In June 2018, the People’s Bank of China (PBC) released the Notice on Improving the Administration of RMB Purchases and Sales (Yin Fa No. 159 [2018]) (hereafter referred to as the Notice). Recently, a PBC official answered relevant questions from the press.
Q: Please brief us on the background of the Notice.
A: The progress in the RMB capital account convertibility, RMB internationalization, the financial market opening up, and the constant stream of new policies necessitates adjustments to be made in the administrative regulations for RMB purchases and sales so as to enable the effective connectivity and consistency of policies. For example, PBC released the Interim Measures for the Administration of Mutual Bond Market Access between Mainland China and the Hong Kong SAR (PBC Decree No.1 [2017]) in June 2017, and the Notice on Further Improving the Cross-border Capital Flow Management and Supporting the Opening-up of the Financial Market (Yin Ban Fa No. 96 [2018]), making it clear that RMB exchagne and risk hedging businesses under the Bond Connect and Shanghai/Shenzhen-Hong Kong Connect are included in the administration of RMB purchases and sales. Meanwhile, market players are demanding greater facilitation of RMB purchases and sales. For example, overseas conglomerates would perform RMB purchases and sales in a collective manner, and any overseas participating bank would designate a branch to act on behalf of other branches in RMB purchases and sales. The Notice aims to improve and optimize RMB purchases and sales, which is not only a reform measure to adapt to new conditions in financial opening-up and open China’s foreign exchange market wider to the world, but also a concrete measure to respond to market entities’ requirement for greater convenience and enhance the capacity of the financial sector to serve the real economy.
Q: What changes have been made to the business scope of RMB purchases and sales?
A: There are two major adjustments in the business scope of RMB purchases and sales. Firstly, the business used to cover only trade in goods and services under current account items and is now expanded to include all current account items. Secondly, on top of direct investments, the business now also involves the approved cross-border portfolio investment. Under current account and direct investment items, overseas participating banks shall carry out RMB purchases and sales only for corporate or institutional customers and the service is temporarily not available to individual customers.
Q: What is the scope of approved cross-border portfolio investment?
A: At present, approved cross-border portfolio investment mainly include businesses under the Shanghai/Shenzhen-Hong Kong Connect and Bond Connect, investments in China’s inter-bank bond market specified in PBC Notice No.3 [2016], portolio investment by the RMB Qualified Foreign Institutional Investors (RQFII) on the onshore market, and etc. With the progress in opening-up of the financial market, the business scope of the approved cross-border portfolio investment will continue to expand and so will that of RMB purchases and sales.
Q: As the business scope of RMB purchases and sales is expanded, what are the qualification requirements for overseas participating banks which can access China’s inter-bank foreign exchange market?
A: At present, qualified overseas institutions that have China’s inter-bank foreign exchange market are mostly overseas participating banks with large volumes of RMB purchases and sales, international influence and geographic representation. The China Foreign Exchange Trade System (CFETS) will, on a voluntary basis, implement the market access policy in accordance with current laws and regulations. Overseas participating banks which apply for access to China’s inter-bank foreign exchange market should provide their commitments in writing in line with Articles 4 and 9 in the Notice. The application procedure, technical standards, and fee arrangements for overseas participating banks seeking to enter the market are the same as those applying to existing market members.
Q: What are the channels for overseas market entities to participate in China's inter-bank foreign exchange market?
A: Overseas participating banks can either enter China’s inter-bank foreign exchange market indirectly via the RMB clearing banks in their respective jurisdictions or their correspondant banks, or enter the market directly by applying to become members of the CFETS—they have to choose one between the two channels. For now, market entities other than overseas central banks, overseas clearing banks and overseas participating banks can indirectly engage in Chinese inter-bank foreign exchange market via overseas participating banks. Market entities which are currently exchanging currencies via domestic bank counters may either go with their original channel or choose a new channel in line with the Notice.
Q: Is it true that, under the Bond Connect and Shanghai/Shenzhen-Hong Kong Connect, only the Hong Kong clearing bank can act as overseas participating banks or overseas clearing banks to trade in Chinese inter-bank foreign exchange market?
A: Under the Bond Connect and Shanghai/Shenzhen-Hong Kong Connect, overseas investors can convert their foreign currency fund into RMB and do risk hedging in Hong Kong settlement banks via bondholders or securities companies. Hong Kong settlement banks refer to overseas participating banks which have access to China’s inter-bank foreign exchange market upon approval of the authorities and RMB clearing bank in Hong Kong. When an overseas banking group designates a branch to perform collective RMB purchases and sales, the procedure shall comply with Article 7 in the Notice.
Q: How to interpret the principle of actual demend?
A: RMB purchases and sales should be real and standard-compliant transactions within the business scope specified by the Notice, and documentary evidence can be presented while the businesses are carried out. Overseas participating banks should adhere to the three basic principles of “Know Your Customer (KYC)”, “Know Your Business (KYB)”, and “Due Diligence (DD)” to perform its duty of authenticity verification in RMB purchases and sales. Such businesses can be conducted according to relevant requirements in the Principles for Cross-Border RMB Business and Guidance on Cross-Border RMB Business released by the national foreign exchange market self-regulatory mechanism.
Q: Is non-deliverable forward allowed?
A: So long as the principle of actual demend is upheld, banks can choose the delivery method of gross settlement or balance settlement based on actual demend when making derivative transactions under RMB purchases and sales.
Q: How to interpret the duty of overseas participating banks, overseas clearing banks, domestic corresponding banks, and the CFETS in terms of authenticity verification?
A: Domestic correspondant banks, overseas clearing banks, and the CFETS shall require overseas participating banks to undertake to perform the duty of authenticity verification when carrying out RMB purchases and sales businesses, and assess the compliance of overseas participating banks in line with the prudential principle. On this basis, they can act as the correspondant banks for overseas participating banks or allow their direct access to the market. Overseas participating banks should adhere to the three basic principles of KYC, KYB, and DD in their business conduct. The CFETS should require overseas clearing banks and overseas participating banks which participate in the market to report information concerning RMB purchases and sales.
Q: How to ensure stability and order in RMB purchases and sales?
A: In order to ensure stability and order in RMB purchases and sales, the Notice clearly states that: firstly, domestic correspondant banks, overseas clearing banks, and overseas participating banks should adhere to the prudential principle when carrying out RMB purchases and sales businesses, maintain a balance in purchase and sale, and avoid massive one-way capital flow; secondly, the Shanghai headquarters of PBC and the CFETS should strengthen monitoring, take prompt measures when ientifying anormalcies, carry out inspections of the RMB purchases and sales of domestic correspondant banks when necessary, and require overseas clearing banks and overseas participating banks to cooperate during such inspections based on the commitments they have made; thirdly, according to the balance of payments and the demands of RMB purchases and sales, the PBC can take macro prudential measures when necessary, which include but are not limited to raising fees for position squaring, in a bid to ensure stability in RMB purchases and sales.
Q: The Notice requires that filings be made to PBC Shanghai Head Office and information reported to the CFETS. What are the specific requirements?
A: For specific filing requirements, please refer to relevant business procedures released by the PBC Shanghai Head Office; for specific requirements concerning information reporting, please refer to the guidance on relevant businesses released by the CFETS.
