Time for Greater Coordination in Managing Domestic and Foreign Currency Fund

China has continued to make strides in expanding the role of the renminbi as a global currency and enhancing the convertibility of the nation's currency on the capital account. This has created benefits on a number of fronts but it has also made the boundary between rules governing fund movements in different currencies harder to distinguish. Nonetheless,there are still significant differences in the regulations for domestic and foreign currencies,and this is leading to regulatory arbitrage on cross-border capital movements and more volatility in fund flows. It is imperative that we study ways to narrow the regulatory differences and build a more integrated supervisory system that can prevent risk.

Supervision Policies for Domestic and Foreign Currencies

In foreign exchange settlements from overseas,namely when the foreign exchange is settled at a foreign bank and then transferred back  into the nation,or foreign exchange transfer to a domestic bank then settled in the foreign banks and again transfer back to the nation,all the entry currency should be in renminbi.

According to the principles of statistics of the international balance of payments,the currency for declaration should be in the currency of the entry place as the standard. The former type of declaration currency should be in renminbi,and the latter should be the currency of the first entry place.

Inspection

The main inspections should include the on-spot and non-on-spot inspections,voluntarily initiated by the grass-root level business personnel,which lacks the detailed relevant guidelines.

The inspection of the RMB transnational payments data would mainly be done through the comparison between the data of RCPMIS system and the international payments declaration system by manual work.

Differences in the Credit Policies of Trade

According to Guidelines on Foreign Exchange Control of Goods Trade,in cross-border trade the enterprises does not need to file a trade credit report if it makes a customs declaration and settles in renminbi; the enterprises need hand in the trade credit report to the local foreign exchange bureau along with the rules if the enterprise makes a renminbi customs declaration and makes settlement in a foreign currency (or vice versa). However,in actual practice,the enterprises' trade data of renminbi customs declaration and renminbi settlement data should be calculated as renminbi merchandise trade. A failure to make such a calculation will result in a data error.

Different Policies for Transshipments

First,there are differences in supervision and inspection. The Renminbi Cross-border Payment and Receipts Management Information System (RCPMIS) of the People's Bank of China lacks an early warning mechanism and cannot detect abnormal cross-border renminbi fund flows in a timely and effective manner. The State Administration of Foreign Exchange has an enterprise reporting system which incorporates macro-level monitoring indicators. Its monthly foreign payments and receipts data support off-site inspections. At the same time,SAFE has greater supervision and inspection capabilities for foreign payments under the entrepot trade.

Second,there also are classification differences. The central bank uses a "negative list" approach on cross-border renminbi settlements by exporters. Settlement is required only for those enterprises which are keeping export goods parked offshore. The system cannot effectively restrict the operations of enterprises engaged in the transshipment trade even when the enterprises have been placed under special monitoring because of past regulatory violations. SAFE has strict controls over the transshipment trade for so-called B and C category enterprises (those with past violations or are in sectors deemed to require greater supervision),but this is only for trade using foreign currency.

Third,there are differences in examination and verification. The People's Bank of China insists that banks verify that there is a valid underlying trade behind renminbi settlements. Banks need to provide information concerning customs declarations on export transactions and payments to assist in the examination and verification process. SAFE has a stricter examination standard for the transshipment business. It calls on banks to authenticate the relevant businesses based on the production,operation,financial status,products and the markets of the enterprises in question. Banks need to verify whether financing amounts and the financing periods are consistent with a company's trading history.

Fourth,there are differences in the post-transaction assessments. Policies concerning cross-border renminbi settlements carry almost no punishment for violations of regulations - with the most severe penalty being disqualification from future transactions. SAFE rules allow on-site and off-site inspections and punishments based on the severity of the offense.

Differences in Service Trade Supervision

There are also differences in management of the service trade. The management of foreign exchange business related to the trade in services calls on financial institutions to "know their clients" and "know their own business." The corresponding detailed rules further clarify the contents for examination of different kinds of service trade foreign exchange while the cross-border renminbi business focuses on general principles and does not provide detailed management rules.

There also are procedural differences. According to the Guidelines on Foreign Exchange Controls on the Trade in Services,for foreign exchange payments of more than $50,000 in the services trade,financial institutions need to verify different types of trade and keep corresponding transaction documents and tax records. For cross-border renminbi business,banks carry out settlement based on the documents provided by the enterprises themselves.

