Capital Flows and a Special Role for Special Inspections

China Forex: Confronted with a trend of net outflows of foreign exchange capital in 2015,the Supervision and Inspection Department stepped up its efforts to thwart illegal activities. It increased inspections and imposed heavier penalties on key sources of improper capital movements. In 2016,as China faces pressure from a slowing economy and mounting risks of net outflows of foreign exchange,what policy measures can we expect?

Zhang Shenghui: In 2015,the foreign exchange inspection system strengthened its off-site inspection and analysis capabilities with a focus on halting illegal outflows of funds. Our department conducted a number of special inspections,and banks were the starting point for these operations. We stepped up supervision of purchases of foreign exchange and foreign exchange payments. We cracked down on criminal foreign exchange transactions and the activities of illegal private banks. This played an important role in stabilizing the financial situation. In 2015,China investigated more than 2,000 cases of foreign exchange irregularities and imposed administrative penalties of more than 400 million yuan.

In 2016,there will be severe challenges on the balance of payments front. As the global economy remains sluggish and U.S. interest rates move higher,the renminbi exchange rate will see more volatility. Domestically,the task of restructuring the economy and stabilizing growth will remain arduous. The economy is reaching a critical period in its restructuring drive. The most important task in 2016 is to prevent risks from large- scale cross-border capital outflows. With this core task in mind,the Foreign Exchange Inspection Department will monitor changes in the collection and payment of foreign exchange,stressing off-site inspection and analysis. The department will focus on clues from unusual transactions and will on determining the authenticity of transactions. It will seek to crack down on unlawful foreign exchange activities including the operations of illegal private banks. Moreover,it will enhance its inspection teams and promote rapid response capabilities. Special inspections will be conducted with the ultimate goal of preventing systemic and regional financial risks.

China Forex: Ever since the Supervision and Inspection Department adopted big-data analysis and developed its off-site foreign exchange inspections system in 2010,foreign exchange inspection departments at all levels have made significant achievements in combating illegal cross-border capital flows. What new efforts might emerge this year in this area?

Zhang Shenghui: As I mentioned earlier,our department will continue to strengthen its off-site inspection and analysis abilities. The specific tasks are as follows:

We will enhance the early warning capabilities in our off-site analysis in accordance with changes in overall policy. We will strengthen the organization of off-site foreign exchange inspections and expand the scope and coverage of these procedures. Through additional training and overlapping levels of analysis,we can enhance the ability of the Foreign Exchange Inspection Department to uncover,punish and deter illegal cross-border capital flows. The Management and Inspection Department is organizing and conducting off-site inspections and analysis and coordinating inspection departments at all levels to conduct extended on-site inspections according to clues obtained from off-site analysis. Those involved in illegal foreign exchange activities will be punished according to law.

Additionally,we will organize off-site inspections of key regions,key services or key industries within our jurisdiction to search for clues in abnormal and illegal cross-border capital flows. We will work to see more positive interaction between the screening of clues and the inspection and punishment operations.

China Forex: In recent years,compliance verification has become increasingly significant under the general guidelines for banks -- which call on them to know their customers,know their customers' business and conduct proper due diligence. What is the significance of this effort to improve the verification of transactions?

Zhang Shenghui: In recent years,with the deepening of reforms in foreign exchange management,SAFE has accelerated the transformation of this management concept and promoted the streamlining of its administration as well as the delegation of authority. It has reduced the need for prior approval of transactions and explored a shift to a post-transaction supervision under broad,guiding principles. Banks,as the key link in implementing foreign exchange policy,assume increasingly prominent and complex responsibilities. Through the promotion of what we call the "three principles," SAFE has accelerated the reform of foreign exchange administration. In so doing it has facilitated trade and investment and promoted the convertibility of the curr