The Reform Program and Foreign Exchange Management

来源: CHINA FOREX 2017 Issue 1 作者:Fang Shangpu

The trend towards global economic and financial integration is undergoing a period of significant adjustment. The major economies have been undertaking structural adjustments and rebalancing their monetary policies. At the same time there have been important changes in cross-border capital flows. This has contributed to profound changes in China's balance of payments position and its foreign exchange situation,specifically a shift to a current account surplus and a capital account deficit from the "twin surpluses" of the past.

Since the global financial crisis of 2008,the economic recovery has been sluggish,and this has held back global trade and investment. Developing countries have had to roll out quantitative easing policies of various sizes and durations,and economic development overall has been unbalanced. From the perspective of global capital flows,emerging economies have had to endure big swings in cross-border capital movements,ranging from steady inflows to reduced intakes as well as net outflows.

From 2000 to the first half of 2014,China had a twin surplus on its current account and capital and financial account but from the second half of 2014 to 2016,the international balance of payments showed a current account surplus and deficit on the capital account and financial account. It should be noted,however,that there is a positive side to this shift in capital flows,at least in China's case. This is actually a sign of progress in the economic reform and opening up program as well as the effort to transform the economic structure.

Rising Incomes

China's economic development has allowed an accumulation of wealth. Rising incomes have created a sharp increase in demand for overseas travel and study. In 2015,China's per capita GDP reached US$8,016,ranking it as a "medium income level" country. China's purchases of foreign exchange for overseas travel and study reached US$270.8 billion in 2015 and US$322.4 billion in 2016,up 27% and 19% year on year,respectively.

The regional development strategy known as "One Belt,One Road" has been steadily rolled out,and Chinese companies have increasingly stepped onto the world stage. This has reversed the inward-looking investment focus of the past when only a tiny number of domestic enterprises had the interest or the ability to win Chinese government approval for foreign investment projects.

In more recent years,there has been a rise of outbound corporate investment as domestic enterprises take advantage of their own increased resources and government policies encouraging offshore investments. In addition to the "One Belt,One Road" initiative,which seeks to boost trade and offshore infrastructure investments,domestic companies have also been encouraged to "go global."

According to Ministry of Commerce statistics,China's outbound non-financial direct investment hit a record high of US$118 billion in 2015,ranking it as the world's second largest source of investment capital. In 2016,China's foreign direct investment reached US$170.1 billion,up 44.10% over the same period of the previous year.

External Debt

The external debt repayment situation has stabilized,and operational risks from high leveraging levels have eased. Repayment of foreign debt has been one of the main reasons for the outflow of capital in recent years. From 2011 to 2014,China's foreign debt total grew steadily,and in late 2014 it reached a recent-year high of US$1.78 trillion. After 2015,China began an orderly repayment of is debts. The decline in new foreign financing and the repayment of existing debts effectively reduced the risk exposure to foreign exchange movements.

Capital outflow pressure has generally eased amid a slowing of corporate deleveraging,particularly in terms of foreign currency debt. In the second and third quarters of 2016,China's foreign debt levels resumed their climb though at a moderate pace. As of the end of September last year,the foreign debt total (including domestic and foreign currencies) stood at US$1.43 trillion.

Trade and investment facilitation and risk prevention are the two main objectives of foreign exchange management in China. Both are essential to overall planning. In recent years,with the deepening of China's reforms and economic opening,there has been an intensifying integration of the domestic and external economies. Foreign exchange management seeks to promote steady economic progress while preventing cross-border capital flow risks. The domestic policy objectives are to eliminate surplus production capacity and inventory,reduce leveraging,improve services for the disadvantaged,and effectively serve the development of the real economy.

Promoting Key Reforms

In serving the real economy,authorities need to support domestic enterprises in their efforts to participate in the global market through trade and investment. To achieve an upgrading of the industrial structure,foreign exchange management departments need to vigorously promote supply side structural reforms. They need to integrate governance and service through decentralization and ongoing deepening of foreign exchange management reforms in key areas.

