Foreign Exchange Market
The global foreign exchange (forex) market has ballooned in recent decades as more and more economies liberalise their capital accounts. The Basel-based Bank for International Settlements said average daily turnover in global forex markets was an estimated US$3.98 trillion as of April 2010.
Rating system brings importers into line
Beijing will set up a new verification system to strengthen oversights on imports and related foreign exchange transactions at banks, a clear sign that the mainland is seeking to curb irregular capital outflows amid a stronger yuan.
The State Administration of Foreign Exchange issued a new rule yesterday under which licensed importers would be classified through a rating system in order to 'facilitate trade and better verify the truthfulness of import deals'.
Those with a C rating would be required to apply to the SAFE to exchange a certain amount of local currency into foreign currencies before an import deal was transacted.
The foreign exchange regulator would also step up efforts to undertake on-site checks on imported cargo during custom clearance procedures, SAFE said.
The rule was aimed at stemming illegal capital outflows that used falsified import deals to transfer money overseas, analysts said. The regulation takes effect on December 1.
Beijing hopes to fine tune its import verification mechanism to ensure payments in foreign currencies are made properly.
The loopholes in the country's foreign exchange system have resulted in rampant illegal money flows in the past decade, according to Li Youhuan, a professor at the Guangdong Academy of Social Sciences, a well-known researcher of fund flows.
Companies could falsify export deals to bring in hot money while using false imports to remit the money abroad.
Beijing waived rules in 1994 to allow licensed companies buy foreign currencies freely for imports, after decades of tight control on foreign exchange.
A strengthening yuan had led to an influx of hot money into the mainland's stock market, Chen Xuebing, a professor of finance at Fudan University, said. 'The rule could offer some help to the regulator to better monitor capital flows,' he said. 'Hot money has already played a destructive role in the Chinese economy, fuelling asset bubbles on the stock and property markets.'
Beijing is under mounting pressure from its Western trading partners to raise the value of the yuan amid the swelling foreign exchange reserves. China reiterated that it would maintain a gradual appreciation of the yuan in order to protect its export-oriented firms whose products would become more expensive in overseas markets owing to a stronger currency.
This gradual appreciation has also led to an increasing flow of hot money abroad. Foreign currencies that enter China after being exchanged into yuan can book capital gains when the yuan appreciates.
According to the new rule, all the mainland's licensed importers are required to register with the SAFE before being classified.
However, A-rated importers would be exempted from the verification process before conducting foreign exchange transactions and transferring the money overseas.
State Administration of Foreign Exchange (SAFE) to use a rating system to better assess the credibility of importers. Companies with a low rating will be closely monitored.
More spot checks on imported commodities to ensure foreign exchange payments are appropriately made.
Importers who are not registered with the regulator are barred from exchanging yuan for foreign currencies to make payments.
Banks required to file reports on foreign exchange payments that are related to import deals to the foreign exchange regulator.
Banks and importers will be fined and punished if they fail to honour the new rule.