China s foreign exchange regime after WTO accession

China's foreign exchange regime after WTO accession

The impact of the WTO on China's foreign exchange control regime

As a part of China's effort to honour its commitments to the WTO, China's foreign exchange control regime will take an active stance in observing WTO rules. The State Administration of Foreign Exchange will gradually transform its functions in order to create favourable conditions for both foreign investors investing in China and Chinese enterprises doing business with the outside world. On the one hand, China has signed up to Article 8 of the IMF agreement, as a result of which the restrictions on convertibility of current accounts such as trade in goods and services have been removed. Renminbi is currently convertible under current account and China's foreign exchange control regime is generally in line with the requirements of the WTO. Therefore, foreign exchange control was not a critical point in the WTO negotiations. In addition, unlike the issues of market access for service trade and tariff reduction, there have been no specific commitments regarding the timing and scope of the opening of foreign exchange control. On the other hand, although there are no requirements regarding the opening of foreign exchange control, the opening of the Chinese market, especially the opening up of the financial and service sectors, will inevitably bring profound influences to bear on China's foreign exchange control regime.

Joining the WTO does not require a country to give up its capital controls to realize full convertibility of its currency under capital account. In fact, many WTO members , developing or developed, are still maintaining control to varying degrees over their capital accounts. China has not made any commitment in relation to convertibility of RMB under the capital account to the WTO, although, the promotion of RMB convertibility under capital account and eventually full convertibility of RMB are China's ultimate goal. In effect China's accession to the WTO will expedite the process.

In response to WTO accession, China's foreign exchange control authorities have voluntarily made adjustments to the laws and regulations regarding foreign exchange control. Reform efforts are aimed at improving the manner of exchange control by streamlining the examination and approval procedures, putting emphasis on ex-post supervision and inspection while reducing ex-ante administration. Since last November, a series of measures has been staged to adapt the control measures to the new situation under the circumstances of the WTO. These measures include:

simplification of the examination and verification procedures for applications for foreign exchange by family-financed students going abroad to study. The ceiling placed on the purchase of foreign exchange from the designated banks was raised from the previous US$2,000 to US$20,000. No approval from the Administration of Foreign Exchange is needed for purchase of foreign exchange within the limit.
Implementation of trial reforms on the administration of domestic foreign exchange loans, aiming at reducing the examination and approval procedures. Six cities and provinces were chosen for the trial reform, where the requirements for case-by-case registration by debtors were replaced by requirements for regular registration by the creditors (ie the banks). When enterprises repay domestic foreign exchange loans with their own foreign exchange under a normal repayment schedule, the competent banks designated by the Administration of Foreign Exchange will take the responsibility of reviewing the legitimacy and authenticity of the applications when processing the transactions, after which the banks are required to submit monthly statements to the Administration of Foreign Exchange in their domiciles. The designated banks can independently open or cancel the special accounts of domestic foreign exchange loans.
Reduction of ex-ante examination and verification by giving trial authorization to banks in processing the settlement of foreign exchange capital funds of FIEs. The original responsibility of the Administration of Foreign Exchange to examine and approve the settlements of foreign exchange capital funds under foreign investment projects was delegated to qualified state-designated banks. FIEs can go directly to the designated banks with relevant documents to process the settlements. Ex-ante examination and verification by the Administration of Foreign Exchange is no longer needed. Eleven cities and provinces were chosen to carry out this experiment.
Adjustment of the administrative measures for the purchase of foreign exchange under some items of the capital account and some restrictions have been lifted or relaxed . The background was that some interim measures were taken during the Asian financial crisis to restrict the purchase of foreign exchange in order to stabilize the foreign exchange market and prevent foreign exchange flight or arbitrage. The macro economy has now been in healthy operation and the international balance of payment has fared well, all of which have enabled China to readjust those measures. The adjustments included a) the lifting of the restrictions on the purchase of foreign exchange for the repayment of overdue domestic loans, which now allows enterprises to submit exchange purchase application to the Administration of Foreign Exchange for approval by stages and installments, b) relaxation of the restrictions on the purchase of foreign exchange for advance repayment of domestic foreign exchange loans, the swap of external debts to loans and repayment of external debts and c) relaxation of the restrictions on the purchase of foreign exchange for the purpose of overseas investments.
Relaxation of the criteria for Chinese-funded enterprises to open foreign exchange settlement accounts in order to facilitate their production and business activities. This measure allows all Chinese- funded enterprises that have a) annual foreign exchange earnings equivalent to US$2 million or above, b) annual spending of foreign exchange equivalent to US$200,000 or above, c) trading rights to import and export, d) sound financial performance and e) no past record of violation of foreign exchange control regulations, to open foreign exchange settlement accounts and retain a certain amount of foreign exchange.
The annulment of the validity period for the use of 'the paper for verification and cancellation of foreign exchange receipts on export' ^[1] and relaxation of the limit imposed on the numbers of issuance of such paper. This effort was intended to simplify the procedures of verification and cancellation to encourage the expansion of exports. According to this measure, enterprises that have been granted credit awards for outstanding export receipts and those that have fulfilled export receipt quotas are allowed to possess as many such papers as required for their export needs. At the same time, they are also allowed to process verifications and cancellations of their export exchange receipts on a monthly basis, while the Administration of Foreign Exchange exercises memorandum examination on the balances .

