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Foreign Exchange Regulator Guards Against Volatile Cross-Border Capital Flows

The State Administration of Foreign Exchange (SAFE) has taken measures to guard against the risk of abnormal cross-border capital volatility in two respects, said its deputy head Wang Xiaoyi. First, the monitoring of cross-border capital outflows has been stepped up and all forex management departments are asked to verify the abnormal fund movements of key enterprises. However, SAFE would not intervene in the business activities of these enterprises and would only ask them to account for abnormal capital outflows. Second, banks are urged to adhere to the three business principles (of “know your client”, “know your business” and “due diligence”) within the framework of existing laws and regulations and verify the authenticity and compliance of their clients' transactions. However, no administrative restrictions and regulations will be imposed for genuine and legitimate cross-border payment demands.

These policies have produced obvious effects. China recorded a smaller forex settlement deficit in September. Cross-border capital outflow also slowed down.

According to Wang Xiaoyi, China will continue this kind of ongoing and ex-post supervision in future and will explore a macro-prudential management framework rather than return to the beaten track of capital control regime. Capital control refers to the mandatory control of financial transactions by residents and non-residents, while macro-prudential management seeks to influence the borrowings of market entities by economic means or other means authorised by law. It is believed that a higher cost of speculation would quell excessive borrowing and puncture the asset price bubble.

Content provided by Picture: HKTDC Research
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