Third,there are differences in supervisory methods. Service trade supervision relies mainly on cross-border fund flow supervision and an analytical system that carries out off-site supervision of foreign exchange payments. This system covers information on renminbi and foreign currencies. But the service trade renminbi supervision system only has renminbi payment data,without foreign exchange payment data. From the standpoint of supervision,the renminbi payment system lacks adequate information and tools for monitoring risk control.

Direct Investment

There are differences in the management of capital movements in foreign direct investment as well. According to foreign currency management rules,renminbi capital of the domestic investment enterprises capital settlement should not be used to repay loans among enterprises or third party bank loans. Foreign exchange capital should be used within a company's business scope and for a company's own use. Moreover,this needs to be verified. Rules for domestic currency management have no clear restraints on the use of such renminbi capital to repay enterprise loans.

There also are differences in the procedures for the management of foreign direct investment capital flows. According to the rules of foreign currency management,foreign currency capital should be placed in a special capital account. The enterprise can settle all or some of the funds though the funds need to be placed in a "ready-to-pay" account before being used for payment. Under rules on domestic currency management,enterprises can use their funds as long as the banks record the domestic use of the renminbi funds and ensure the use is within the company's approved business scope. Under domestic currency management rules enterprises can open only one special capital account,and there is no need for a "ready-to-pay" account.

Moreover,there are differences in the management of direct investment capital inflows and outflows. According to foreign currency rules,an offshore investment needs to be reported for registration purposes before investment capital can be moved offshore. For domestic currency management,the outbound investment may be made before the investment is recorded. These differences complicate data management and make it more difficult to spot abnormal capital movements as well as track rule violations. As far as cross-border movement of profits is concerned,however,there is almost no policy difference related to the type of currency used.

Overseas Loans

The main differences are as follows. According to Document [2013]168 issued by the People's Bank of China,enterprises can apply directly to domestic banks to settle overseas loans extended in renminbi without any limits on payment size or qualifications of the entities involved. Banks that deal with such business need to report these renminbi cross-border payments as well as receipts. Enterprises can also choose banks from outside their home areas to conduct such business. According to Document [2009]24 issued by SAFE,domestic enterprises are required to register their overseas lending under a quota system at the foreign exchange regulator's office. Such loans cannot exceed 30% of the company's share capital.

Compared with the policies for foreign exchange management,rules governing offshore loans made in renminbi are much more favorable in terms of location,size and regulatory procedures. For this reason,banks prefer to make renminbi loans. At the moment,there are no specific regulations requiring registration of offshore renminbi loans and consequently there are no penalties for enterprises that fail to register.

Banks need to verify the authenticity of the overseas entity and must apply for a special entity code. The opening and the closing of domestic currency accounts and payment and receipts information is reported through the RCPMIS system of the People's Bank of China. The primary deposit account requires central bank examination and approval and there can be only one such account. The special institutional codes can be applied for before or after the opening of these accounts.

The opening and the closing of an account as well as payments and account balance information for foreign currency accounts shall be reported through the SAFE foreign exchange account management system. Examination and approval by SAFE is not required and there are no limits on the number of accounts. The special institutional codes need to be obtained before accounts can be opened.

Using Accounts Funds

Funds cannot be used for cash business and transactions must comply with anti-money-laundering regulations. Domestic currency funds can only earn current account interest and cannot be used for wealth management products. The funds can be used to buy foreign exchange and the remittance of these funds. There are no clear documentation materials required for examination and that makes it difficult to determine authenticity.

The foreign currency account funds cannot be used for direct or indirect settlement in any form. Payments with the domestic institutions are considered to be transnational transactions.

Individual Accounts

Under current policies,banks can make use of simplified procedures for individual depositors of foreign currency in amounts below US$5,000 made in a single working day. The individual depositor must provide other documentation for amounts over that level. Likewise,banks can use simplified procedures when an individual withdraws foreign currency of less than US$10,000 in a single working day. The individual must have SAFE approval for amounts over US$10,000. However,there are no such limitations on renminbi accounts except that banks need prior notification for withdrawals in larger amounts.

From the management perspective,the policy differences complicate the task of obtaining accurate statistical data for renminbi transactions. The differences open the door to policy arbitraging and heightened risk of abnormal capital flows. With the growing role of cross-border renminbi