Facilitating Cross-border Investment and Financing

— In an exclusive interview, Guo Song, director general of the Capital Account Management Department of the State Administration of Foreign Exchange, assesses reform measures put

China Forex: A number of reform measures were launched in capital account foreign exchange management in 2017 in an effort to help expand the opening up of the financial market. Could you share with us the progress made in these areas over the past year?

Guo Song: In 2017, under the correct leadership of the Communist Party Central Committee, the State Council, the Party Committee of the People's Bank of China and the Party organization within the foreign exchange administration, administrative departments that deal with capital account issues continued to adhere to the policy of expanding capital inflows while managing capital outflows. They did this by pushing reforms and stabilizing market expectations. The main objectives were to promote foreign exchange management reform and guard against risks from cross-border capital flows. In this effort they sought to overcome existing difficulties and introduce a number of major foreign exchange control measures concerning the capital account and in turn support the real economy. Specific measures were as follows:

First, we improved foreign exchange management of foreign-invested enterprises by keeping pace with the times. Regulators were faced with a new situation for foreign direct investment. We described it as national treatment prior to market entry plus a "negative list"approach, whereby business activities are permitted unless specifically proscribed. We improved the management of high-profit equity sales and divestments by foreign-invested enterprises in general. We also strengthened our reviews of transactions to determine whether they were authentic and in compliance with laws and regulations. We also tightened our supervision of the remittance of profits of foreign-invested enterprises while ensuring that investors from overseas maintained their right to remit profits.

Second, we actively constructed an integrated overseas loan policy system for both domestic and foreign currencies. In order to check cross-border capital flow risks from overseas loans and prevent the illegal use of foreign currency policies for regulatory arbitrage, we stated that the total balance of overseas and domestic loans should not exceed 30% of a firm's net assets.Additionally, we clarified the requirements for registering overseas loans.

Third, we experimented with a pilot program under the capital account. According to classification management,a pilot program of foreign exchange payments for settlement of specific funds in specific regions and specific industries was conducted in Taizhou in Jiangsu Province.This allowed us to gain additional experience in liberalizing foreign exchange settlements and payments under the capital account.In addition, we successfully launched the Pilot Program on Cross-Border Transfers of Non-performing Assets of Banks in Shenzhen, the Pilot Program on Foreign Debts for Hi-tech Enterprises in the Zhongguancun National Innovation Demonstration Zone, and the Pilot Program for Facilitation of Foreign Debts of Leasing Companies in Tianjin. The reform measures were in line with local conditions and the needs of local enterprises,and this effectively served the real economy.

Guo Song, director general of the Capital Account Management Department

Fourth, we actively promoted reforms in crossborder financing and foreign currency loans to effectively reduce financing costs for enterprises. This was done by cooperating with the People's Bank of China to improve macro-prudential management policies for cross-border financing and expand cross-border financing for domestic institutions. We also widened the scope of settlements on domestic foreign exchange borrowings, in particular for loans related to the export trade. Additionally, we clarified the operating rules and effectively supported the operations of export trade enterprises. At the same time, the Pilot Free Trade Zone reform was promoted nationally. As a result, when Chinese and foreign financial leasing companies engage in business with a domestic lessee, they can collect foreign currency income if offshore borrowings or domestic foreign exchange loans account for more than 50% of the cost of the underlying goods tied to a leasing transaction.

Fifth, we promoted the opening up of the interbank bond market by actively cooperating with the People's Bank of China to formulate rules and regulations for the Bond Connect program which links the domestic interbank bond market and the Hong Kong stock exchange. We also clarified the management rules regarding remittances and settlements as well as foreign exchange risk management under the Bond Connect program. Northbound trading, which refers to mainland trade originating in Hong Kong under the Bond connect program, reached 225.06 billion yuan between its launch on July 3, 2017 and the end of November of the same year. As of the end of November 2017, there were 787 overseas institutions and tradable products on the market. The value of interbank bonds held in trust for overseas institutions reached 1135.9 billion yuan at that point, and 78.7 billion yuan of that was from Bond Connect.With a further opening up of the domestic bond market,more and more overseas institutions have chosen to issue renminbi bonds on the China market.

China Forex: What reform measures will be introduced in 2018 in respect of foreign exchange management under the capital account?

Guo Song: In 2018, foreign exchange management under the capital account will earnestly implement the spirit of the Communist Party's 19th National Congress,the Fifth National Financial Work Conference and the Central Economic Work Conference. It will focus on serving the real economy,preventing financial risks and deepening financial reform. In accordance with the decisionmaking arrangements of the Party Central Committee and the State Council, we will continue to deepen the reform of foreign exchange management under the capital account, further simplifying administrative management and exploring new ways to facilitate crossborder investment and financing. This will be aimed at expanding the two-way opening up of financial markets and steadily promote currency convertibility under the capital account. The expected measures are as follows:

The macro-prudential management of foreign debt financing flows will be achieved mainly by adjusting the relevant parameters of cross-border financing leverage.

First, we shall continue to promote reforms in key areas of cross-border securities investments. We will support the opening of more futures exchanges,improve foreign exchange management regarding qualified institutional investors and promote the opening up of the capital account.

Second, we shall improve macro-prudential policies related to foreign creditors' rights and obligations. Third,we shall improve post-transaction regulatory capacitybuilding, enhance Coordinated Direct Investment Surveys (CDIS), and strengthen statistical monitoring and on-site management and post-transaction management under the capital account. We will step up the monitoring and early warning capabilities of cross-border capital flows, enhance the effectiveness of foreign exchange management of the capital account and effectively prevent risks from cross-border capital flows.

