Plans for Reform in Foreign Exchange Regulation

China Forex: There were substantial reforms in making the renminbi convertible under the capital account in 2015. Could you give us your view of the progress last year and the possible reforms this year?

Guo Song: According to our latest estimate,the renminbi is fully or partly convertible on 37 of the 40 capital and financial items listed under the International Monetary Fund (IMF)'s classification system. That is 92.5% of the total,5 percentage points higher than that at the beginning of 2015. In the past year,we deepened reforms in the following key areas: 

We explored new measures to promote greater convertibility of the renminbi for direct investments. In June of 2015,we implemented a policy allowing foreign-invested businesses across China to settle foreign exchange from their own capital whenever they wanted. This made it easier for payments and remittances,and met the market's requirement for reducing exchange rate risk. Meanwhile,we reformed the registration procedures for foreign direct investments,turning over the registration task to banks.

We also made cross-border lending easier. We made uniform regulations for Chinese and foreign-invested enterprises and launched pilot projects under a prudential foreign debt regulatory system whereby companies could determine their own foreign debt ratios. In early 2015,companies in three industrial zones were allowed to borrow funds twice the size of their net assets. These zones were the Zhongguancun National Innovation Demonstration Zone in Beijing,Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in Shenzhen and the Zhangjiagang Free Trade Zone in Jiangsu province.

In August of 2015,the debt ratio pilot program was integrated into the pilot policy for collective management of foreign exchange funds of multinational corporations. Under this program multinationals were permitted to borrow funds equal to the size of their net assets. We also simplified regulations on foreign borrowings and canceled a requirement for asset management companies to register any transfers of foreign currency distressed assets. We also now allow centralized registration of some qualified non-bank financial institutions and enterprises that are eligible for foreign currency loans that are secured by a standby letter of credit.

There were also breakthroughs in renminbi convertibility for securities investments. We reached an agreement on the mutual recognition of investment funds with Hong Kong,and that permitted the cross-border issuance and sale of qualified fund products in mainland China and Hong Kong. That agreement also meant that two more of the 40 capital and financial items under the IMF classification were considered as enjoying currency convertibility. These two items are Collective Investment Securities Issued by Non-residents and Collective Investment Securities Issued by Residents.

To assist in the development of China's crude oil futures market,we also announced foreign exchange management rules for foreign entities investing in crude oil futures,allowing them to use foreign currency to meet  margin requirements and make fund transfers according to their actual needs. At the same time,we removed restrictions on capital volume and scrapped the requirement for administrative approval in some cases. We worked with the People's Bank of China to standardize related foreign exchange rules for foreign central banks participating in the interbank bond market and the foreign exchange market. Quota restrictions on the Qualified Foreign Institutional Investor program were eased further,allowing some bigger asset management institutions to invest more than US$1 billion. In addition,procedures for quota adjustment,inward and outward remittances and data submission were greatly simplified.

These actions left only three areas under the capital account with no renminbi convertibility --  primary market securities offers,money market instruments and derivatives -- for non-resident investors.

China Forex: China is seeing tremendous changes in its receipt and payments of foreign exchange position as compared to past years. What is your view of the situation and how can China limit risk in the management of foreign exchange under the capital account?

Guo Song: There have been substantial changes in foreign exchange receipts and payments,with cross-border capital flows becoming much heavier,more diversified and showing increased frequency. This is partly the result of China's efforts to reform its economy as well as the current domestic and international financial environment. We expect that China will continue to face a difficult task in balancing its international payments as pressure from capital outflows continues in 2016. Therefore,we will need to improve our monitoring and early-warning capabilities for cross-border capital flows to prevent risks in the management of foreign exchange under the capital account. Our main tasks are as follows:

First,we need to enhance our information collection and monitoring capabilities to strengthen our ability to deal with abnormal capital movements. We need to be able to detect concealed transactions by improving statistical collection methods and increasing the frequency of our collections. This will help us prevent risk and stem illegal capital flows.    

We also will improve the management mechanism of cross-border capital flows to better adapt to the new environment. We will draw on the information system for the capital account and establish a more comprehensive management mechanism to track cross-border capital flows,combining prudential management,post-transaction monitoring and onsite and offsite verifications. We will continue targeted inspections in the area of bank compliance and crack down on speculative arbitrage transactions. This will enable our foreign exchange management to play its proper role in maintaining a balanced payments position and preventing disruptions from cross-border capital movements.

We also need to proactively conduct research to improve our policy instruments and response methods. We will reexamine existing foreign exchange management measures which focus on ongoing and post-transaction monitoring. We need to devise more innovative policy instruments to meet a changing foreign exchange situation.

We also need to strive for a more balanced system of foreign exchange management. We now have some measures that were put in place during a time when "inflow controls" were necessary and strict regulations on foreign borrowings and strict quotas under the Qualified Foreign Institutional Investor program were put in place.  In the future,we will remove some unnecessary requirements for administrative approvals as we try to build a prudential management system for cross-border capital flows in accordance with the guidance of the Central Committee of the Communist Party of China and the State Council.

China Forex: What do you think needs to