The revised Foreign Exchange Administration Regulations of the People's Republic of China (New FX Regulations) were promulgated on August 8 2008 and came into effect on the same date, a clear response to the swift growth of the country's nearly $2 trillion foreign exchange reserve as well as rising cross-border currency flow.
The New FX Regulations have removed the mandatory requirements for transfer and settlement of foreign exchange. Under the new law, the foreign exchange income of a domestic institution or individual may be transferred back into China (either to be reserved in a foreign exchange account or sold to qualified financial institutions) or deposited overseas. The abandonment of mandatory settlement policy is intended to slow down the growth of foreign exchange reserves and to ease the renminbi appreciation.
A distinct shift of supervision focus can be seen in the clauses on the new penalty imposed on illegal collection and settlement of foreign exchange. Unauthorised collection and settlement of foreign exchange (such as hot money poured into China without due approval or filing) is subject to the same penalty as unauthorised purchase of foreign exchange and remittance offshore: 30% of the amount of violation. To verify the legality of such cross-border foreign exchange, the supervision authority applies the authenticity and lawfulness of underlying transaction test. The new law also strengths the control over use of settled foreign exchange, which should be strictly in line with the purpose as approved by the foreign exchange administration authority or qualified financial institution.
The new law specifies that in certain emergencies, such as serious unbalance of payment or economic crisis, the state may take necessary protection or control measures. Such protective provision suggests a response to the risk of depreciation of PRC assets or exchange rates due to hot money escaping within a short period.
In addition, the new law opens a door for domestic financial institutions to provide commercial loans to offshore entities, though implementing rules and registration requirements are still pending.
By David Liu