June 26, 2007 - In Beijing, the SAFE recently held a briefing meeting on inspection of the foreign exchange transactions of banks. Attendees included representatives from 19 Chinese-funded banks, 4 foreign cooperative banks, and some foreign-funded banks. Ms. Hu Xiaolian, deputy governor of the PBOC and administrator of the SAFE, attended the meeting and delivered a speech.
According to Ms. Hu, the disequilibrium in the balance of payments has become increasingly serious. On many occasions, the Party Central Committee and the State Council have attached great importance to this problem and have proposed clear requests to promote a general equilibrium in the balance of payments and to strengthen improvements in foreign exchange management. One of the key administrative tasks for the current period is to monitor short-term speculative capital inflows, strengthen inspection and management of cross-border capital inflows, especially short-term capital inflows, and seriously deal, according to the law, with foreign exchange inflows without real transaction backgrounds or those with fraudulent reports on export trading volumes. According to the unanimous decision of the Party Central Committee, since last year the SAFE has actively boosted the reform of the foreign exchange management system and further facilitated foreign exchange holdings and use by enterprises and individuals for trade and investment activities. Meanwhile, the SAFE has seriously combated illegal and abnormal short-term capital inflows and foreign exchange sales, thus restraining short-term speculative capital inflows.  In terms of foreign exchange receipts and payments under the items of trade, services, capital fund, and external debt as well as some industries like tourism and real estate, relevant foreign exchange inspection departments have carried out special inspections of capital inflows and sales of foreign exchange. Meanwhile, since many of China 's foreign exchange administration policies and regulations are implemented through the banks, key inspections were intensified on the compliance of the foreign exchange transactions of banks and their own foreign exchange collection and sales. This is very necessary and timely for accurately analyzing the cross-border capital flows, discovering the main channels and forms of abnormal capital inflows, searching for policy loopholes, and offering a scientific decision-making basis for reinforcing and improving macro-control.
Ms. Hu pointed out that in recent years foreign exchange-designated banks have made great efforts to coordinate with the adjustment of foreign exchange policies, carrying out the tasks of authenticity verification. They have contributed to the healthy development of China 's foreign trade, the steady advancement of the financial opening-up, and the promotion of a general equilibrium in the balance of payments. However, some problems have arisen from the inspections, to which great attention should be paid.
Concerning the question of how banks can promote their own healthy development and better implement their responsibilities related to foreign exchange administration, Ms. Hu put forward the following requests.
First, banks should properly balance the relationship between their own interests and the national interests. Along with the continual progress in the financial system reform, commercial banks have faced obviously stronger restraints from their shareholders and the market, and their internal management and operating mechanisms have witnessed fundamental changes. The pursuit of interests by banks has poured energy into the development of the financial industry. However, the interests of banks are closely linked to the operation of the macro-economy. While pursuing their own interests, banks should further strengthen their consciousness of the overall situation and take an initiative to carry out national macro policies.
Second, banks should properly manage the relationship between passive and active implementation of foreign exchange inspections. So far, most of the authenticity verifications of foreign exchange under the current account and the verifications of the comparatively standard foreign exchange sales and purchases under the capital account have been handled directly by the banks. Therefore, banks are required to fulfill the responsibility of exercising authenticity verifications seriously and to take an initiative to actively carry out the requirements for foreign exchange inspections.
Third, banks should properly manage the relationship between commercial competition and fulfilling the subrogation responsibility of the government. With the continual financial opening-up, commercial banks are facing increasingly severe market competition. Banks should compete orderly under the precondition of seriously implementing national macro-economic policies and fulfilling the subrogation responsibility of the government. The competition should not become the solicitation of clients and businesses at the price of failing to carry out inspections.
Fourth, banks must properly manage the relationship between their business management and foreign exchange supervision requirements. Due to the special requirements for the business processing and internal management of banks, foreign exchange supervision must be implemented through electronic and IT approaches. In order to fulfill the subrogation responsibility of the government more efficiently and conveniently, banks should further improve their business procedures to satisfy the two requirements. Meanwhile, banks should establish relevant platforms for the collection, processing, and exchange of information so as to receive authentic and accurate data and information, and then should help implement the regulations in practice.
Fifth, the banks must properly manage the relationship between financial innovation and compliance. The foreign exchange administrations have been supporting and encouraging financial innovation, and have strengthened enforcement efforts by adjusting relevant policies and employing a series of measures for developing foreign exchange derivatives and expanding financial investment abroad. While enhancing innovation consciousness, the banks should intensify the risk concepts and master the direction of the innovation from the perspective of the long-term healthy development of both themselves and the financial industry, not only meeting the needs of clients, but also satisfying the relevant regulations and the requirements for national macro-control.
Ms. Hu emphasized that in the near term the foreign exchange administrations would carry out a special inspection on implementation of control of the size of the short-term external debt and on the execution of the administrative regulations by banks throughout China . Hence, all banks should prepare for this in advance, seriously and actively carrying out self-checking and coordination.
Mr. Deng Xianhong, deputy administrator of the SAFE, reported on the illegal behavior found from the inspections of the foreign exchange business. He put forward that generally all the foreign exchange-designated banks have attached increasingly more importance to the compliance of their foreign exchange business operations, and their legal consciousness in terms of operations has been improved; but certain illegal behaviors in the foreign exchange business still exist in some banks. These illegal behaviors can be mainly classified into three types. First, responsibility for authenticity examination is not fulfilled in some banks, for example, handling foreign exchange collection and sales for clients against the rules, violating the related rules about foreign exchange loans, and breaching the administrative regulations concerning the verification business for exports. Such behaviors have led to inflows of some foreign speculative capital through trade or investment channels, and some of the capital even flows into the domestic real estate and stock markets in disguised forms, thus having some negative effect on the healthy development of China 's macro-control and economy. Second, for some banks, illegal behaviors exist in the operation of the foreign exchange business, such as policy-incompliance in the comprehensive position management of foreign exchange sales and purchases, poor management of short-term external debt, illegal treatments of their own foreign exchange sales business, and posting exchange rates beyond the stipulated floating ranges, etc. All of these have seriously harmed the implementation effect of the policies, not only disregarding the requirements for risk control and the sound operation of the banks, but also bringing pressure on implementing the monetary policies of the Central Bank and maintaining an equilibrium in the balance of payments. Third, in some banks, the quality of data reporting is poor, the business or accounting system cannot meet the current regulatory requirements, and the balance of payments fails to be managed according to the rules. During the 2006 annual inspection, the SAFE  punished 19 Chinese-funded banks and 10 foreign-funded banks that were found to be violating the relevant foreign exchange administrative regulations. The results of the illegal behaviors discovered during the 2006 special inspection of the external debt of banks and the 2007 special inspection of the foreign exchange collection and sales of banks are in the process of being handled.