Project-IFM

8/7/2019 Project-IFM

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1 National law university

Project work

On

´FOREIGN EXCHANGE REGULATION OF CHINAµ

Submitted towards the partial fulfilment of

3rd Semester of M.B.A. (Finance)

Degree course, for the subject

INTERNATIONAL FINANCIAL MANGEMENT

Submitted by:- Submitted to:-

Vijay Narayan Choudhary Dr. Rituparna Das

Roll No.- 249 Associate Professor

M.B.A. (Finance) Faculty of Management

3rd Semester National Law University




ACKNOWLEDGEMENT:-

This project work would never have been an achievable task, had we not been under the great

shelter of guidance of respected sir Dr. Rituparna Das. His simplified teaching technique

based on examples has helped me gain more understanding of the subject.

The very essence of the project work is the linguistic precision which has an impact of

conveying more details in least possible words.

An ample use of various reference readings has been very frequently made while compiling

data for this project. Such rich reading has been made available at hand by the treasure-likewell maintained library of the National Law University, Jodhpur. I am very much grateful to

the library staff of the university for their unfailing co-operation.

I am very much under obligation to mention here, the contributions of my batch mates who

have, knowingly or unknowingly, provided me the competitive edge which is the driving

force of the whole labour and extra labour put into the project.

Finally, I feel very much gratified to the administration of the National Law University,

Jodhpur for providing comfortable environment and rich infrastructure which has always

been a facilitating stuff.

Vijay Narayan Choudhary




CHAPTERIZATION-

Serial no. Chapterization Page no.

1. Introduction of forex market China 4-5

2. History of China¶s foreign exchange management

system

6-7

3. Foreign exchange regulation by SAFE 7-14

4. Regulations on foreign exchange system of the

people´s republic of china

15-30

y Bibliography 31




CHAPTER- 1

INTRODUCTION OF FOREIGN EXCHANGE MARKET CHINA

Foreign exchange market China1

forms an important segment of the national economy of

China. Currently, the foreign exchange business constitutes the largest business component of

the global financial market.

The official currency of mainland China or the People's Republic of China is known

as the Renminbi Yuan or simply Yuan. The Yuan is commonly symbolized as CNY. The

foreign exchange rates in China are dependent on the exchange rate of Yuan with respect to

other foreign currencies. The currency exchange rates in China keep on fluctuating according

to the changes that are happening in the international trade and commerce scenario. This is

also observed in the foreign exchange market of China.

With the recent growth of international trade in China, the Yuan is also being traded

as an important currency in the forex market in a substantial volume.

The exchange rates of Yuan are determined by the Chinese Central Bank and they are

dependent on a number of factors. These factors include the volume of trading of Yuan, the

supply of Yuan in the forex market and a number of other factors.

The operations of foreign exchange trading in China are carried out by a number of banks and

foreign exchange trading agencies. They offer excellent and dependable services to their

customers and the exchange rates offered by them are competitive and cheap in nature. The

facility of foreign exchange trading over the Internet is also available. With the help of this

facility, foreign exchanges can be traded 24 hours a day and 7 days a week. A large number

of websites in China are offering authentic information about the Chinese foreign exchange

market and the foreign exchange rates prevailing in the market. The foreign exchange

agencies in China are providing updated information to the forex traders online and the forex

investors in China are finding it convenient in order to achieve their financial goals.

1http://finance.mapsofworld.com/foreign-exchange-market/china.html




China's foreign exchange reserves, (1977-2010) -

At the start of the reform era at the end of 1978, China's foreign exchange reserves were

minimal, but enough to cover the requirements of a country with a very small import bill.

In the early 1980s, export growth contributed to an initial rise in reserves to a peak of

US$17.4bn by 1984. High trade deficits in 1985 and 1986 eroded the reserves in those years.

In 1987 the surplus on trade in services slightly exceeded the merchandise trade deficit,

producing a small current-account surplus, and a comfortable net capital inflow helped push

up reserves to US$16.3bn. The reserves were held above this level for another two years.

The economic slowdown of 1989-91 produced a sharp fall in imports in 1990, while exports

continued to rise, producing a merchandise trade surplus for that year of US$9.2bn, whichwas gradually eroded in the next three years as imports rose faster than exports. By 1993 the

trade and current accounts were in deficit, but the acceleration in inward FDI flows kept

foreign exchange reserves rising for most of the rest of the decade.

