CAPITAL INFLOW AND THE IDEOLOGICAL CHANGE IN FOREIGN EXCHANGE ADMINISTRATION

Brief retrospect on the evolution of the foreign exchange administration's ideology since the foreign exchange rate regime reform in 1994

The actual compulsory foreign exchange settlement for Sino-invested enterprises, which was set by the foreign exchange purchase and sale system in 1994, reflects China's foreign exchange administration ideology, which encourages inflow and restricts outflow. The compulsory foreign exchange purchase and sale system has played a significant role in maintaining the balance of international payments, the stability of RMB exchange rate and the increase of foreign exchange reserves. With accelerated international capital inflow into China and concerns with issues such as the rapid increase of official foreign exchange reserves, capital flight and money laundering, the State Administration of Foreign Exchange (SAFE) has since 2002 shifted its supervision ideology from focusing just on capital outflow to both capital inflow and outflow.

Current situation of accelerated capital inflow into China

Generally speaking, the profit-seeking nature of capital determines that the ultimate goal of capital inflow is outflow. Facing the current accelerated capital inflow, it is reasonable to feel concerned about future outflow, especially considering the results of capital outflow in the 1998 Asian financial crisis. While keeping alert, we should not consider the problem completely from the angle of the Asian financial crisis.

On one hand, customs declaration verification networking plugs the loopholes in the management of massive capital outflow through import cheating. On the other hand, due to the enhancement of foreign investors' confidence in China's economic development since its entry into the WTO, the current capital inflow may last for quite a long time. This capital may flow out after a long time-lag, or even never if they are aiming at further development in China.

Issues concerning the whole-process supervision of both capital inflow and outflow

First of all, we should redouble our efforts both in managing the cross-border flow of foreign exchange cash and in cracking down on underground banks. Secondly, as the money exchanges in Hong Kong and Macao need a large amount of RMB cash to support their RMB exchanges, we should reinforce management on the cross-city drawing of RMB cash in China and punishment on the smuggling of RMB cash. Thirdly, we should expand the scope of banks conducting private foreign exchange purchasing business, increase operating sites and simplify the procedure to fulfill the domestic residents' demand for foreign exchange and to increase the operation costs of underground banks. Fourthly, on the basis of improving the statistic and monitoring on the multi-national corporations' fund flowing, we should coordinate with the foreign exchange account information management system to keep track of these cross-border funds. Last but not least, foreign exchange management departments should reinforce their coordination with the securities and the insurance authorities to strengthen the monitoring on the capital flow of insurance and securities industries.

(by Long Yong, Master of Fincance, FE Comprehensive Dept., PBOC Guangzhou Br.)