chapter 1: introduction of international forex policy

China's foreign trade and capital transactions are expected to soar after it becomes a member of the WTO. It is estimated that its foreign trade volume could double by 2005 to US$600-640 billion, while annual foreign direct investment would shoot up from the current level of US$40-45 billion to US$100 billion. Given these estimates, the daily workload of foreign exchange management departments would double if the existing system of verifying current account transactions and approving capital account transactions is to continue.

The further opening of the China market, especially the banking and services sectors, following China's WTO entry will inevitably bring about new problems of forex management. China's WTO commitments have basically set the tone for its forex reform and policy adjustments, but the details have yet to be worked out. In this connection, it can be expected that:

1.China has to abolish policies that contravene WTO rules and agreements and lift restrictions in its forex management policies.

2.With the further opening of the services sector and removal of non-trade barriers upon WTO accession, relevant management policies will be relaxed or abolished, leading to a big increase in the demand for non-trade forex.

3.Forex management will face great pressure as the volume of forex receipts and payments expands after China becomes a WTO member. At the same time, the increased flow of international capital will make it imperative for China to simplify and accelerate its forex approval and verification procedures.

4.Foreign-invested enterprises (FIEs) in China have been granted preferential treatment in forex management. Following its WTO entry, China must align the different forex management policies for FIEs and domestic enterprises.

5.As China further liberalises its trade in services upon WTO accession, the business activities of non-resident corporate bodies and natural persons are bound to grow. This will create a pressing demand for better forex management for non-residents.

On December 28, 1993 the People's Bank of China (PBOC) announced a reform programme of China's forex system. The reform, based on a managed floating system, became effective on January 1, 1994 and has remained in place up to this date. The following are some of the major measures adopted at the time:

1.Introduction of a system of settling forex through banks to replace the forex retention system practised since 1979. All enterprises were required to repatriate their forex receipts and sell them to designated banks at the prevailing renminbi exchange rate, or to open forex settlement accounts at these banks.

2.Introduction of a system of selling forex through banks to replace regulations requiring state approval for forex payments under the current account. Under this system, enterprises could convert renminbi into forex under the current account at designated banks upon presentation of valid documents and within given limits.

3.Unification of the official exchange rate and the swap market exchange rate. The PBOC published an average yuan-to-dollar exchange rate every morning based on the prices quoted on the inter-bank forex markets on the previous day, and listed the exchange rates for other major currencies based on exchange rate fluctuations in international forex markets. Designated forex banks could quote prices within a narrow range fixed by PBOC.

4.Establishment of foreign debt repayment funds. In order to protect the country's foreign trade credibility and strengthen the management of foreign debt repayment, China encouraged various localities, departments and enterprises with heavy foreign debts to establish foreign debt repayment funds by depositing an amount equivalent to a certain percentage of their outstanding debts at designated banks. Forex in these accounts could only be used for the payment of principal and interest, not other expenditures.

5.Banning the free circulation of foreign currencies. Foreign currency settlements of all forms were abolished and the issuance of foreign exchange certificates was discontinued.

Under existing regulations, the forex management for FIEs mainly covers the following:
1.Registration of forex;
2.The opening, utilisation and monitoring of forex accounts;
3.Forex receipts and payments under the current and capital accounts;
4.Balance of forex receipts and payments;
5.Annual review of forex positions;

Foreign debts management.
The "Procedures for Bank Settlements" and "Procedures for the Management of Bank Accounts" promulgated by the PBOC in December 1988 and October 1994 respectively provide the basis for the management of bank accounts and settlements of FIEs. There is as yet no special enactment for FIEs. In order to support FIEs in their production and operation, the PBOC issued the "Procedures for Providing Loans to Foreign Investment Enterprises by Chinese Banks" with the approval of the State Council in April 1987, providing them with a renminbi financing channel.