Joining the World Trade Organisation (WTO) in 2001 contributed to rapid growth in imports,

but exports also expanded at a fast pace, while FDI inflows exceeded US$60 billion a year by

2004-2006.

In October 2006, China's foreign exchange reserves exceeded USD1 trillion for the first

time. By the end of September 2008, the reserves topped USD 1.9 trillion, equal to nearly

USD1,500 per head for the entire population of China.

It remained around this level until the end of 2008 as trade growth slowed and foreign

investment inflows declined. Then, as 2009 progressed, the upward march resumed, with

reserves rising above USD2 trillion in April and reaching a record USD 2.545 trillion at the

end of June 2010.




CHAPTER- 2

HISTORY2

I. The history of China¶s foreign exchange management system-

For a long time China has been implementing relatively strict foreign exchange

administration system due to shortage of foreign exchange resources, insufficiency of macro

control capability, imperfection of market system. Since China took on the innovative

opening-up policy in 1978, China forms a foreign exchange administration profile--³RMB

(Chinese Yuan) is convertible for current account items, while partially convertible for

capital account step by step.

China¶s foreign exchange reform can be divided into three periods:-

Exchange regime during the planed economy (1949-1978)-

A highly centred, planning system was implemented in the planed economy environment.

Bank of China was the only specialized bank involving in foreign exchange business. All

foreign exchange receipts were obliged to surrender to the state, any purchase of foreign

exchange should be included in the state plan. The nation never incurred foreign borrowings

or allowed foreign direct investment.

Exchange regime during the transitional period (1979-1993)-

(1) The State Administration of Foreign Exchange, which is authorized for charging foreign

exchange control matters under the leadership of the People¶s Bank of China, was

established.

(2) The enterprises were permitted to retain a portion of their foreign exchange earnings.

(3) Foreign exchange swap centre was set up and developed.

(4) The RMB

exchange rate regime was reformed.(5) Various financial institutions were allowed to involve in foreign exchange business.

(6) Restrictions on domestic individuals¶ foreign exchange receipts were relaxed.

2http://c-faculty.chuo-u.ac.jp/~toyohal/JSME/pdf03s/03s220-wang




(7) The foreign exchange certificate was introduced in order to encourage foreign exchange

inflows and sales for RMB from overseas Chinese reside

Exchange regime after 1994-

(1) In 1994, China realized RMB conditionally convertible under current account

transactions.

(2) The dual exchange rate regime of the RMB was unified into a single managed floating

exchange rate on the basis of market demand and supply.

(3) A system of purchasing and surrendering foreign exchange through designated foreign

exchange banks was formed.

(4) A nationwide, unified and standard inter - bank foreign exchange market, i.e. China

Foreign Exchange Trade System (CFETS) was established.

(5) Domestic enterprises that meeting some conditions was allowed to open settlement

foreign exchange account to keep export receipts within the upper limit set by SAFE.

On December 1st, 1996, China officially accepted the obligations of Article VIII of the

IMF Articles of Agreement and made the RMB fully convertible for current account

transactions.




CHAPTER- 3

FOREIGN EXCHANGE REGULATION BY SAFE

II. Present foreign exchange administration in China-

When people talk about convertibility, they normally think that China is one of the

few countries still with strict capital control. But if we go into this issue in more detail, we

will find that at present China¶s capital account is partially convertible. Corresponding to the

43 items of the seven categories under capital account transactions set up by the IMF, some

of the items have always be treated as fully or basically convertible ; some of them are still

strictly or totally prohibited. When evaluating the extension of China¶s capital account

opening-up, some international organizations, including the BIS conclude that the RMB has

become convertible to a substantial extent for capital account transactions. In conclusion,

China is already on its way to capital account convertibility.

First of all, FDI flows are encouraged. The only measure applied is authenticity test. The

priority area for FDI has enlarged from manufacturing sector to high technology and

infrastructures. At present, China fulfils its commitment to access to WTO, foreign

investments are also allowed in financial services, insurance, securities and other specialist

service areas. In the future, China supports the foreign investors to take part in the

restructuring and reform of state-owned enterprises and commercial banks by way of merger

and acquisition.