There is a need for more active support for cross-border e-commerce and other new businesses. The scope of the cross-border e-commerce pilot area was extended to 12 cities,including Tianjin. The cross-border foreign exchange payment business of payment institutions will be extended nationwide. Regional restrictions need to be relaxed,administrative approval authority decentralized,payment limits on single transactions should be raised,and the scope of payments needs to be broadened. As of the end of 2016,the accumulated volume of cross-border e-commerce business had reached US$21.5 billion,indicating healthy development.

Under the foreign direct investment account,prior approval has been done away with to a large extent,meaning that companies often need only to register their investment projects. The source of foreign exchange funds shall be further expanded and the procedures for making remittances shall be further simplified in order to help domestic enterprises "go global." Foreign exchange procedures will be simplified and decentralized,with banks playing a bigger role in the process.

There is also a need for improvement in the centralized operation and management of foreign exchange funds of multinational companies. In order to implement the government's 13th five-year plan,there is an effort to groom more companies that can compete effectively in the international marketplace. In 2012,China launched a pilot project for the centralized operation and management of foreign exchange funds by multinational companies. The pilot project rolled back restrictions,greatly reducing the transaction and financing costs of the participating multinationals. Some companies saved more than one billion yuan in their financing costs while others reduced their settlement amounts by as much as 90%.

It is also important that we establish a special foreign exchange quota to support domestic enterprises that wish to become strategic investors in companies preparing to go public in Hong Kong. These special quotas would be used by companies or individuals helping domestic companies raising funds on the stock market in the Special Administrative Region. The funds would have to be transferred back onshore eventually. In addition to helping companies solve problems of costly and hard to obtain financing,this also helps avoid taking on more debt. Moreover,it generally is in line with the government's push to help domestic companies expand their business offshore.

Opening the Financial Market

Opening up the financial market is another important part of the nation's ongoing reforms and the effort to optimize the allocation of resources. China needs to make a further opening of the domestic capital market and thereby facilitate capital movement. It needs to ensure there is a two-way opening of the capital market.

The way to do this is to continue reforms of the Qualified Foreign Institutional Investor (QFII) program relax quota controls and simplify the approval process as well as allow greater access to the domestic capital market. Similar reforms are needed for the Renminbi Qualified Foreign Institutional Investor (RQFII) program. There should be an end to restrictions on capital remittances as a percentage of capital and a requirement that outward remittances be made on an installment basis. At the same time,there should be an easing of time constraints on bringing capital back onshore. It is also necessary that we narrow the gap in rules regarding RQFII and QFII. Finally,there should be a full implementation of the rule allowing settlement of foreign currency borrowings when the borrower wishes to do so. Moreover,we should move to lessen the restraints on the use of capital brought in from abroad and that should be done through the use of a "negative list" that allows activities that are not specifically barred.

There is also a need for promoting the development of the foreign exchange market,an important component in international economic exchanges and capital flows. Foreign exchange management departments need to support the market's development,and that means to ensure an abundance of products and a more diversified market. This includes the addition of standardized forward and futures products that meet the needs of diversified exchange rate risk management. As of the end of 2016,for example,there were 597 institutions in the interbank foreign exchange market,including 73 non-bank financial institutions,two non-financial enterprises and 59 foreign financial institutions. In addition,we need to ensure this market has sufficient self-discipline and operates smoothly.

Bond Market

The interbank bond market is another area where further reform efforts are needed. In May 2016,there foreign exchange management rules were further relaxed in order to promote investments in the domestic bond market by foreign institutional investors. These included a lifting of caps on investments by single institutions and overall ceilings as well as the removal of lockup periods for investment funds as well as installment arrangements. It also enabled easier inward and outward remittances,relaxed rules on the settlement of foreign exchange and other measures to facilitate local bond purchases. With the introduction of the reform measures of the inter-bank bond market,as of the end of 2016,there were 180 foreign institutions and investment funds registered in Shanghai for such bond market transactions.

Cross-border Financing Management Reform

In recent years,with the implementation of China's "going global" and "One Belt,One Road" initiative,the financing needs of Chinese enterprises (especially private enterprises) has been increasing. In order to facilitate the use of domestic and foreign financial resources,the examination and approval process related to foreign borrowings and guarantees have been gradually eased.

