China’s central bank, the People’s Bank of China, liberalised its individual foreign exchange regime on February 1, making it easier to structure and implement cross-border transactions.
The directive superseded or abolished 16 provisions dealing with individual foreign exchange transactions to allow for more efficient administration and better convertibility of the renminbi.
Among the most important changes is an annual quota that will be assigned to each individual for the settlement of foreign exchange, abolishing a previous limit on each settlement transaction. The quota sets a threshold below which foreign exchange transactions can be handled directly at a bank.
An annual quota of $20,000 has already been in place for domestic individual purchase of foreign exchange since May 2006.
On January 5, the State Administration of Foreign Exchange issued detailed rules for administering individual foreign exchange transactions, prescribing an annual quota of $50,000 for both individual settlement of foreign exchange and individual purchases of foreign exchange from February 1.
The measures liberalise a number of types of capital account transactions by domestic individuals. In particular, individuals will be allowed to purchase B shares and make financial investments involving overseas shares, fixed income products and other approved financial instruments through the qualified domestic institutional investor scheme.
Chinese citizens will be able to participate in overseas listed companies’ employee stock ownership and stock option plans. The listed companies will be required to file applications on behalf of their employees and obtain approval from the foreign exchange department before handling relevant foreign exchange transactions.
The rules also liberalise provisions dealing with remittances by Chinese citizens for offshore special purpose vehicles for “roundtrip investments”, an integral step in the conversion of a domestic enterprise into a wholly-foreign owned enterprise under an offshore holding company for the purpose of listing offshore.
Although the regulations relate only to foreign exchange transactions by individuals, they represent a bold step forward in the relaxation of China’s foreign exchange control regime at a time when official reserves exceed $1,000bn.
Joseph Yam, the head of the Hong Kong Monetary Authority, the quasi-central bank, recently said he saw the renminbi becoming freely convertible and perhaps becoming an international reserve currency one day.
Many hold similar views. The recent relaxation in the foreign exchange control regime is a step in that direction.
Carson Wen is a partner in the Hong Kong office of Jones Day. John Hao, an associate, also contributed.