Secondly, portfolio investment liberalization has been conducted in a cautious manner in

order to stay away from associated shocks. Foreign investors are allowed to invest in B-

shares and foreign currency-denominated bonds issued domestically and H-shares and N-

shares issued on overseas markets except for RMB-denominated equities and bonds on the

domestic markets. According to the WTO commitments, there is possibility to set up Chineseand foreign joint venture securities companies. However, their trading activities are limited to

primary market underwriting and fiduciary trading on the secondary market. In addition,

priority trading is not allowed.




Thirdly, external debts are strictly controlled and China is working towards centralized

administration on foreign debts. Short-term foreign debts are monitored by their outstanding

amounts whereas medium and long-tem foreign debts are controlled by the pre-determined

quota. The borrowers are also subject to qualification examination. In principal, international

borrowings of domestic enterprises are subject to permission from the administrative

agencies and have to be carried out through qualified financial institutions. The exceptions

are that foreign-invested enterprises have the discretion to borrow internationally to make up

the difference between their registered capital and paid-in capital. The international

borrowings of foreign banks and short-term trade finance within three months have been

included in the foreign debt statistics.

System China has regarding foreign exchange control-

China's current Forex control system was first introduced in 1996. According to this system,

all Forex transactions are classified into two categories: capital account items and current

account items.

Capital account items are those capital inflow or outflow transactions which serve either to

increase or decrease a company's debt or equity, including foreign direct investment, all types

of loans, loan-related security transactions and securities investments. All capital account

transactions are subject to approval by the State Administration for Foreign Exchange

(SAFE).

Current account items are transactions of an ordinary recurrent nature, including payments

for foreign trades and services, and interest payments for Forex debts. Under the 1996

regulations, current account transactions did not require approval. With the new rules

promulgated in late 1998 however, SAFE has tightened control over certain capital account

transactions and does approve certain current account transactions.








International current transactions-

The RMB is convertible on current account, which refers to transactions involving goods,

services, income and current transfers, etc. Foreign exchange refers to payments and assets

denominated in foreign currencies and used in international settlements, including:

y foreign currencies in cash, including banknotes and coins;

y documents or instruments payable in foreign currencies, including negotiable

instruments, bank deposit certificates, bank cards, etc.;

y securities denominated in foreign currencies, including bonds, stocks, etc.;

y Special Drawing Rights;

y And other assets denominated in foreign currencies.

The Regulations apply to all receipts and payments of foreign exchange involving domestic

entities, Chinese citizens and foreigners who have continuously lived in China for more than

one year as well as to all those carried out within the PRC by foreign entities or individuals.

Foreign exchange operations must be based on bona fide and legal transactions. Financial

institutions are subject to investigation and supervision of the SAFE to ensure that they

exercise due diligence in checking the authenticity and consistency of documentation with

receipts and payments.

In principle, foreign currencies are prohibited from circulation and may not be quoted for

pricing or settlement within PRC territory. Since the 2008 revisions to the Foreign Exchange

Regulations, domestic entities and individuals are free to repatriate or not their overseas

receipts of foreign exchange, though the SAFE retains the power to modulate their flows in

response to economic conditions. They may hold foreign exchange receipts on current

account or sell them to financial institutions. Foreign exchange payments on current account

transactions must be carried out with foreign exchange owned by the payers or purchased

from authorized financial institutions, and they must be based on valid documents.

Regulatory role of the SAFE-

Under the 2008 Foreign Exchange Regulations, the SAFE and its local offices retain their

responsibility for the regulation of foreign exchange operations and of the interbank foreign

exchange market. The SAFE is mandated to conduct its activities in accordance with the

principles of "safety, liquidity, and profitability". Based on conditions in the foreign




exchange market and the requirements of the monetary policies, the SAFE may adjust

excessive fluctuations in the foreign exchange market in accordance with the law. The

exchange administration agencies carry out comprehensive supervision over financial

institutions' foreign exchange positions. Financial institutions must avoid mismatching their

assets denominated in domestic and foreign currencies, and the SAFE overseers can order

adjustments. The SAFE enjoys broad powers to conduct investigations of foreign exchange

operations. It may enter places of suspected foreign exchange violations to obtain evidence. It

may address enquiries to entities and individuals about cases under investigation. It may

enquire about any accounts other than individual savings accounts of parties involved in

cases under investigation, and it also entitled to use information held by other government

agencies. Where property has been or might be transferred or concealed or important

evidence concealed, forged or destroyed, the SAFE can apply to the People's Court for orders

freezing assets or placing them under seal. Upon learning of any violation foreign exchange

regulations, financial institutions are obligated to denounce their customers to the SAFE.

