China Strengthens Supervision on Foreign Exchange Capital Inflows

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Jul. 11 – China’s State Administration of Foreign Exchange (SAFE) released the “Circular on Strengthening the Administration of Foreign Exchange Capital Inflows (Huifa [2013] No. 20, hereinafter referred to as ‘Circular’)” on May 6, which aims to clamp down on false trading, strengthen capital inflow management and help decelerate the pace of RMB appreciation. Detailed information can be found below.

Scrutiny over Enterprises
One of the distinct features of the Circular is that it has strengthened the scrutiny on importers and exporters who channel money into the country disguised as trade bills.

Under the Circular, the SAFE will issue a warning to the enterprise whose capital flows do not match its goods’ flows or whose capital inflows are rather large. Such an enterprise will then have to provide explanations to the SAFE within ten working days.

Where the enterprise fails to explain the situation in a timely manner, the SAFE will supervise the enterprise in a more rigorous manner and label it as a ‘Class-B’ enterprise. The enterprise will be moved back to the A list only after all its relevant indicators return to normal range for three consecutive months.

Moreover, the Circular has imposed the following restrictions on the Class-B enterprises:

  • The enterprise’s trade foreign exchange earnings shall only be settled and transferred after external payments have been made;
  • The enterprise’s income and expenditure of the same entrepot trade business shall be handled at the same bank; and
  • The settlement currency for the enterprise’s income and expenditure under a newly-signed entrepot trade contract shall be the same, whether a foreign currency or RMB.

Requirements Imposed on Banks
According to the Circular, each commercial bank’s positions of foreign exchange settlement and sales shall be determined by its balances of domestic foreign exchange loans and foreign exchange deposits on the domestic market.

Calculation Formula

Lower limit for integrated positions of all banks in the settlement and sales of foreign exchange = (Balance of domestic foreign exchange loans at the end of last month – Balance of foreign exchange deposits at the end of last month × Reference loan-to-deposit ratio) × Adjustment coefficient for balance of payments

Specifically, the reference loan-to-deposit ratio for Chinese-funded banks and foreign-funded banks is 75 percent and 100 percent respectively. Banks whose foreign exchange loan-to-deposit ratio exceeds the above-mentioned ratio shall adjust their integrated positions to above the lower limit within the first ten working days of each month.

SAFE Supervision
The Circular also requires the SAFE to strengthen its supervision on abnormal capital inflows and take the initiative to conduct on-site verification or inspection. Moreover, the SAFE may impose fines on banks, enterprises and other market players which have violated the provisions on foreign exchange administration and suspend their relevant business operations.

The Announcement came into effect on June 1, 2013.

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