Development and Thoughts of Foreign Exchange Administration...

Title: Development and Thoughts of Foreign Exchange Administration  under the Current Account

Current account transactions are cross-border exchanges or transfers of non-capital factors，mainly including transaction items of goods，services and income. They serve as an important livelihood project closely related to the real economy and people’s daily life. These transactions constitute about 80% of China’s total balance of payments for a long time，and 10% of the global total current account transactions，second only to the United States. These transactions involve more than one million trading enterprises and tens of millions of individuals using foreign exchange，reflecting the fundamentals of China’s opening up to the outside world. They are the ballast for China’s balance of payments and the booster for foreign-related economic development.

Foreign exchange administration under the current account in different historical periods

Since the founding of the People's Republic of China in 1949，under the strong leadership of the Communist Party of China (CPC)，foreign exchange administration under the current account has always kept pace with the national economic system reform by focusing on the central work of the Party and the state. At the same time，the management concepts and methods have experienced gradual adjustment from planned distribution to market-oriented，law-based and internationalized distribution according to the country’s economic and social development and balance of payments changes in different historical periods. It witnessed the great change in China’s socialist reform and opening up.

1979-1993: Rewarding exports and restricting imports，and encouraging foreign trade to earn foreign exchange

After three years of national economic recovery following the founding of the People’s Republic of China，the state entered the period of socialist construction. The 8th CPC National Congress clearly proposed to concentrate on the development of social productive forces to achieve national industrialization. At this stage，foreign exchange administration stuck to the principle of “total control over revenue and expenditure，determining expenditures by revenue，maintaining a basic equilibrium，and having a slight surplus”，so as to sustain a basic equilibrium of foreign exchange revenue and expenditures and support national construction and development.

The Third Plenary Session of the 11th CPC Central Committee in 1978 shifted the focus of the work of the Party and the state to the building of socialist modernization and made the historic decision of reform and opening up. With regard to foreign exchange administration，the market mechanism was introduced into the field of foreign exchange distribution，and the foreign exchange retention system was implemented，that is，local governments and enterprises could obtain a certain foreign exchange quota according to the scale of export revenue，so as to purchase foreign exchange for imports. In order to increase foreign exchange revenue and solve the shortage of foreign exchange resources，China implemented the policy of “rewarding exports and restricting imports”.

1994-2011: Giving autonomy of foreign exchange utilization and promoting market-based allocation

At the end of 1993，the Third Plenary Session of the 14th CPC Central Committee approved the Decision of the CPC Central Committee on Several Issues Concerning the Establishment of a Socialist Market Economic System，which defined the basic framework of the socialist market economic system. China’s foreign exchange administration system began to advance towards the direction of market-based allocation of foreign exchange resources. In 1994，the foreign exchange retention was abolished and the system of foreign exchange sales and purchases through banks was implemented. In December 1996，after a two-year transition period of conditional convertibility，China announced the realization of current account convertibility，which marked a substantive step of market-oriented transformation in foreign exchange administration under the current account. In 2001，China’s accession to the World Trade Organization (WTO) took foreign trade onto the "fast track".

Firstly，continuing to relax restrictive regulatory requirements to unleash the vitality of market entities. The first was to expand the autonomy of enterprises in foreign exchange utilization. The second was to meet foreign exchange needs of individuals. Restrictions on the amount and scope of foreign exchange purchased by individuals were gradually removed，and the current administration system with the annual facilitation quota of foreign exchange sales and purchases by individuals as its core was set up in 2007. The facilitation quota was raised from US$20,000 to US$50,000，and purchases and sales of foreign exchange occupying the facilitation quota could be handled by presenting valid identity documents，effectively boosting international exchanges such as personal travel，study and business. The third was to delegate approval power. For instance，the online verification system of import and export verification forms was launched in 2001，realizing online submission and issuance of verification forms，and the requirement of enterprises’ presenting the paper records of the verification forms to the SAFE before verification was cancelled.

Secondly，changing management modes to adapt to the changing situation. The first was to shift the policy from "being slack for capital inflows but strict for capital outflow" to "balanced management". The second was to change from "prior approval for each transaction" to "aggregate management during and after the transaction". As the volume of import and export business soared with the rapid growth of foreign trade，the prior verification system of "one-to-one correspondence and case-by-case verification" failed to meet the real needs.

2012-2017: Deepening reforms，and planning as a whole to promote convenience and prevent risks

In 2012，the 18th CPC National Congress made comprehensive plans for building socialism with Chinese characteristics，emphasizing the need to accelerate the improvement of the socialist market economy.

Firstly，promoting trade liberalization and facilitation and high-quality development of foreign-related economy. The first was to improve the effectiveness of in-process and post-process supervision. The second was to expand opening up at a higher level. In 2013，the foreign exchange administration in the special customs supervision area was improved，and the simplified policies of foreign exchange administration under the current account outside were introduced into the area.

Secondly，strengthening the authenticity and compliance management to effectively guard against and defuse financial risks. As China continued to open wider to the outside world，the spillover effect of policy risks in developed economies significantly increased，and the fluctuation of China’s cross-border capital was amplified，posing challenges to the maintenance of balance of payments and economic and financial stability.

Foreign exchange administration under the current account in the new pattern

In October 2017，the 19th CPC National Congress put forward Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era，pointing out that profound and complex historic changes were taking place at home and abroad and that socialism with Chinese characteristics entered a new era. Grounded in the new stage and situation and guided by the new development philosophy，foreign exchange administration under the current account has advanced high-level trade liberalization and facilitation，and stimulated trade innovation and development. The systems and mechanisms of foreign exchange administration under the current account have been improved to meet the requirements of modernization of China’s system and capacity for governance，making new ground in pursuing opening up on all fronts.

Promoting higher-level facilitation to serve the development of the real economy

Since 2018，foreign exchange administration under the current account has continued to deeply implement to streamline administration and delegate power，improve regulation and upgrade services，and deepen the supply-side structural reform in the financial sector，with more than 30 new facilitation measures under the current account. At present，99.9% of current account transactions are handled directly by banks，injecting new vitality into and expanding new space for market entities.

Firstly，expanding the scope and improving the quality of pilot facilitation projects by promoting the reform. In 2019，a pilot program to facilitate