The Regulations provide anonymity and rewards for whistleblowers. Sanctions for

violations of the Foreign Exchange Regulations include fines in amounts up to 100 per cent

of the foreign exchange involved and, when warranted, criminal proceedings can be initiated.

Illegal transportation of foreign exchange across the PRC's borders may give rise to warnings

and fines not in excess of 20 per cent of the foreign exchange involved, but more serious

penalties are applicable under Customs Laws and Regulations. Carrying on unauthorized

foreign exchange trading may entail fines of up to CNY 2 million, suspensions or cessations

of business activities. In appropriate cases, authorities can institute criminal pursuits. All

those with management responsibility for violators of the Foreign Exchange Regulations are

exposed personally to fines and, in appropriate cases, to criminal prosecution. Decisions of

the SAFE is subject to administrative reconsideration as well as suits before the people's

courts.

China reforming its foreign exchange control regulations-

Following the relaxation of some foreign exchange restrictions in 2001, the State

Administration of Foreign Exchange (SAFE) has further liberalized foreign exchange control

on both capital account and current account items.




The Renminbi and Foreign Exchange Control4

-

The Renminbi, China¶s legal currency, is issued and controlled solely by the People¶s Bank

of China. The exchange rates of the Renminbi are decided by the People¶s Bank of China and

issued by the State Administration of Exchange Control. China operates foreign exchange in

a unified way, with the State Administration of Exchange Control exercising the functions

and powers of exchange control.

In 1994, China reformed the foreign exchange system, combined the Renminbi exchange

rates, adopted the bank exchange settlement system and set up a unified inter-bank foreign

exchange market. On this basis, China included the foreign exchange business of the foreign-

invested enterprises in the bank¶s exchange settlement system in 1996. On December 1, 1996,

China formally accepted Article Eight of the Agreement on International Currencies and

Funds, and realized the Renminbi¶s convertibility under the current account ahead of schedule. In 1997, when confronted with the Asian financial crisis, the Chinese government

declared that the exchange rate of the Renminbi would remain stable, and the Renminbi

would not be devalued. This earned China the praise of the international community. In 2001,

China¶s foreign exchange reserves reached US$ 212.2 billion. In addition, the variety of

financial businesses has been increasing steadily, and China has opened an array of new

businesses to become integrated into the various aspects of modern international financial

business, such as consumer credit, securities investment funds and investments linked with

insurance.

4http://www.china.org.cn/english/features/38255.htm




CHAPTER- 4

REGULATIONS ON FOREIGN EXCHANGE SYSTEM OF THE

PEOPLE´S REPUBLIC OF CHINA5

Chapter I. General Provisions

Article- 1

These regulations are formulated with a view to improving foreign exchange administration,

maintaining an equilibrium in the balance of payments and promoting sound economic

development.

Article- 2

The foreign exchange administration department of the State Council and its local offices

(hereinafter referred to collectively as "the exchange administration agencies") shall exercise

foreign exchange administration in accordance with laws and regulations and assume the

responsibility for the implementation of these regulations.

Article- 3

Foreign exchange, as referred to in these regulations, includes the following means of

payments and assets denominated in foreign currency for international settlement:

(1) Cash in foreign currency, including banknotes and coins;

(2) Documents or instruments payable in foreign currency, including, among others,

negotiable instruments, bank deposits, bank cards;

(3) Securities denominated in foreign currency, including, among others, bonds and stocks;

(4) Special Drawing Rights,

(5) Other assets denominated in foreign currency.