New policy measures

In a continued effort to streamline the foreign exchange control system, the State Administration of Foreign Exchange has announced a series of new policy measures in 2002. These new measures include the following:

to continue to promote reform of the administration of foreign exchange accounts to support enterprises in their effort to develop foreign trade while at the same time strengthening the monitoring of foreign exchange receipts and payments. Chinese-funded enterprises with the trading right of import and export are allowed, upon approval by the Administration of Foreign Exchange to open foreign exchange settlement accounts. ^[2] Account ceilings will be determined as a proportion of the foreign exchange receipts under the current account of the enterprises and therefore can be adjusted. Experiments on the use of information management systems to monitor the foreign exchange accounts will be expanded in an effort to eventually achieve real-time monitoring of such accounts.
to further streamline the verification and cancellation procedures for both imports and exports in order to facilitate the business operations of enterprises while strengthening ex-post supervision. On the basis of last year's effort to implement various measures such as the introduction of a sub-system monitoring foreign exchange receipts on exports into the electronic law-enforcement system at ports of entry and exit and a memorandum examination system on foreign exchange receipt balances, new measures of verfication and cancellation have been introduced which include:
- relaxation of the time limit imposed on the filing of forward foreign exchange receipts with the Administration of Foreign Exchange, extending the filing period from the previous 90 days to 180 days;
- further streamlining of verification and cancellation procedures for those enterprises which have good records of verification and cancellation of foreign exchange receipts on export;
- annulment of procedures for filing the registration of foreign exchange payments for some imports;
- establishment of a memorandum examination mechanism regarding foreign exchange payments for imports;
- implementation of a classified handling approach for overdue verification and cancellation of import payments.
to promote information management systems on personal purchases of foreign exchange as an effort to provide facilitation for normal use of foreign exchange by individuals and improve the means of supervising personal purchase of foreign exchange. The pilot operations of the information management system on personal purchase of foreign exchange are basically normal and have effectively prevented repeated purchases of foreign exchange by individuals. Such exercises will be adopted on a nationwide basis. The key consideration of such a move is to establish uniform procedures and criteria for market access, allowing qualified state-designated banks to open private foreign exchange banking business in order to provide better financial services to individuals while at the same time encouraging fair competition among banks.
to strengthen the exchange control over insurance businesses in an effort to normalize insurance operations involving foreign exchange and fill in the gaps in supervision and administration in the foreign insurance area. To adapt to the needs of rapidly developing insurance businesses after WTO accession, relevant regulations governing the exchange control of insurance businesses will be announced and implemented in the near future. Such regulations will exercise uniform control over foreign exchange transactions by both Chinese and foreign insurance agencies.
to further promote the reform of the administration of capital fund settlements of FIEs and domestic foreign exchange loans. In this connection, examination and approval procedures will be reduced while emphasis will be placed on indirect administration. On the basis of previous experiments, uniform implementation plans will be established in order to delegate control responsibilities regarding the examination and verification of capital fund settlements under foreign investment projects, domestic foreign exchange loans and repayment of foreign exchange loans with own foreign exchange to qualified state- designated banks. The Administration of Foreign Exchange will exercise its control and regulation of foreign exchange receipts and payments activities through its supervision over banks' execution of relevant rules and regulations. Effective from 1 July 2002, FIEs can settle their capital accounts directly with the designated banks and foreign investors can complete all procedures at bank counters.
to reinforce the work on the verification of capital contributions in FIEs in order to fully establish a registration system for the inflow of foreign investments. In compliance with the requirements of the Notice on Further Strengthening the Work on the Verification of Capital Contributions of Foreign-invested Enterprises and Establishing a Complete Exchange Registration System for Foreign Investment , certified public accounts are required, before the issuance of capital verification reports , to make validation enquiries to the Administration of Foreign Exchange, which will check authenticity and legitimacy of capital contributions against its examination and verification records and through the import declaration network enquiry system, and at the same time register the actual inflow of foreign capital.
to liquidate and gradually solve the problems of foreign exchange advances under banks' letters of credit in order to improve the quality of banking assets. The banks are allowed, with the approval of the Administration of Foreign Exchange, to use renminbi funds repaid by enterprises or recovered by legal means from enterprises or by realization of enterprise property to purchase foreign exchange to offset foreign exchange advances under letters of credit incurred before the stipulated time line.

^[1] Editor's note: Export foreign exchange verification and cancellation is an ex-post administrative measure designed to verify the foreign exchange receipts against the reported export value. The paper for verification and cancellation of foreign exchange receipts on export is a certificate produced and issued by the Administration of Foreign Exchange bearing uniform serial numbers with a specified validity period. The paper is used for the following purposes: customs declaration, collecting the forex receipts on export from the designated bank, processing verification and cancellation of the forex receipts with the Administration of Foreign Exchange, and applying to the tax authorities for export tax rebates. Such paper is available to those Chinese companies that have import and export qualifications and all foreign-invested enterprises upon completion of certain procedures. “ LY

^[2] Editor's note: Prior to this, only foreign-invested enterprises and Chinese-funded enterprises that meet certain qualification standards could have such accounts.