China’s extensively amended Regulations of the Foreign Exchange Administration of the PRC (the Amended Regulations) went into effect on August 5, 2008. China issued the first version of these regulations in 1996, and amended them the following year. It took 11 years for the government to issue new amendments to respond to the problems associated with China’s soaring foreign currency reserves and the instability of the global financial market. The Amended Regulations abolish the old rule that the foreign currency incomes of domestic enterprises must be brought back into China. In addition, the Amended Regulations provide for closer monitoring of cross-border capital flows, and authorize the government to adopt necessary measures to protect and control the balance of international payments.
The Chinese government is cautious of the inflow of hot money, and the Amended Regulations emphasize the supervision and management of foreign currency flows. The Chinese government will closely watch the movement of investment capital, including foreign investments in the country and Chinese investments abroad.
Under the amended Regulations, the State Administration of Foreign Exchange (SAFE) will monitor international payments and regularly publish relevant statistics. The financial institutions engaged in foreign exchange businesses must report their clients’ foreign exchange payments and changes in their foreign exchange accounts to SAFE in accordance with the law. According to the amended Regulations, when there is or is likely to be a serious imbalance, or when the national economy experiences or will potentially experience a serious crisis, the government may employ necessary measures to protect or control international payments.
The old regulations were premised on the shortage in foreign currencies that the Chinese government faced, and subsequently limited the outflow of foreign exchange from China. For instance, under the old regulations, current-account foreign currency incomes of domestic entities had to be sold to or deposited in government-designated banks, and capital-account foreign-currency incomes of domestic entities had to be transferred back to China. However, since the Chinese government’s foreign exchange reserves have soared in recent years, the Chinese government switched to a different approach that focuses on the balance between the inflow and outflow of foreign exchange. Consequently, the Amended Regulations abolish several limitations on the outflow of foreign exchange. Specifically, foreign currency income is no longer required to be repatriated and sold to the designated banks, which means the income of entities in China can stay abroad and be spent abroad.
Where foreign exchange issues are concerned, the Amended Regulations also eliminate the differences between domestically owned enterprises and foreign-invested enterprises, between state-owned enterprises and privately owned enterprises, and between entities and individuals. Rather than basing procedures and regulations on the nature of the enterprise, the treatment of foreign exchange issues will depend on the nature of the transaction.
The Amended Regulations include a new chapter regarding the government’s supervision of foreign exchange activities. The foreign exchange authorities are entitled to conduct on-site examinations of financial institutions, question any institutions or individuals involved in foreign exchange activities, and demand relevant explanations.
The Amended Regulations also specify the monetary penalties and other liabilities for violations of the foreign exchange rules. For instance, anyone who has transferred foreign exchange out of China in violation of relevant rules or in disguise to transfer the foreign exchange back within a specified period of time will be fined an amount that is less than 30 percent of the monetary amount involved, or between 30 to 100 percent of the amount involved, depending on the gravity of the offense. A serious offense may lead to criminal prosecution.