5http://www.safe.gov.cn/model_safe_en/laws_en/laws_detail_en.jsp?ID=30600000000000000,34&type=&id=

3




Article- 4

These regulations shall govern all activities in relation to receipts and payments in foreign

exchange or foreign exchange operations of domestic entities and domestic individuals, and,

receipts and payments in foreign exchange or foreign exchange operations of foreign entitiesand foreign individuals in the People´s Republic of China.

Article- 5

International payment and transfer in foreign exchange for current account transactions shall

not be subject to government restrictions.

Article- 6

The government undertakes a reporting system for balance of payments statistics.

The foreign exchange administration department of the State Council shall take the

responsibility for compiling and monitoring balance of payments statistics, and publish these

statistics on a regular basis.

Article- 7

Financial institutions conducting foreign exchange operations shall conduct businessoperations through foreign exchange accounts opened for their clients in accordance with the

regulations enacted by the foreign exchange administration department of the State Council.

Financial institutions duly authorized for foreign exchange operations shall report their

clients´ foreign exchange receipts and payments, and changes in foreign exchange accounts

opened for their clients to the exchange administration agencies in accordance with laws and

regulations.

Article- 8

Foreign currency is prohibited from circulation and shall not be quoted for pricing or

settlement in the territory of the People's Republic of China unless otherwise regulated by the

government.






Article- 13

Foreign exchange receipts for current account transactions may be retained or sold to

financial institutions duly authorized for foreign exchange sale and purchase operations in

accordance with the relevant regulations of the government.

Article- 14

Foreign exchange payments for current account transactions may be made with foreign

exchange owned by the payer, or with the foreign exchange purchased from financial

institutions duly authorized for foreign exchange sale and purchase operations with the

presence of such valid documents as specified by the foreign exchange administration

department of the State Council.

Article- 15

The foreign exchange administration department of the State Council shall determine the

limits and reporting requirements of foreign currency allowed to be carried into or out of the

People´s Republic of China.

Chapter- III: Foreign Exchange Administration on Capital Account Transactions

Article- 16

Direct investments within territory of the People´s Republic of China by foreign entities and

foreign individuals shall be registered with the foreign exchange administration agencies after

being approved by the relevant authorities.

Issuance and transactions of securities or derivatives in the People´s Republic of China by

foreign entities or foreign individuals shall be made in accordance with the regulations

governing market entry, and be registered in accordance with the regulations made by the

foreign exchange administration department of the State Council.






Article- 20

Banking institutions may issue overseas commercial lendings directly within the scope of

their approved business operations. Other domestic entities shall make an application to the

foreign exchange administration agencies in the case of issuing overseas commerciallendings. The foreign exchange administrations agencies may either approve or reject the

application taking into account the applicant´s assets and liabilities, and other relevant

factors. Where the scope of business operations of domestic entities requires approval of

relevant authorities in accordance with the regulations of the government, such approval shall

be obtained before making the application to the foreign exchange administration agencies.

Overseas commercial lendings shall be registered in accordance with the regulations made by

the foreign exchange administration department of the State Council.

Article- 21

Receipts in foreign exchange for capital account transactions may be retained or sold to

financial institutions duly authorized for foreign exchange sale and purchase operations with

the approval of the foreign exchange administration agencies, unless no approval is required

in accordance with the regulations of the government.

Article- 22

Payments in foreign exchange for capital account transactions shall be made with the foreign

exchange owned by the payer, or with the foreign exchange purchased from financial

institutions duly authorized for foreign exchange sale and purchase operations upon

presentation of valid documents specified by the foreign exchange administration department

of the State Council. Where approval of the foreign exchange administration agencies is

required in pursuance of the regulations of the government, the approval shall be obtained

prior to the payment in foreign exchange.

Foreign investor´s Renminbi income in a legally terminated foreign invested enterprise which

has completed liquidation procedures and fulfilled tax obligations in accordance with the

relevant regulations of the government may be converted into foreign currency through

financial institutions duly authorized for foreign exchange sale and purchase operations and

remitted out of the People´s Republic of China.




Article- 23

Foreign exchange or converted Renminbi receipts for capital account transactions shall be

used for the purpose approved by the foreign exchange administration agencies in accordance

with the relevant regulations of the government. The foreign exchange administrationagencies have the right to conduct supervision and inspection of the use of foreign exchange

or converted Renminbi receipts and changes of relevant accounts.

