Facilitate Cross-Border Trade and Investment, and Establish a New System for...

Title:Facilitate Cross-Border Trade and Investment, and Establish a New System for Higher-Level Open Economy

In line with the CPC Central Committee’s requirements of “understanding the new development stage，applying the new development philosophy，and creating a new development dynamic”，the State Administration of Foreign Exchange (SAFE) continues to deepen “reforms to delegate power，streamline administration and optimize government services”，and assist in establishing a new development pattern of "dual circulation"，in which domestic economic cycle plays a leading role while international economic cycle remains its extension and supplement. The SAFE also strives to enhance the ability of foreign exchange management to serve the real economy and facilitate cross-border trade and investment. To this end，the SAFE prioritizes stability while pursuing progress，and coordinates development and security. Based on full consideration of factors such as policy effects and risk control，in January 2022，the SAFE decided to carry out a pilot project of high-level opening-up of cross-border trade and investment in the Lingang New Area of Shanghai Free Trade Pilot Zone，the Nansha New Area of Guangdong Free Trade Pilot Zone，the Yangpu Economic Development Zone of Hainan Free Trade Port，and Beilun District，Ningbo City，Zhejiang Province.

Background

In recent years，abiding by the decisions and arrangements of the CPC Central Committee and the State Council，the SAFE has continuously advanced the reform and opening-up in the foreign exchange sector，and promoted liberalization and facilitation of cross-border trade，investment and financing. Following major regional development strategies of the state，we have supported those regions to spearhead foreign exchange reforms，which have boosted the local real economy. We have also implemented targeted policies to create a safe，efficient and low-cost cross-border fund settlement environment for current accounts that is favorable to cross-border financing of enterprises. Additionally，we have streamlined administration and delegated power to cut the overall cost of enterprises’ foreign exchange business. Meanwhile，we have improved the efficiency of cross-border capital use，and provided policy support for enterprises’ innovation and development. By pursuing progress while maintaining stability，we have better met enterprises’ needs of flexible foreign exchange use. Furthermore，in spite of difficulties，we have deepened the two-way opening and interconnection of the financial market to facilitate the cross-border securities investment of domestic and foreign investors，and continued to increase risk prevention and control and supervision capabilities. On the whole，China's foreign exchange reform has harmonized opening-up with development security，yielding fruitful results that have fulfilled expectations.

The facilitation reform of current accounts has improved the effectiveness of foreign exchange management in serving the real economy. To encourage high-quality trade development，based on the principle of "inclusiveness and prudence"，foreign exchange administration on current account has underlined institutional innovation and effective governance to serve the real economy and improve people's livelihood. On the premise of authenticity and legality of transactions，we have upgraded the risk assessment-oriented model of entity classified management and precise facilitation to assist trade liberalization，facilitation and high-level opening-up.

The reform and opening-up of capital accounts has been consistent with economic growth. After years of development，China has opened wider to the outside world，evidenced by higher-level open direct investment，diversified cross-border securities investment channels，and greatly relaxed restrictions on cross-border financing.

Establish New Development Pattern with Higher-Level Opening-Up

At a new development stage，it is necessary to further deepen the supply-side reform in the foreign exchange sector，and synchronize the reform and opening-up with risk prevention and control. On the basis of a strong risk prevention and control system，the SAFE has launched a pilot project of higher-level opening-up in qualified regions to foster the synergy of regional reform policies and widen all-around opening-up. This will improve the efficiency of domestic economic cycle with a safer international one，which two can complement each other.

Located in the Yangtze River Delta，the Guangdong-Hong Kong-Macao Greater Bay Area，and the Hainan Free Trade Port，the four pilot regions are characterized by clear opening-up and development strategies，distinctive economic structures，and concentrated policy appeals. At the same time，in these relatively small regions without large economic volume，the pilot project can better serve the real economy by giving full play to the integrated effect of policy benefits，and preventing and controlling possible risks.

The objectives are as follows. The pilot project shall promote the synergy of regional cross-border trade，investment and financing facilitation policies，explore a "more open and safer" foreign exchange management reform path，and gain experience for a foreign exchange management system compatible with the modernization of governance system and capabilities in an open environment. First，serve the real economy and regional development. We will implement liberalization and facilitation policies for high-level cross-border trade，investment and financing in pilot areas to ease capital use and exchange. Second，strengthen policy support and synergy. We will coordinate various regional policies，and gradually shift the foreign exchange management reform from pipeline-type opening to regional pilot opening. Third，foster safety awareness and bottom-line thinking. We will strengthen macro-prudential management of cross-border capital flows，improve risk monitoring and assessment as well as interim and ex-post supervision，and explore risk prevention and control mechanisms in tune with the high-level opening of investment and financing.

