantee contracts in terms of foreign exchange management, and the claim of the guarantee rights by the creditor under the guarantee item and the fulfillment of the guarantee compliance obligations by the guarantor shall still conform to the relevant administrative provisions on the external debt, direct investments, portfolio investments, and so forth. VI. How shall relevant risks be prevented and controlled after this policy reform? In order to address the risks from the sharply rising external claims and debts incurred by the large centralized guarantee compliance resulting from exposure to the international balance of payments, the following major risk control measures are adopted by the Provisions: First, statistics on the conclusion and compliance of the guarantee contract, which may lead to newly-added external claims and debts, shall be collected on a case-by-case basis. Second, cross-border guarantee transaction activities of all parties involved shall be restrained by means of guarantee compliance audit reviews (due diligence review), temporary suspension of contract conclusions after default as well as a negative list approach for capital use and other self-disciplinary requirements. Third, monitoring and disposal efforts will be reinforced for guarantee activities in violation of the regulations by adopting measures such as registration of claims and debts, off-site verifications, and foreign exchange inspections. Fourth, rights to conduct timely adjustments to the cross-border guarantee management patterns will remain with the foreign exchange authorities by means of the balance-of-payments safeguard clause. Through the above arrangements, cross-border fund flow risks under the guarantee item can be kept controllable. VII. In what respects does foreign exchange management reform of cross-border guarantees promote capital account convertibility? Release and implementation of the Provisions will achieve policy consistency in foreign exchange management for cross-border guarantees and a basic convertibility of cross-border guarantees. These are reflected in the following areas: in the field of domestic guarantees with external loans, although ex-ante approvals, approvals for the guarantee compliance, and most of the qualification limits are abolished, this reform maintains case-by-case registration in the contract conclusion process; while in the field of domestic loans with offshore guarantees, under the premise of conforming to the relevant restrictive conditions, Chinese- and foreign-funded enterprises are permitted to conclude contracts on their own and to handle guarantee compliance that is within one time the value of their net assets. Thus the policies on domestic loans with offshore guarantees for Chinese- and foreign-funded enterprises in China are unified and significantly improved. 2014-07-07/en/2014/0707/1117.html
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Q: Could you please provide a briefing on China’s foreign- exchange situation during the first half of 2013? A: China has seen a transition from an increase in rapid inflows to balanced inflows and outflows of foreign exchange since the beginning of 2013. Foreign-exchange settlements and sales reached USD 911.4 billion and USD 773 billion respectively, resulting in a surplus of USD 138.4 billion during the first half of the year. During the period from January through April, due to the benefits of adequate international liquidity, stable economic fundamentals, and strengthened expectations of an appreciation of the RMB, the trend in large-scale foreign-exchange inflows that emerged during the second half of last October continued, with foreign-exchange settlements and sales at banks registering a surplus of an average of about USD 32.1 billion per month. But due to the changed economic environment in China and the rest of the world, as well due to policy adjustments in China, net inflows of foreign exchange have dropped sharply since May, with the foreign-exchange settlements and sales reaching a surplus of USD 10.4 billion in May but recording a small deficit of USD 400 million in June. Q: Why was there a slump in net cross-border capital inflows during the last two months? A: This was due to international, domestic, seasonal, and policy factors. In the global markets, as the U.S. Federal Reserve announced a gradual withdrawal of the quantitative easing monetary policy after its economic recovery picked up, since May the emerging markets have witnessed a currency depreciation, a decline in the stock markets, and capital outflows. In China, because of downward pressures on its economic growth, those who are bearish on China were on the rise, expectations of an appreciation of the RMB lessened, and forward rates showed the RMB will depreciate more sharply against US dollar; deleveraging reappeared among Chinese firms, and cross-border credit sales and trade financing by banks changed from an average of net inflows of USD 3.3 billion per month during the January-April period to an average of net outflows of USD 21.8 billion per month during May and June. In addition, as the foreign-exchange purchasing price on offshore RMB markets became higher than that on the domestic foreign-exchange market, more purchases of foreign exchange were made in the Chinese mainland, and RMB net payments under the trade item fell from a monthly average of USD 10.9 billion during the January-April period to USD 5.1 billion during May and June. All of the above factors contributed to the decrease in the surplus in foreign-exchange settlements and sales by