Chapter- IV: Foreign Exchange Administration on Operations of Financial Institutions

Article- 24

Financial institutions shall have the approval of the foreign exchange administration agencies

for the operation or termination of foreign exchange sale and purchase business. Financial

institutions shall have the approval of the foreign exchange administration agencies or the

financial supervisory authorities according to their division of supervisory responsibilities for

the operation or termination of other foreign exchange business.

Article- 25

The foreign exchange administration agencies undertake comprehensive position

management in respect to the foreign exchange operations of financial institutions. Detailed

measures shall be formulated by the foreign exchange administration department of the State

Council.

Article- 26

Currency conversion of financial institution´s capital, profit and mismatched assets

denominated in domestic and foreign currencies shall have the approval of the foreign

exchange administration agencies.




Chapter- V: Renminbi Exchange Rate and Administration on Foreign Exchange

Market

Article- 27

The Renminbi exchange rate is in a managed floating regime based on market supply and

demand.

Article- 28

Financial institutions duly authorized for foreign exchange sale and purchase operations, and

other entities which have complied with such conditions as specified by the foreign exchange

administration department of the State Council, may participate in trading of foreign

exchange in the inter-bank foreign exchange market in accordance with the regulations issuedby the foreign exchange administration department of the State Council.

Article- 29

Trading of foreign exchange in the market shall comply with the principles of transparency,

equality, fairness, honesty and credibility.

Article- 30

The trading currencies and formats in the foreign exchange market shall be specified by the

foreign exchange administration department of the State Council.

Article- 31

The foreign exchange administration department of the State Council shall supervise and

manage domestic foreign exchange markets in accordance with laws and regulations.

Article- 32

The foreign exchange administration department of the State Council may, on the basis of the

changes in the foreign exchange market and monetary policy, smooth excessive fluctuations

in the foreign exchange market in accordance with laws and regulations.




Chapter- VI: Supervision and Management

Article- 33

The foreign exchange administration agencies shall carry out their responsibilities in

accordance with laws and regulations and have the power to take the following measures:

(1) Make on-the-spot inspection of financial institutions conducting foreign exchange

operations;

(2) Enter into suspected places of illegal foreign exchange activities, conduct investigation

and obtain evidence;

(3) Question the entities or individuals who have receipts or payments in foreign exchange or

conduct foreign exchange operations and ask for explanation of matters directly relevant to

the illegal foreign exchange activities under investigation;

(4) Examine and copy materials such as transaction documents directly relevant to the illegal

foreign exchange activities under investigation;

(5) Examine and copy financial and accounting records and other relevant documents of the

party involved in or entities and individuals directly relevant to the illegal foreign exchange

activities under investigation; documents and records which could potentially be transferred,

concealed or destroyed may be seized;

(6) Examine accounts, other than individual savings accounts, of the party involved in, or

entities and individuals directly relevant to, the illegal foreign exchange activities under

investigation, subject to the permission of the foreign exchange administration department of

the State Council or the foreign exchange administration agencies at the provincial level;

(7) In the case that there is evidence of transfer or concealment of the money or other assets

in question, or concealment, forgery or damage of important evidence, or there is evidence

that it is possible for these to happen, make an application to a People´s Court to freeze or

seize the said money, assets or evidence.

Relevant entities and individuals shall co-operate with the foreign exchange

administration agencies in the supervision and inspection, give honest explanations to






Article- 38

Any entity or individual has the right to report any activity in violation of foreign exchange

regulations.

The foreign exchange administration agencies shall keep the reporter confidential, and reward

the reporter and other entities or individuals who have helped in investigating and penalizing

the activity in violation of foreign exchange regulations.

Chapter- VII: Legal Responsibilities

Article- 39

To penalize foreign exchange evasion schemes, such as transferring foreign exchange abroad

in violation of the regulations or transferring domestic capital abroad by fraudulent means,

the foreign exchange administration agencies shall order the foreign exchange in question to

be repatriated and impose a penalty not exceeding thirty percent of the amount involved in

the evasion scheme; in the case of serious violations, the penalty imposed will be in the range

of more than thirty percent and less than one hundred percent of the amount involved in the

evasion scheme; in the case of criminal offence, a criminal prosecution shall proceed.

