• SAFE Issues Reports On Administration and Supervision of Cross-Border Movements of Funds  
  • March 7, 2012
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • The State Administration of Foreign Exchange (SAFE) issued a report on its website on 27 February 2012 summarising its achievements in the administration and supervision of cross-border movements of funds over the last few years and setting out in general terms the challenges it may face going forward and proposals for addressing such challenges. About a week earlier, SAFE also published a very comprehensive supervisory report on China’s cross-border funds flow in 2011 with a comparison of the relevant statistics with previous years. For your ease of reference, the two SAFE reports are referred to herein as the Reports.

    The following information in the Reports is worth noting:

    • The measures which SAFE adopted to prevent ‘hot money’ inflow include the implementation of a wide range of inspections on specific items such as the conversion of foreign capital injections and the borrowing of short-term foreign debts. Financial institutions and large-scale enterprises in China were the main targets for such close inspections. From 2007 to 2011, more than 15,000 deals were found to be in violation of the PRC foreign exchange control regulations and as a result, SAFE imposed administrative fines totalling RMB1.27 billion. In addition, SAFE worked jointly with the PRC public security authorities and uncovered 210 illegal foreign currency dealings (e.g. “underground banking” and illegal online Forex margin trading), which involved a total amount of more than RMB100 billion.

    • As at the end of 2011, the foreign currency reserves of China were USD3.2 trillion, representing a growth of USD330 billion as against the end of 2010, but this was USD110 billion less than the growth in 2010. A more balanced inflow and outflow of funds across China is a result that the PRC government would expect to see given its overall macro-economic policies.

    • The scale and amount of cross-border RMB movements have increased significantly over recent years. In 2011, the amount of cross-border settlements in RMB exceeded RMB2 trillion, four times the amount in the same period in 2010. By the end of 2011, the balance of RMB deposits in HK had reached RMB 588.5 billion, representing 18.9 per cent of the non-local currency deposits in the HK market (second only to US dollar deposits).

    • Non-financial institution related foreign direct investments into China increased by 10% in 2011, however, this is 7 per cent below the growth recorded in 2010. Manufacturing and real estate are the major sectors that received foreign direct investment in 2011. Meanwhile, funds outflow back to foreign investors through dividend payments has increased by 33 per cent; this is in addition to a significant reserve of unpaid/undeclared dividends onshore. The growth in outbound capital investments by Chinese investors slowed to USD 60.1 billion in 2011; representing a modest 2 per cent increase over 2010.

    • Given the uncertainties of the global economic environment, SAFE will continue to take a cautious approach to its management of foreign exchange in order to maintain a healthy balance of the inflow and outflow of funds. SAFE will expedite reforms in order to improve its supervisory role with the intention to: (i) simplify the procedures under the current items (e.g. import and export of goods); and (ii) steadily improve the free conversion of currencies under capital items (e.g. equity investments).

    The Reports demonstrate the increasing transparency and confidence of SAFE in managing China’s foreign exchange control regime.