banks. In terms of seasonal and policy factors, since May and June are peak seasons when Chinese residents choose to travel or to begin their studies abroad, as well as seasons when most foreign-funded firms distribute their bonuses, average monthly purchases of foreign exchange for overseas tours and for investments rose 16 percent and 83 percent respectively from the January through April period of this year. During the past few months, government departments, including the People’s Bank of China, the General Administration of Customs, the China Banking Regulatory Commission, and the State Administration of Foreign Exchange (SAFE), have introduced policies and measures to regulate the settlement of cross-border trade in RMB and customs declarations for exports and to enhance management of bank wealth management products and foreign- exchange inflows, and have managed to contain capital arbitrage via false trading in liquidity. Q: Most emerging markets have been under pressure from currency depreciations and capital outflows during the past months. I am wondering whether China is at risk of continuous large-scale cross-border capital outflows during the second half of the year. A: As the U.S. Federal Reserve is expected to gradually increase its exit from quantitative easing that began in May 2013, there have been signs that this may lead to gradual withdrawal of foreign capital from the emerging markets, with a decrease in the MSCI Emerging Markets Index and the currency indices by more than 10 percent. So far, no signs of massive foreign-capital withdrawals have been discovered in China. First, FDI and net cross-border capital inflows in securities investments have continued to rise. In June, net FDI inflows totaled USD 11.9 billion, up by 14 percent month on month, and net foreign-exchange settlements for securities investments totaled USD 1.5 billion, 3.5 times that during the previous month. Second, FDI withdrawals have remained at a low level. Foreign- exchange purchases for FDI withdrawals totaled USD 3.5 billion during the first half of the year, down by 17 percent year on year. Third, there have been only slight changes in the investment profits repatriated by foreign-funded firms. Foreign-funded firms usually distribute bonuses around June of every year. During this June, profits repatriated by foreign-funded firms dropped 2 percent year on year to reach USD 12.6 billion. Given the uncertainties and instabilities in China and the rest of the world, it is expected that during the second half of the year China’s cross-border capital will stabilize amid fluctuations. As global economic growth continues to slow down, China’s overall external demand will remain weak while international trade frictions will increase, thus placing heavy pressure on exports. As most people believe that the RMB exchange rate is currently at an equilibrium, higher two-way volatility and weaker expectations of an appreciation of the RMB are favorable for slowing down capital inflows. In 2012, for example, China saw bi-directional changes in cross-border capital flows. This pattern of cross-border capital flows and the balanced supply and demand for foreign exchange will become more common in the future, so adaptive adjustments will be made to both domestic macro controls and to the behavior of domestic market players. During the next phase, the SAFE will focus on strengthening the monitoring of cross-border capital flows, increasing policy and data transparency, improving contingency plans and policies to limit the impacts of two-way cross-border capital flows, and will do whatever it takes to control risks in order to support a balance in the balance of payments and the sustained healthy development of China’s foreign-related economy. Q: What about the increase in the foreign-exchange positions of the banks after the SAFE introduced measures to strengthen administration of foreign-exchange fund inflows? A: On May 5, the SAFE issued the Circular of the SAFE on Relevant Issues on Strengthening Administration of Inflows of Foreign- Exchange Funds (Huifa [2013] No. 20, referred to as Circular No. 20 hereafter), stating that a bank’s minimal consolidated position in foreign-exchange settlements and sales will be linked to the foreign-currency loan-to-deposit (LDR) ratio. Banks whose foreign-currency LDR ratio exceeds the reference rate can reduce their LDR ratio via decreasing foreign-currency loans and increasing foreign-currency deposits, or via buying foreign exchange on the spot market and increasing its position through forward foreign- exchange trading. As the policy allows for a two-month transition period, since its issuance the influence of this circular has been absorbed by the financial market, and the foreign-exchange market has remained stable. The overall consolidated position of banks at the end of June was USD 22.5 billion more than that on May 5, the day on which Circular No. 20 was issued, and it was higher than the amount that Circular No. 20 required to be increased. Further analysis shows that net outstanding forward foreign-exchange settlements registered an increase of USD 23.8 billion, while the decrease in the banks’ positions on a cash basis was USD 1.3 billion during the same period, suggesting that forward foreign exchange was not traded thoroughly flat on the spot market so that banks could meet the requirements of Circular No. 20 to increase their consolidated positions. Circular No. 20 has had a limited impact on the banks’ domestic- and foreign-currency cash positions. 2013-08-09/en/2013/0809/1085.html