Article- 40

To penalize illegal foreign exchange arbitrage in violation of the regulations, such as paying

or receiving in foreign exchange for expenses which shall be paid or received in Renminbi or

purchasing foreign exchange from financial institutions duly authorized for foreign exchange

sale and purchase operations with fake or invalid transaction documents, the exchange

administration agencies shall order the funds involved in the illegal arbitrage to be converted

back and impose a penalty not exceeding thirty percent of the amount involved in the illegalarbitrage; in the case of serious violations, the penalty imposed will be in the range of more

than thirty percent and less than one hundred percent of the amount involved in the illegal

arbitrage; in the case of criminal offence, a criminal prosecution shall proceed.




Article- 41

To penalize the foreign exchange inward remittance in violation of the regulations, the

foreign exchange administration agencies shall order redress and impose a penalty not

exceeding thirty percent of the amount in question; in the case of serious violations, thepenalty imposed will be in the range of more than thirty percent and less than one hundred

percent of the amount in question.

To penalize the illegal foreign exchange sales, the exchange administration agencies shall

order the foreign exchange illegally surrendered to be converted back and impose a penalty

not exceeding thirty percent of the amount in question.

Article- 42

To penalize the carrying of foreign currency into or out of the People´s Republic of China in

violation of the regulations, the exchange administration agencies shall issue a warning, and

may impose a penalty not exceeding twenty percent of the amount in question. If existing

laws and regulations stipulate that cases of similar nature are in the jurisdiction of the

Customs authority, those laws and regulations shall prevail.

Article- 43

To penalize any activity in violation of the regulations governing external debt such as

undertaking external borrowing, overseas bond issuance or external guarantee without

permission, the foreign exchange administration agencies shall issue a warning and impose a

penalty not exceeding thirty percent of the amount in question.

Article- 44

To penalize the change of designated use of foreign exchange or converted Renminbi receipts

without permission in violation of the regulations, the exchange administration agencies shallorder redress, confiscate the illegal gains and impose a penalty not exceeding thirty percent of

the amount in question; in the case of serious violations, the penalty imposed will be in the

range of more than thirty percent and less than one hundred percent of the amount in

question.




To penalize the illegal use of foreign exchange, such as the use of foreign exchange in the

People´s Republic of China for pricing or settlement and the transfer of foreign exchange in

violation of the Regulations, the foreign exchange administration agencies shall order redress,

issue a warning, and may impose a penalty not exceeding thirty percent of the amount in

question.

Article- 45

To penalize the unauthorized trading, disguised trading, illegal buying or selling, and the

illegal brokerage trading of a relatively large amount of foreign exchange, the exchange

administration agencies shall issue a warning, confiscate the illegal gains and impose a

penalty not exceeding thirty percent of the amount in question; in the case of serious

violations, the penalty imposed will be in the range of more than thirty percent and less than

one hundred percent of the amount in question; in the case of criminal offence, a criminal

prosecution shall proceed.

Article- 46

To penalize the unauthorized operation of foreign exchange sale and purchase business, the

foreign exchange administration agencies shall order the redress of the case, confiscate the

illegal gains, if any, and where the illegal gains exceed RMB500,000, impose a penalty in the

range of one to five times the amount in question; where there is no illegal gain or the illegal

gains do not exceed RMB500,000, the penalty imposed will be in the range of RMB500,000

to RMB2,000,000; in the case of serious violations, the relevant authority shall order

suspension of operations and rectification or revoke the license; in the case of criminal

offense, a criminal prosecution shall proceed: To penalize unauthorized operation of foreign

exchange business other than foreign exchange sale and purchase, the foreign exchange

administration agencies or the financial supervisory authority shall use the aforesaid

regulation as a reference.

Article- 47

To penalize a financial institution carrying out any of the following listed activities, the

exchange administration agencies shall order redress within a specified period, confiscate the

illegal gains and impose a penalty in the range of RMB200,000 to RMB1,000,000; in the case




of serious violations or failure to redress the case within the specified period, the foreign

exchange administration agencies shall order termination of relevant business operations.

