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China Strengthens Supervision of Individual Forex Purchases

With the start of a new year, mainlanders are able to buy foreign currencies by using their new annual individual forex purchase quota of US$50,000. Unlike previous years, however, individuals who want to buy foreign currencies at banks must now fill out a more detailed application form which breaks down the purpose of purchase into more than 10 items. In addition, it highlights six restrictions buyers must observe.

In the application form, it is expressly stated that foreign currencies purchased in a personal capacity on the mainland must not be used in the purchase of overseas properties, securities, life insurance policies, investment-linked insurance policies that are entitled to reversionary bonuses, and other capital account items that have yet to be liberalised.

The six restrictions are not new. In fact, the State Administration of Foreign Exchange (SAFE) just reiterates the existing requirements and has not changed its policies on the purchase of foreign currencies by individuals. Currently, as China has not achieved full convertibility under the capital account, overseas investments by mainlanders can only be conducted through stipulated channels, such as the Qualified Domestic Institutional Investor (QDII) scheme.

SAFE has earlier pointed out the potential risks of mainlanders buying life insurance or investment-linked insurance products with reversionary bonuses overseas. Given such risks, the existing forex administration policies will remain unchanged. The authorities subsequently stepped up regulatory effort, and during the first month the new rules were applied to the merchants concerned, the transaction value in question has decreased by several billions of yuan.

Buying foreign currencies by “borrowing” the quotas of friends and relatives is rather common in China. According to industry players, much of the foreign exchange has in fact been used to purchase properties, invest in securities and buy insurance products outside of the mainland. These transactions are probably deemed to have broken the law as they are actually unregulated capital account transactions and have thus evaded the country’s exchange controls.

According to a source from SAFE, the string of events since the Asian financial crisis in 1998 have showed that large, unregulated cross-border capital flows is a major cause of financial volatility which could undermine economic growth. Allowing another person to use one’s annual forex quota constitutes a circumvention of SAFE’s authenticity requirement, and may even become a channel for money laundering, tax evasion and transfer of illicit funds. Strict regulation is thus necessary.

Violators to be Put on Watch List and Deprived of Quotas

Apart from reiterating forex purchase requirements, the regulator has also made clear the punishment for violators with the aim of increasing the cost of non-compliance.

Individuals caught breaking the rules, such as filing false information, obtaining foreign currencies through deception, cheating, engaging in money laundering and the unlawful use and transfer of forex funds, will be put on a watch list and will stay on the list for that year and the following two years, during which the individuals concerned will be deprived of their forex quotas and subject to anti-money laundering investigation in accordance with the law, SAFE warned.

Under the Regulations of the People’s Republic of China on Foreign Exchange Administration, persons found to have committed such acts as illegally transferring foreign currencies abroad to avoid regulation, conducting unlawful arbitrage transactions, altering the purpose for which the foreign currency is used without authorisation etc shall be punishable. In serious cases, the violator shall be ordered to pay a fine of not less than 30% of the amount of foreign exchange involved but not more than the total amount involved. Information declaration is therefore particularly important, industry sources said.

Click here for details of the Regulations.

Content provided by Picture: HKTDC Research
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