The Trade Finance Quarterly of the
International Chamber of Commerce (Paris)
Co-author of Business Law in China, published by the ICC (2008)
*
* *
On 1 December 1996, China accepted
the regime of Article VIII of the International Monetary Fund (IMF) and
undertook to implement the convertibility with respect to current account
transactions of the "people's currency" (the "renminbi" -
RMB) that is measured in units called "yuan" (CNY).
The current exchange rate rŽgime
fulfilling China's IMF Commitments was originally instituted in 1996 and was
last revised in August of 2008 with the adoption by the State Council of the
Regulations on Foreign Exchange Administration. The PRC has opted for a
market-oriented, managed floating exchange rate. On 21 July 2005, the PBOC,
with the authorization of the State Council, departed from the peg to the US
dollar initiated in 1996 and moved toward a determination with respect to a basket
of currencies. The daily trading price of the US dollar against the RMB in the
inter-bank foreign exchange market is allowed to float based on market supply
and demand within 0.5 percent around the central parity published daily by the
PBOC. The trading prices of non-US dollar currencies against the RMB are
allowed to move within bands announced separately by the PBOC. In fact, the RMB
has been trading close to 6.80 to the US dollar since July 2008.
Several Hong Kong banks already
settle their clients' transactions with Chinese parties in Chinese currency.
Vibrant markets, both lawful and underground, arise and disappear in Hong Kong
depending on official rates of exchange of the local and the mainland
currencies.
International
current transactions
The RMB is convertible on current account, which refers to
transactions involving goods, services, income and current transfers, etc. Foreign
exchange refers to payments and assets denominated in foreign currencies and
used in international settlements, including:
á
foreign currencies in
cash, including banknotes and coins;
á
documents or
instruments payable in foreign currencies, including negotiable instruments,
bank deposit certificates, bank cards, etc.;
á
securities denominated
in foreign currencies, including bonds, stocks, etc.;
á
Special Drawing Rights;
and
á
other assets
denominated in foreign currencies.
The Regulations apply to
all receipts and payments of foreign exchange involving domestic entities,
Chinese citizens and foreigners who have continuously lived in China for more
than one year as well as to all those carried out within the PRC by foreign
entities or individuals. Foreign exchange operations must be based on bona fide
and legal transactions. Financial institutions are subject to investigation and
supervision of the SAFE to ensure that they exercise due diligence in checking
the authenticity and consistency of documentation with receipts and payments.
In principle, foreign
currencies are prohibited from circulation and may not be quoted for pricing or
settlement within PRC territory. Since the 2008 revisions to the Foreign
Exchange Regulations, domestic entities and individuals are free to repatriate
or not their overseas receipts of foreign exchange, though the SAFE retains the
power to modulate their flows in response to economic conditions. They may hold
foreign exchange receipts on current account or sell them to financial
institutions. Foreign exchange payments on current account transactions must be
carried out with foreign exchange owned by the payers or purchased from
authorized financial institutions, and they must be based on valid documents.
Regulatory role of
the SAFE
Under the 2008 Foreign
Exchange Regulations, the SAFE and its local offices retain their
responsibility for the regulation of foreign exchange operations and of the
interbank foreign exchange market. The SAFE is mandated to conduct its
activities in accordance with the principles of "safety, liquidity, and
profitability". Based on conditions in the foreign exchange market and the
requirements of the monetary policies, the SAFE may adjust excessive
fluctuations in the foreign exchange market in accordance with the law.
The exchange
administration agencies carry out comprehensive supervision over financial
institutions' foreign exchange positions. Financial institutions must avoid
mismatching their assets denominated in domestic and foreign currencies, and
the SAFE overseers can order adjustments.
The SAFE enjoys broad
powers to conduct investigations of foreign exchange operations. It may enter
places of suspected foreign exchange violations to obtain evidence. It may
address enquiries to entities and individuals about cases under investigation.
It may enquire about any accounts other than individual savings accounts of
parties involved in cases under investigation, and it also entitled to use
information held by other government agencies. Where property has been or might
be transferred or concealed, or important evidence concealed, forged or
destroyed, the SAFE can apply to the People's Court for orders freezing assets
or placing them under seal.
Upon learning of any
violation foreign exchange regulations, financial institutions are obligated to
denounce their customers to the SAFE. The Regulations provide anonymity and
rewards for whistleblowers. Sanctions for violations of the Foreign Exchange
Regulations include fines in amounts up to 100 per cent of the foreign exchange
involved and, when warranted, criminal proceedings can be initiated.
Illegal transportation
of foreign exchange across the PRC's borders may give rise to warnings and
fines not in excess of 20 per cent of the foreign exchange involved, but more
serious penalties are applicable under Customs Laws and Regulations. Carrying
on unauthorized foreign exchange trading may entail fines of up to CNY 2
million, suspensions or cessations of business activities. In appropriate
cases, authorities can institute criminal pursuits. All those with management
responsibility for violators of the Foreign Exchange Regulations are exposed
personally to fines and, in appropriate cases, to criminal prosecution.
Decisions of the SAFE are subject to administrative reconsideration as well as
suits before the people's courts.
Outlook
Much as occurred during the Asian financial crisis of 1997, the effects of the
2008 global financial crisis have so far impacted China mostly through
international trade. In April 2009, in order to support the country's
contracting exports and for reasons of international status, the State Council
announced that the cities of Shanghai and Guangzhou, Shenzhen, Zhuhai and
Dongguan in Guangdong Province would be allowed to use the RMB to settle trade
with Hong Kong and some other neighboring trade partners. In June 2009, the China Construction
Bank, the second largest bank in China, announced that it was exploring
offering renminbi-denominated credits to finance international trade.
The SAFE's 2009 policies were in
stark contrast with those promoted in 2007 to stem the inflow of
"hot" funds anticipating a depreciation of the dollar that were being
disguised as trade-based to avoid the exchange controls remaining in effect on
capital transfers. Some 5,300 export firms were suspected and identified for
investigation of these violations. Between November and April 2007, annual
growth in accounts receivable by all trade-related firms had dropped 44
percentage points compared with the first ten months of 2007. In November 2008,
the SAFE required Chinese companies to register advance payments on imports and
deferred payments on exports and began monitoring payment flows through a
mandatory electronic reporting system. In April 2008, the SAFE reportedly
ordered foreign banks to cut their short-term foreign debt by 10-15 per cent,
and local banks theirs by 5 per cent.
In a reversal of
attitudes and in order to curtail the global financial crisis' potential
effects on foreign banks' local subsidiaries and branches, as well as crises of
confidence of local banks in their foreign counterparties on the domestic
markets, in November 2008 the PBOC announced that it would make available a
short-term lending facility for foreign banks in the country to help them
through the liquidity crunch.
The current policy thrusts of the
Chinese authorities are (i) to encourage the development of the local foreign
exchange markets, inter-bank and retail, as well as their opening to foreign
participants; (ii) to combat the use of fraudulent current transactions to
disguise transfers of capital, whether inward or outward; (iii) to loosen
controls on exports of Chinese capital as a way of easing the pressure upward
on the country's currency; and (iv) to funnel some of the country's foreign
reserves into the domestic economy.
Daniel Arthur LaprŽs is Avocat au barreau
de Paris and Barrister & Solicitor (Nova Scotia). He is the co-author of
Business Law in China, available at www.iccbooks.com.
His e-mail is daniel@lapres.net