China Forex: In 2017, China's foreign direct investment declined from 2016 levels. What is your take on that reduction and what do you see ahead in 2018?What is the current attitude of the State Administration of Foreign Exchange (SAFE) towards direct investment?How can SAFE ensure that foreign enterprises conduct foreign investment in a legally compliant fashion?

Guo Song: In 2017, the total of offshore direct investments by Chinese companies declined from the previous year in line with our efforts to optimize the types of offshore investments. Over that period we had a relatively steady exchange rate and we promoted a return to more rational investment. The cross-border capital flows situation improved markedly, and the investment behavior of Chinese enterprises became more rational. It is expected that in 2018, China's offshore investment will continue to develop in a steady fashion.

With regard to overseas direct investment, SAFE's guidelines and policies are clear. We encourage enterprises to participate in the global economy and integrate themselves in the global value chain. We adhere to the principle of having enterprises act as the main market players. This is done by embracing market principles and international practices while accepting government guidance in foreign investment. We also hold to the policy of decentralizing administrative authority and combining regulation with relaxed controls where possible.We support competent and qualified domestic enterprises in carrying out authentic foreign investment activities that comply with regulations.We also encourage companies to participate in the Belt and Road Initiative,a key national strategy,and international capacitybuilding. This is aimed at promoting cooperation between China and other countries. At the same time,we have paid close attention to potential risks from irrational investment overseas.We have also encouraged investors to ensure that their investments complied with regulations.

In future, we will adhere to the general principle of seeking steady development while adopting new developmental ideas. We will deepen reforms, enhance institutional mechanisms and serve the Belt and Road Initiative in accordance with the requirements of highquality development. We will promote reform and risk prevention simultaneously in order to increase the degree of market liberalization.We will facilitate offshore investment and help the new guidelines of China's program of opening its economy.At the same time, we will guard against risks from cross-border capital flows to safeguard China's economic and financial security and promote the sustained and healthy development of offshore direct investment.

China Forex: What achievements have been made in the management of cross-border financing?What plans are in place to improve and promote the management of cross-border financing?

Guo Song: Since the implementation of this kind of across the board macroprudential management,we have seen remarkable results, both at the macro and micro levels. This policy replaces administrative measures of the past which were based on the ratio of assets and liabilities of the micro-market players. This now covers domestic and foreign investors under the same framework. It also applies to short and long term investments, regardless of whether they are from domestic or foreign entities.In the process, the cross-border financing regulatory policies that apply to foreign-funded enterprises have greatly broadened the financing channels for domestic institutions. This has effectively reduced financing costs which can better serve the real economy. As of the end of September 2017, China's foreign debt stood at US$1.68 trillion, maintaining growth for six consecutive quarters, playing a positive role in balancing China's payments position.

In the future, we will continue to improve the macro-prudential management policies for crossborder financing of all types. This will let us give full play to the countercyclical regulatory role of macroprudential policies in order to balance the relations between preventing foreign debt risks and promoting the development of the real economy. In the near future, with the focus on improving macro-prudential management of cross-border financing by banks, the macro-prudential exemption for cross-border bank financing will be arranged reasonably. The macroprudential management of foreign debt financing flows will be achieved mainly by adjusting the relevant parameters of cross-border financing leverage. This will let us effectively deal with the adverse impact of largescale cross-border foreign debts of the economy and financial system.

China Forex: Over the past year or so, foreign exchange management has been tightened as far as the supervision of offshore lending by Chinese banks using domestic guarantees is concerned. Can you share with us your assessment of that effort and your plans in this area for the future?

Guo Song: In the past year, we focused on some potential risks that emerged in the areas of domestic and foreign lending. We have strengthened off-site inspections, the regulation of domestic and foreignfunded loans and overseas investments, the coordination and supervision on domestic and foreign loans in both domestic and foreign currencies with strict inspection and punishment. We have improved the relevant laws and regulations and we have adopted measures in other aspects. It is obvious that these measures have achieved good results. From January to November 2017, the average monthly contractual amount of foreign loans to domestic institutions with guarantees by domestic banks was US$270 million, far below the average monthly level in 2016. The growth rate of foreign loans with domestic guarantees slowed significantly, and banking business was much more cautious.

In future, we shall actively support market players, including banks and enterprises, in carrying out authentic and legally compliant domestic and foreign loan business and support cross-border investment and financing transactions that are legal and legitimate.

China Forex: As mentioned earlier, the reform of key areas of cross-border securities investment will be promoted in 2018. Could you please share with us some of your plans?

Guo Song: In future, we shall continue to expand the two-way opening up of domestic financial markets,improve the facilitation of cross-border securities investment, and support the steady liberalization of the capital markets. The reform will be carried out mainly in the following aspects: First,we shall explore opportunities to ease foreign exchange regulations related to panda bonds. Second, we will encourage foreign employees of listed domestic companies to participate in market activities. In 2016, the CSRC made it clear that foreign employees could participate in equity incentive programs of listed domestic companies.However, the supporting regulations for foreign exchange management have not been issued. To solve the problem of the bonus payments of the foreign employees participating in equity incentives of the listed domestic companies, we shall formulate relevant foreign exchange management requirements stipulating that foreign employees can participate. Third, we shall continue to improve the foreign exchange management of qualified foreign institutional investors.In 2002 and 2011, we successively introduced the Qualified Foreign Institutional Investors (QFIIs) and Renminbi Qualified Foreign Institutional Investors (RQFIIs) programs to allow greater market participation by overseas institutional investors. As of the end of November 2017, a total of 288 QFII institutions and 196 RQFII institutions had been approved with investments in the capital markets of US$97.159 billion and 650.062 billion yuan,respectively. In response to the concerns of market investors and custodian banks, we will study and promote relevant facilitation measures, including facilitating the remittance of QFII funds, relaxing the investment lock-up period and provide safe-haven tools for QFII institutions and the like.