On August 6, 2008, the State Council issued the modified Regulations on the Management of Foreign Exchange, which took effect on the same date. The revised regulations are likely to have a profound impact on the management of foreign exchange, the formation of the renminbi exchange rate, and the flow of international speculative capital into China.

They introduce four key policy innovations to address newly-emerging problems that have accompanied China’s economic rise and fast accumulation of foreign exchange reserves as follows:

(i) the adoption of equilibrium management on foreign exchange inflows and outflows and the elimination of the compulsory repatriation of foreign exchange income. This will allow enterprises to park foreign exchange income abroad, subject to certain conditions and time limits.

(ii) the requirement for China to adopt a managed floating exchange system based on market supply and demand, the overall management of the money supply of financial institutions that handle foreign exchange transactions, and the scale of management over foreign debts.

(iii) an emphasis on the supervision of cross-border capital flows and the establishment of an emergency response mechanism.

(iv) the adoption of supervisory measures and procedures for foreign exchange administrative authorities to perform their responsibilities more efficiently, such as conducting on-site inspections, collecting evidence, reviewing and copying related financial documents, etc.

The People’s Bank of China (PBOC) also announced the same week the creation of a new Foreign Exchange Department to oversee foreign exchange policy implementation, to track global capital flows, and to develop an offshore reniminbi exchange. Still, in light of the PBOC’s recent conservative analyses on exchange rate policy, it remains to be seen whether the revised regulations and new department will translate into robust exchange rate liberalization in the near term.