注: 本文英文原文由MWE中国律师事务所Kevin Qian团队于2017年1月25日撰写发布。太平洋联合中文部门翻译此中文版本。本文尊重原作者, 所有内容以英文原文为主。
Note: This English article was produced by MWE China Law firm Kevin Qian’s team; below Mandarin version was translated by Pacific Union China concierge for Mandarin readers’ reference; please refer to the English version as the original source.
Regarding the SAFE’s new rules on foreign currency scrutiny, we would like to share with you some of our initial thoughts and comments for your consideration:
1. Interpretation of the New Rules
1.1 Key points of the new rules:
* Individuals required to make faithful and complete declarations
When purchasing foreign exchange, individuals are required to carefully read these rules and faithfully and completely make declarations, and make a promise to bear corresponding legal liabilities.
* Strengthening banks’ authenticity and compliance check obligations
Banks are required to strengthen compliance management, carefully implement the business principles, and improve client identification.
* Strengthening the implementation of punishment for violations
If any individual commits acts in violation of laws and regulations such as making a false declaration, fraudulently obtaining foreign exchange, practicing fraud, misusing and illegally transferring foreign exchange, he will be placed on a “Watch List”, will be restricted or prohibited from purchasing foreign exchange for a certain period into the future, will be incorporated into personal credit records according to law, will be imposed administrative penalties, will be subject to an anti-money laundering investigation, will be transferred to a judicial authority for further handling, etc..
1.2 Direct implications of the new rules
Please note that even without the new rules, Chinese individuals are not allowed under the existing SAFE laws and regulations to make overseas payments under the capital account. Except by the specified channels such as QDII (Qualified Domestic Institutional Investor), foreign exchange purchased by Chinese residents can only be used for foreign payments under the current account, including private travel, overseas study, official business, and going abroad on business, visiting relatives, overseas medical treatment, trading of goods, purchasing of non-investment insurance, consulting services, etc.
That said, given the effectiveness of the new rules, some existing practices, such as transferring foreign exchange through a number of relatives and friends, or use of third-party remittance services, for the purpose of making investments outside of China would be highly scrutinized and prohibited.
However, the door remains open for practices such as investment through QDII, overseas loan under domestic guarantee/deposit, overseas direct investment by Chinese companies, etc.
2. Background of the New Rules
Currently, the issuance of the new rules actually does not change the foreign exchange management policies for individuals, nor does it change individuals’ annual quota for purchase of foreign exchange. Instead, the new rules indicate (1) an increased emphasis on requiring individuals to provide a genuine reason when purchasing foreign exchange and (2) that the central bank will closely monitor the foreign exchange purchase business of various commercial banks.
Given the political situations in Europe and the United States, the investment landscape has been somewhat uncertain. In response, China has tightened its controls over foreign currency exchange. It is hopeful that the enhanced supervision of conversion of the Chinese yuan (“RMB”) will not be permanent and, eventually, the RMB will be converted freely. China’s central bank has two major goals: (1) that the RMB will become an international currency; and (2) the RMB will become a strong currency.
However, under these two goals, there are three sub-issues that require the government’s consideration: (1) the central bank must maintain absolute sovereignty to issue currency; (2) the RMB exchange rates must remain relatively stable; and (3) the free flow of currency for inbound and outbound investment under the capital account. In the current environment, the success of the first two sub-issues comes at the expense of the third.
Naturally, the central bank will maintain its sovereign authority over the issuance of currency, and will not make changes based on foreign influence. . At this time, only one of sub-issues two and three can be chosen. The government has determined that maintaining a relatively stable RMB exchange rate is of greater importance at this time and, therefore, has sacrificed the free exchange of RMB and its use as a global currency for the time being. One of the main reasons for the policy position is to avoid a volatile RMB exchange rate due to uncontrolled outflow of foreign currency reserves or foreign political volatility. However, this change is likely a short-term strategic adjustment that will not radically change the central bank’s ultimate goal of making RMB a strong international currency that can be freely exchanged. Three years ago, in order to encourage domestic investment, the central bank had relaxed policies for conversion from RMB to USD or other currencies (the foreign exchange reserve at that time was USD 3500 billion), which actually eased the central bank’s burden of holding a huge amount of foreign exchange on hand. At that time, there were also some disguised free flows of currencies under the capital account, such as Shanghai-Hong Kong Stock Connect, foreign insurance products, and overseas loans with domestic guarantees.
Therefore, we can say optimistically that the current new policy is short-term and is expected to last between 8 to 12 months.
3. Impact on Chinese Capital Flow
Based on the background of this policy shift and the previous practices, it appears that the strict system regarding foreign exchange remittance out of China under the capital account is only a temporary strategic arrangement. Therefore, its impact on the US real property market should likewise be short-term. Considering that about 50% of Chinese real estate investment in the U.S. is located in California, it will cause a stagnation of the real property market in the short term. However, as the validity of the new policy gradually diminishes, the US real property market will see a significant rebound, which conforms to the real demand of the market.
4. Forecast of the trend
Currently, China’s high net worth individuals are seeking diversification of their assets. Their willingness to invest in the US is primarily based on the desire for preservation and increase of the value of their assets, and also their demands in respect to pensions, medical care, education, air quality, etc. Furthermore, relatively speaking, the US real estate market performs better. From the perspective of international economics and politics, the Chinese government is ready to compromise with the Trump administration and work with the US on the “One Road, One Belt” program. The cooperation is wider than the conflict. Therefore, it is possible that both parties work together to reasonably manage the world market, handle tough world affairs, rely on each other, and jointly create a fair cooperative environment.
The new rules and policy regarding the exchange of RMB are likely short-term and the impact should be limited. As their validity gradually diminishes and the US becomes increasingly attractive to inbound investment, the RMB is very likely to realize free flow under the capital account in the long-term.