(1) failure to check the authenticity of trading documents and their consistency with the

receipts and payments in foreign exchange when conducting receipts and payments for current account transactions;

(2) Violation of the regulations on receipts and payments for capital account transactions;

(3) Violation of the regulations on foreign exchange sale and purchase business;

(4) Violation of the regulations on comprehensive position management of foreign exchange

business;

(5) Violation of the regulations on trading in the foreign exchange market.

Article- 48

To penalize any of the following listed activities, the foreign exchange administration

agencies shall order redress, issue a warning, and may impose a penalty not exceeding

RMB300,000 for entities or RMB50,000 for individuals:

(1

) Failure to comply with the regulations on balance of payments statistics compilation andreporting;

(2) Failure to comply with the regulations on submitting documents such as financial and

accounting statements and statistics.

(3) Failure to comply with the regulations on presenting valid documents or presenting

unauthentic documents;

(4) Violation of the regulations on foreign exchange accounts management;

(5) Violation of the regulations on foreign exchange registrations;

(6) refusal to co-operate with, or obstruction of the supervision, inspection or investigation

conducted by the foreign exchange administration agencies in accordance with the

regulations.




Article- 49

In respect of domestic entities which violate the foreign exchange regulations, in addition to

imposing penalties in accordance with these regulations, the directly responsible person in

charge and other directly responsible persons shall be disciplined; directly responsibledirectors, supervisors, senior management and other directly responsible persons in financial

institutions shall be given a warning and a penalty in the range of RMB50,000 to

RMB500,000; in the case of criminal offense, a criminal prosecution shall proceed.

Article- 50

Any officer of the foreign exchange administration agencies, who shows preferential

treatment, commits irregularities, abuses his authority or neglects his duties shall be

prosecuted for criminal liability in the case of criminal offense or, disciplined in accordance

with the regulations in a case not constituting a criminal offense.

Article- 51

If one party contests a specific administrative behavior conducted by the foreign exchange

administration agencies, the party may make an appeal for administrative review in

accordance with laws and regulations; if the party still contests the decision of the

administrative review, the party may appeal to a People's Court in accordance with laws and

regulations.

Chapter- VIII: Supplementary Provisions

Article- 52

The definitions of the terms in these Regulations are as follows:

(1) "domestic entities" refers to, among others, government agencies, enterprises, public

institutions, social organizations and armed forces, excluding foreign diplomatic agencies and

consulates in the People´s Republic of China and resident representative offices of

international organizations in the People´s Republic of China.




(2) "domestic individuals" refers to Chinese citizens and foreign nationals residing in the

People´s Republic of China for a continuous period in excess of one year, excluding foreign

diplomats in the People´s Republic of China and resident representatives of international

organizations in the People´s Republic of China.

(3) "Current account transactions" refers to, among others, the transaction items in the

balance of payments involving goods, services, income and current transfers.

(4) "capital account transactions" refers to the transaction items in the balance of payments

leading to changes in external assets and liabilities, including, among others, capital transfer,

direct investment, portfolio investment, financial derivatives, loans.

Article- 53

Non-financial institutions shall have approval of the foreign exchange administration

department of the State Council to operate foreign exchange sale and purchase business.

Detailed regulations shall be formulated separately by the foreign exchange administration

department of the State Council.

Article- 54

The Regulations shall enter into force on its issuing date on August 1, 2008.



BIBLIOGRAPHY-

1. Foreign exchange control in China, Tu Hong, 1st edition 2007, Kluwer law

international.

2. http://www.safe.gov.cn/model_safe_en/laws_en/laws_list_en.jsp?id=3 3. http://www.pbc.gov.cn/english/detail.asp?col=6800&id=76

4. http://www.bjreview.com.cn/document/txt/2008-09/10/content_ 151362

5. http://www.lehmanlaw.com/resource-centre/faqs/foreign-exchange.html

6. http://www.sourcejuice.com/1315252/2010/03/11/Comprehensive-Department-State-

Administration-Foreign-Exchange-2009-annual-international

7. http://www.china.org.cn/english/features/38255.htm

8. http://finance.mapsofworld.com/foreign-exchange-market/china.html

9. http://c-faculty.chuo-u.ac.jp/~toyohal/JSME/pdf03s/03s220-wang