In cooperation with the People's Bank of China,there has been an effort to expand pilot projects on cross border capital movements to financial institutions and enterprises nationwide. To help companies "go global",prior approval for external borrowing has been scrapped,enabling domestic companies to tap cross-border sources of financing within limits tied to their capital or net assets. This has enhanced the financing channels on the domestic market,reducing costs,and in turn serving the real economy.

The requirement of prior examination and approval for cross-border guarantees has also been relaxed. This has made it easier for overseas guarantees of domestic loans by foreign-funded enterprises and domestic enterprises,helping to solve financing problems for enterprises in their offshore operations. It is estimated that the new rules reduce the time needed for guarantees to one business day from at least a week before and save as much as two percentage points on financing costs.

Since the international financial crisis in 2008,there have been significant changes in global views on financial regulation. There has been a consensus on the need for prudential management of cross-border capital flows,and this includes many governments as well as international organizations,such as International Monetary Fund. This has provided China with a useful reference in its effort to change the foreign exchange management mode and prevent risks from cross-border capital flows as it moves ahead with plans to promote capital account convertibility.

Key objectives in foreign exchange management include compliance with laws and regulations as well as ensuring that there are legitimate business activities underpinning transactions. This relies on a platform of self-discipline within the banking system and a framework for monitoring cross-border capital flows and detecting areas of potential problems. And there is need to crack down on remittance fraud and underground banks and other illegal foreign exchange activities.

Facilitating Trade and Investment

China's cross-border capital flow volatility has increased,but the nation's long-term economic fundamentals are still positive. China's foreign exchange situation is now balanced and stable. Foreign exchange management will continue to try to strike a balance between the promotion of trade and investment and prevent cross-border capital flow risks. Foreign exchange management reforms will be deepened,and there will be further efforts to enhance the ability of the regulatory framework to serve the real economy.

There is also a need to maintain normal foreign exchange market order. It is necessary to adhere to the use of market-oriented means and give full play to the decisive role of the exchange rate and other price mechanisms in allocating foreign exchange resources. This means reducing administrative intervention where possible.

It is also necessary to implement integrated regulations to strengthen cross-border policy coordination for domestic and foreign currencies. Additionally,there must be a further progress in shifting away from prior approvals to post-transaction monitoring and strengthening of the prudential management functions.

Foreign exchange management will focus on the following aspects. China also needs to improve the early warning system and its response mechanism for macro-prudential management of cross-border capital flows. There must be counter-cyclical controls of cross- border fund movements as well as efforts to expand the types of policy tools and the building of more effective prudential risk-mitigation tools.

Based on the prudential management principles,we need a "negative list" type of controls that permit behavior that is not specifically barred and gradually abolish exchange position limits. Based on the "three principles of expanding businesses," we must strengthen efforts to ensure authenticity of bank foreign exchange transactions and complete compliance audits.

There is a need for the continued crack down on illegal activities to maintain the foreign exchange market order. It needs to build a government regulatory and market self-discipline parallel management framework,to give full play to the role of the bank as a bridge connecting the foreign exchange management departments and market players to effectively transmit policies,and to practice strict control policies against speculative behavior and arbitrage activities.

There is a need for sound,open and competitive domestic foreign exchange market. To a greater extent it needs to give full play to the renminbi exchange rate in the allocation of foreign exchange resources,so that cross-border capital flows can be adjusted when necessary. The exchange rate mechanism should respond to the impact of cross-border capital flows and become a mechanism for "automatic regulatory management. "Authorities need to deepen the foreign exchange market by enriching the market tools and increasing the number of market players. They need to create a multi-tiered market with an inclusive trading platform. Foreign exchange market supervision also must be revised and we must allow greater room for innovation.

Finally,there is a need for improvement in the monitoring of cross-border capital flow data. China needs to establish a foreign exchange statistical system that meets international standards and all of the requirements of prudential management. Moreover,it needs to improve its data collection system and boost its ability to make use of big data in the area of foreign exchange.

The author is the deputy director of the State Administration of Foreign Exchange