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Crack down on illegal forex settlements
By Zhang Dingming (China Daily)
Updated: 2004-11-03 00:13
China's foreign exchange regulator said Tuesday it had found widespread
irregularities in forex settlement operations by local banks in its inspections
this year.
The State Administration of Foreign Exchange (SAFE) said such illegal
behavior resulted in unwanted hefty increases in China's forex reserves and
complicated the State's macro-management efforts. SAFE pledged to crack down on
speculative capital inflows.
The administration inspected 35 banks and their branches on their purchases
of forex from individuals and businesses from January to September, and probed
41 businesses about their forex sales to banks. A total of US$120 million of
illegal transactions was spotted, it said.
Under China's tight forex management regime, local companies are required to
sell most of their legitimate forex earnings to designated banks, most of which
are subsequently sold to the central bank and become part of the nation's forex
reserves.
China's forex reserves jumped by 27 per cent from the end of last year to
US$514.5 billion at the end of September.
"The illegal foreign exchange settlements between banks and businesses and
individuals have affected the international balance of payment, resulted in
abnormal growth of foreign exchange reserves, disrupted macro-management,.."
SAFE said in a statement.
Illegal forex sales -- by both businesses and individuals -- to banks were
found not only under the current account, which mostly covers foreign trade, but
also in the capital account, under which the local currency, or renminbi, is
only partly convertible, the administration said.
Forex inflows into China have been growing rapidly in the past couple of
years, as businesses and individuals, as well as currency speculators, tried to
accumulate renminbi-denominated assets in expectation of an appreciation of the
renminbi exchange rate and in pursuit of higher interest rates in the local
market.
Signs of currency speculation became more evident this year, with capital
inflow growing fast even in months when the nation's trade surplus, a typical
driver of forex surpluses, narrowed significantly or even when trade deficits
were recorded.
China's new external borrowings, excluding trade credits, surged by 97.8 per
cent on a year-on-year basis to US$83.4 billion during the first six months of
the year, SAFE said earlier.
And the net inflow of foreign liabilities -- new borrowings minus repayments
and interest -- registered US$22.7 billion for the period, six times what was
recorded a year earlier.
"The situation of excessive foreign exchange supply in the domestic market
became more serious, which has undermined the effect of macro-management," SAFE
said.
The rapid forex increases has resulted in greater money supply in the local
banking system, as the Chinese central bank -- the People's Bank of China -- has
to purchase excess dollars to enforce a narrow range for the renminbi's exchange
rate.
But that's not what monetary policymakers want to see currently. Rapid
monetary growth since last year has already been identified as a major driver
for frenzied fixed investment that has prompted worries that the Chinese economy
is overheating.
The State has initiated a round of macro-management measures, including
credit curbs, land controls and higher reserve requirements for banks, in an
effort to appropriately slow down investment and economic growth.
In a related development, SAFE reported major progress in its efforts to
eliminate all types of illegal forex transactions yesterday, saying it had
smashed 86 underground forex dens so far this year and confiscated 50 million
yuan (US$6 million) in cash.
The cases included a variety of crimes, such as money laundering, investment
fraud, fraud in bank borrowing as well as illegal transfer of State assets, it
said.
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