The general principles are as follows. The pilot project shall adhere to systematic concepts，harmonize development and security，and stick to the management principle of cross-border receipt and payment authenticity. It is also essential to integrate reform and opening-up with risk prevention and control by exploring risk prevention and control mechanisms at the regional level in agreement with high-level opening-up. In addition，the project shall improve open supervision capabilities and strengthen digital and intelligent supervision. First，serve the real economy and all-around opening-up. Focusing on serving the real economy，the project mainly targets non-financial enterprises in the pilot areas. Through policies such as facilitating the receipt and payment of current account funds for high-quality enterprises，carrying out pilot projects for foreign debt facilitation，and expanding the use of capital account income funds，we will further simplify cross-border trade，investment，and financing management procedures，and create a new regulatory policy environment. Meanwhile，we will cultivate new drivers for foreign trade and investment，and strengthen domestic and international economic synergy and dual circulation. Second，overall advancement and simple operation. Different from the previous single-item reform，this pilot project will be "comprehensive and integrated" with a package of opening-up measures covering cross-border trade，investment and financing to be launched at one time. Aiming at "basic capital account convertibility" for real enterprises，we will remedy bottlenecks to improve the system integration，synergy and efficiency. Third，controllable risks and effective monitoring. Limited to a small area and oriented to real enterprises，the pilot project does not involve cross-border securities transactions or policy adjustments of individual accounts，in other words，risks can be controlled from the schematic level. Besides，we will closely track the implementation of the pilot project based on a sound evaluation and correction mechanism. Complying with the two-in-one management requirements of "macro-prudential management and micro regulation"，we will ensure that the foreign exchange market is both open and controllable.

Main Contents

The pilot project of high-level opening-up of cross-border trade and investment can be summarized as a “9+4+2” portfolio，in other words，9 capital account reform measures，4 current account facilitation measures，and 2 measures to strengthen risk prevention and control and supervision capabilities.

In terms of the capital account reform，we firstly expand cross-border investment and financing channels for enterprises. We will support micro，small and medium high-tech enterprises to independently borrow external debt within a certain amount. We will also carry out pilot projects for qualified foreign limited partners (QFLP) and qualified domestic limited partners (QDLP)，as well as integrated domestic and foreign currency capital pool of multinational companies. In addition，the cross-border asset transfer business will be opened steadily and prudently. Second，facilitate cross-border investment and financing. Domestic reinvestment of foreign-invested enterprises will be exempt from registration. Eligible non-financial enterprises’ foreign exchange registration of capital accounts will be directly handled by banks. The scope of use of capital account income funds will be expanded，and qualified enterprises can choose independently the currency for cross-border investment and financing. Meanwhile，we will appropriately raise the upper limit of the scale of overseas lending by non-financial enterprises.

With regards to the current account facilitation，we will facilitate the receipt and payment of current account funds for high-quality enterprises，and support banks in optimizing new international trade settlement. Further，we will orderly expand the scope of enterprises for net settlement of trade balances，and exempt special foreign exchange refunds for trade in goods from registration.

As for strengthening risk prevention and control and supervision capabilities，we will improve the two-in-one management framework of "macro-prudential management and micro regulation" and fortify risk monitoring and early warning as well as counter-cyclical adjustment of cross-border capital flows. At the same time，we will crack down on illegal activities in the foreign exchange sector to maintain the stability and order of the market. Moreover，on the basis of a pilot error correction mechanism and risk response plan，we will strengthen interim and ex post supervision and off-site supervision capabilities，and keep a close eye on large-value abnormal cross-border transactions. By doing so，we strive to ensure the smooth and orderly progress of the pilot project.

In the next step，the SAFE will continue to coordinate development and security，and further deepen the reform and opening-up in the foreign exchange sector. We will also promote liberalization and facilitation of cross-border trade，investment and financing，and optimize the business environment，contributing to the real economy and macroeconomic stability. At the same time，we will prevent the risk of cross-border capital flows，and preserve the order of the foreign exchange market.

The author is the Director General of SAFE's Data Monitoring Center for Foreign Exchange Transactions