The State Administration of Foreign Exchange (SAFE) released a report (SAFE Report) on its website on 10 April 2012 summarising the achievements that China has made in pushing forward RMB convertibility for capital account transactions (cross-border capital investments and loans) and setting out, very briefly, China’s approach in achieving the goal of RMB full convertibility.
The SAFE Report outlined the major achievements that China has made in the following aspects:
- RMB convertibility for cross-border FDI transactions has been improved significantly since the first relaxation in 2006. SAFE has (i) changed its administration of RMB/foreign currency conversion and remittance for outbound FDI transactions from prior approval to post registration, (ii) broadened the sources of funds which Chinese enterprise may use for outbound investments and (iii) permitted remittance of funds offshore before the offshore project company is established. By and large, RMB convertibility for outbound FDI transactions has already been achieved. As to inbound FDI, SAFE has issued rules regulating the conversion of foreign exchange capital into RMB, foreign capital injection into the real estate market and return investment by Chinese investors, with the focus of preventing speculative “hot-money” inflow to the China market.
- RMB convertibility for cross-border investments in securities markets has also been improved. China introduced the QFII (Qualified Foreign Institutional Investor) regime in 2002 and QDII (Qualified Domestic Institutional Investor) regime in 2006 - the former allows qualified offshore investors to invest in China’s securities markets whilst the latter offers a platform for qualified Chinese investors to invest in the outbound securities markets. Up until 9 March 2012, SAFE has granted investment quotas to QFIIs totalling USD 24.55 billion and to QDIIs in the amount of USD 75.247 billion. In addition, China launched a RQFII (i.e. an RMB QFII) pilot program in December 2011 under which qualified offshore investors may invest in China’s securities markets by using offshore RMB (refer to SAFE issues rules governing the management of quota and cross-border funds flow relating to RMB QFIIs). Very recently, Chinese regulators increased the quota for QFII investment from USD 30 billion to USD 80 billion and the quota for RQFII investment from RMB 20 billion to RMB 70 billion.
- RMB convertibility related to cross-border loans has been easier to implement and less restrictive over the recent years. Since 2009, SAFE has permitted Chinese enterprises to provide debt finance to their offshore subsidiaries within the quotas granted by SAFE. Since 2010, Chinese domestic enterprises may seek approval to borrow money from offshore lenders. More significantly, SAFE relaxed its control on the provision of foreign security (which secures obligations of an offshore entity or is granted in favour of an offshore entity) by Chinese entities in 2010 with the promulgation of Notice on the Administration of Foreign Security Provided by Domestic Institutions (refer to New regulatory changes in the PRC regarding foreign security given by Chinese institutions).
- SAFE has gradually introduced various reforms to implement RMB convertibility. It has changed its administrative approach from case-by-case approval to a high-level supervision in dealing with certain capital account matters. Various SAFE approval procedures have been simplified and streamlined. SAFE has also reduced its direct involvement in some matters by delegating the supervisory role to commercial banks.
The SAFE Report emphasises that RMB convertibility will be a gradual process. SAFE will keep a close eye on the status of domestic and global economy in facilitating the RMB convertibility and ensure the financial security of China in the first place.
For further information, please contact Sun Hong.