Regulator moves to plug forex loophole
By Feng Jie (China Daily)
Updated: 2005-05-28 08:41

China's foreign exchange regulator tightened rules governing certain types of trade-related forex inflows on Friday, in a fresh move to stem speculative funds from entering the country.

Starting next Wednesday, overseas remittances exceeding US$200,000 classed as export advance payments, entrepot forex earnings, or other categories where the bank cannot verify the trade background, must present further proof they are trade-related.

This is in reaction to the arrival in China of some short-term speculative funds under the disguise of trade, which "enlarged imbalances in China's international payments," the State Administration for Foreign Exchange (SAFE) said.

The administration has been taking moves in recent months to plug loopholes in its supervisory regime and prevent the inflow of funds betting on an appreciation of the local currency.

China has been under foreign pressure to let its currency rise in value against the US dollar, as trading partners complain that the renminbi is undervalued to give Chinese goods an unfair trade advantage.

SAFE's recent moves have mostly centred on verifying that transactions are based on trade, before the forex is allowed to be sold.

Chinese currency is convertible on the current account, which largely covers trade in commodities and services, but is also partly convertible on the financial and capital account.

The growing inflow of forex in recent years, partly fuelled by expectations that the renminbi will soon be allowed to rise in value, has been accelerating growth in China's money supply.

China's central bank has been buying huge US dollar excesses in the banking system to enforce a narrow floating band of the exchange rate of the renminbi, a practice that simultaneously injects liquidity into the local banking system.

The excess liquidity has frustrated central bankers, who are trying to slow down rapid local monetary growth, prompting worries of an overheating economy.

The rapid increase in forex reserves, a result of the central bank's purchases of excess dollars from the market, continued this year, posing a "severe challenge to the effectiveness of China's monetary policy," the People's Bank of China said in its first-quarter monetary policy report released on Thursday.

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