Facilitating Cross-border Investment and Financing

China Forex: A number of reform measures were launched in capital account foreign exchange management in 2017 in an effort to help expand the opening up of the financial market. Could you share with us the progress made in these areas over the past year?

Guo Song: In 2017，under the correct leadership of the Communist Party Central Committee，the State Council，the Party Committee of the People’s Bank of China and the Party organization within the foreign exchange administration，administrative departments that deal with capital account issues continued to adhere to the policy of expanding capital inflows while managing capital outflows. They did this by pushing reforms and stabilizing market expectations. The main objectives were to promote foreign exchange management reform and guard against risks from cross-border capital flows. In this effort they sought to overcome existing difficulties and introduce a number of major foreign exchange control measures concerning the capital account and in turn support the real economy. Specific measures were as follows:

First，we improved foreign exchange management of foreign-invested enterprises by keeping pace with the times. Regulators were faced with a new situation for foreign direct investment. We described it as national treatment prior to market entry plus a "negative list" approach，whereby business activities are permitted unless specifically proscribed. We improved the management of high-profit equity sales and divestments by foreign-invested enterprises in general. We also strengthened our reviews of transactions to determine whether they were authentic and in compliance with laws and regulations. We also tightened our supervision of the remittance of profits of foreign-invested enterprises while ensuring that investors from overseas maintained their right to remit profits.

Second，we actively constructed an integrated overseas loan policy system for both domestic and foreign currencies. In order to check cross-border capital flow risks from overseas loans and prevent the illegal use of foreign currency policies for regulatory arbitrage，we stated that the total balance of overseas and domestic loans should not exceed 30% of a firm's net assets. Additionally，we clarified the requirements for registering overseas loans.

Third，we experimented with a pilot program under the capital account. According to classification management，a pilot program of foreign exchange payments for settlement of specific funds in specific regions and specific industries was conducted in Taizhou in Jiangsu Province. This allowed us to gain additional experience in liberalizing foreign exchange settlements and payments under the capital account. In addition，we successfully launched the Pilot Program on Cross-Border Transfers of Non-performing Assets of Banks in Shenzhen，the Pilot Program on Foreign Debts for Hi-tech Enterprises in the Zhongguancun National Innovation Demonstration Zone，and the Pilot Program for Facilitation of Foreign Debts of Leasing Companies in Tianjin. The reform measures were in line with local conditions and the needs of local enterprises，and this effectively served the real economy.

Fourth，we actively promoted reforms in cross-border financing and foreign currency loans to effectively reduce financing costs for enterprises. This was done by cooperating with the People’s Bank of China to improve macro-prudential management policies for cross-border financing and expand cross-border financing for domestic institutions. We also widened the scope of settlements on domestic foreign exchange borrowings，in particular for loans related to the export trade. Additionally，we clarified the operating rules and effectively supported the operations of export trade enterprises. At the same time，the Pilot Free Trade Zone reform was promoted nationally. As a result，when Chinese and foreign financial leasing companies engage in business with a domestic lessee，they can collect foreign currency income if offshore borrowings or domestic foreign exchange loans account for more than 50% of the cost of the underlying goods tied to a leasing transaction.

Fifth，we promoted the opening up of the interbank bond market by actively cooperating with the People’s Bank of China to formulate rules and regulations for the Bond Connect program which links the domestic interbank bond market and the Hong Kong stock exchange. We also clarified the management rules regarding remittances and settlements as well as foreign exchange risk management under the Bond Connect program. Northbound trading，which refers to mainland trade originating in Hong Kong under the Bond connect program，reached 225.06 billion yuan between its launch on July 3，2017 and the end of November of the same year. As of the end of November 2017，there were 787 overseas institutions and tradable products on the market. The value of interbank bonds held in trust for overseas institutions reached 1135.9 billion yuan at that point，and 78.7 billion yuan of that was from Bond Connect. With a further opening up of the domestic bond market，more and more overseas institutions have chosen to issue renminbi bonds on the China market.

China Forex: What reform measures will be introduced in 2018 in respect of foreign exchange management under the capital account?

Guo Song: In 2018，foreign exchange management under the capital account will earnestly implement the spirit of the Communist Party's 19th National Congress，the Fifth National Financial Work Conference and the Central Economic Work Conference. It will focus on serving the real economy，preventing financial risks and deepening financial reform. In accordance with the decision-making arrangements of the Party Central Committee and the State Council，we will continue to deepen the reform of foreign exchange management under the capital account，further simplifying administrative management and exploring new ways to facilitate cross-border investment and financing. This will be aimed at expanding the two-way opening up of financial markets and steadily promote currency convertibility under the capital account. The expected measures are as follows:

First，we shall continue to promote reforms in key areas of cross-border securities investments. We will support the opening of more futures exchanges，improve foreign exchange management regarding qualified institutional investors and promote the opening up of the capital account.

Second，we shall improve macro-prudential policies related to foreign creditors’ rights and obligations. Third，we shall improve post-transaction regulatory capacity-building，enhance Coordinated Direct Investment Surveys (CDIS)，and strengthen statistical monitoring and on-site management and post-transaction management under the capital account. We will step up the monitoring and early warning capabilities of cross-border capital flows，enhance the effectiveness of foreign exchange management of the capital account and effectively prevent risks from cross-border capital flows.

China Forex: In 2017，China’s foreign direct investment declined from 2016 levels. What is your take on that reduction and what do you see ahead in 2018? What is the current attitude of the State Administration of Foreign Exchange (SAFE) towards direct investment? How can SAFE ensure that foreign enterprises conduct foreign investment in a legally compliant fashion?

Guo Song: In 2017，the total of offshore direct investments by Chinese companies declined from the previous year in line with our efforts to optimize the types of off