Regulatory Compliance in Cross-border Renminbi Trade
Regulation of cross-border renminbi transactions aims to achieve a combination of low key but pragmatic guidance for the market while maintaining a healthy respect for compliance requirements. This differs from foreign exchange management in several important areas from the regulatory process to the regulatory framework and the methods of enforcement. With the continuous improvement of the regulatory system，greater demand is being placed on banks for ensuring regulatory compliance in cross-border renminbi trade.
Using the renminbi simplifies transactions. Management of cross-border business in the national currency has largely relied on market-based principles. The aim has been to encourage market players to use the nation's own currency in cross-border transactions. In order to do so we have reduced the reliance on prior approvals for transactions in favor of post-transaction supervision combined with what is called "negative list" management (which permits a wider range of activities) and more information sharing among regulatory bodies.
Regulatory procedures for domestic currency business also differ from those governing foreign currency in terms of business registration and classification as well as bank account management，the requirement for the use of foreign exchange accounts for foreign invested companies，the management of early-stage investment expenses of foreign-invested companies and non-resident account management. Using renminbi in transactions has its advantages regardless of whether the funds are moved under the current account or the capital account.
In merchandise and services trade as well as foreign direct investment，overseas (outbound) direct investment，trade financing and other areas，the use of cross-border renminbi settlements is not subject to any access restrictions. There also are no requirements for prior registration and approval，and there are no restrictions on transaction volume. Banks and enterprises can carry out cross-border renminbi business based entirely on business needs.
As far as supervision and management are concerned，there are policy differences between the management of cross-border capital flows in foreign currency and domestic currency. Cross-border renminbi policy falls under the direct management of the People's Bank of China's Monetary Policy Second Department，which is responsible for focusing on promoting the internationalization of the renminbi and carrying out inspections to ensure compliance with the central bank's requirements. The State Administration of Foreign Exchange is responsible for managing foreign currency business to promote a balanced payment position. In accordance with the Regulations of the People's Republic of China on Foreign Exchange Regulations，it investigates violations of foreign exchange rules and has the authority to impose severe penalties.
Case analysis
As China's economy grows and the renminbi gains ever wider acceptance as an international currency，there is a growing business for payments in domestic currency related to foreign trade and investment. The expanded role for the renminbi has emerged in tandem with the creation of onshore and offshore markets. In addition to interest rate differences in the domestic and offshore markets，there are differing exchange rates for the renminbi as well. On the offshore renminbi market，the exchange rate is more volatile，and mainland banks and their Hong Kong branches have devised a series of arbitrage products to take advantage of the market divergence. At the same time there are numerous instances of policy arbitraging.
When there is insufficient access to short-term foreign currency credits，market participants could use a number of sophisticated tools to circumvent the problem. They can make use of advice of letters of credit and converting renminbi into foreign currency or renminbi usance letters of credit plus the issuance of back-to-back letters of credit in a currency different than the master letter of credit. Interest rate arbitrage，export refinancing and import refinancing，cross-border discounting，and overseas loans with a domestic guarantee -- all offer opportunities for . Such arbitrage affects cross-border capital flows and can run counter to the objectives of macro-prudential policies of regulators. This has created concerns from the departments of cross-border renminbi management. There are more cases to illustrate the point.
A Chinese company registered two affiliated companies in Hong Kong as upstream and downstream entities. Between February and September of 2016，the company bought a bill of lading from an overseas company by paying a fee of 1% of the total stated value. It then fabricated a contract and invoice according to the contents of the bill of lading，and carried out an offshore ¡°sale¡± under terms of ¡°payment on receipt of goods.¡± The company received renminbi as payment from its downstream company，and later paid the upstream company in US dollars after purchasing foreign exchange. This was considered to be a ¡°domestic purchase of foreign exchange with overseas foreign exchange settlement,¡± taking advantage of the price differentials. The company benefited from higher interest rate by placing the US dollars in an offshore fixed deposit and it recorded gains from the appreciation of the dollar against the renminbi. The company in question made an illegal profit of more than two million yuan using this method.
With expectations of a depreciating renminbi，enterprises are more likely to use the re-export trade to conduct risk