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17 Int'l Fin. L. Rev. 45 (1998)
China Implements New Foreign Exchange Regime

handle is hein.journals/intfinr17 and id is 732 raw text is: China implements
new foreign
exchange regime
Resisting the pressure to devalue the renminbi, the central bank and State
Administration of Foreign Exchange have taken steps to prevent damage to China's
foreign exchange system. By Thomas E Jones of Freshfields, Hong Kong

Along with the rest of Asia, China has experi-
enced a good deal of pressure on its domestic
currency, the renminbi, since the regional
recession began. However, unlike the other
Asian economies, China has chosen not to
devalue. In fact, the government has taken a
staunch political stance towards preventing a
devaluation over the coming year, committing
itself to maintaining the stability of the renminbi
and to preventing another round of competitive
devaluation across Asia.
Unfortunately, while this strategy has
certainly reaped political benefits (China's firm
economic tactics have   been  favourably
compared to Japan's woeful indecision during
the same period), there have been serious
economic consequences. Exports, formerly
slated by the government to grow by 10% in
1998, are well off the official target, and are
expected to grow by only 6% for the rest of this
year. While it is estimated that China will
report a $50 billion trade surplus and approach
Despite government
reassurances that the renminbi
will not be devalued, many
companies in China are
seeking to minimize theirforex
debt exposure by converting
foreign currency borrowings
into renminbi borrowings

$40 billion in direct investment this year, it is
worrying that growth for China's foreign
exchange reserves has seemingly stalled at
somewhere around $141.1 billion increasing
by only $1.2 billion during the first nine
months of this year. Many experts and officials
are wondering why; and the answer seems to be
linked to a number of leaks in the country's
foreign exchange regime.
The central bank (PBOC) and the State
Administration of Foreign Exchange (SAFE)
have launched a series of initiatives aimed at
promoting damage control for the country's
foreign exchange regime. These initiatives have
been expressed in a flurry of internal notices
issued by the PBOC and SAFE headquarters and
passed to banks and branch offices of these
organizations (as well as other banks and financial
institutions in China) with warnings that they
should be strictly implemented with immediate
effect. These notices affect those engaged in trade
with   China,   foreign  investors,  foreign
investment enterprises, foreign exchange desig-
nated banks (including branches offoreign banks
in  China), domestically-funded  enterprises,
Chinese trading companies and SAFE and its
branches (see box). Affected entities are seeking
assistance in understanding what types of transac-
tions can still be completed without falling foul of
Chinese law, particularly in relation to handling
debt transactions.
China requires all borrowers of foreign debt
to register their debt with SAFE under the 1987
Provisional Regulations on the Monitoring of
External Debt and the 1997 SAFE Foreign Debt
Monitoring Detailed Implementing Rules.
While many of the recent central bank and
SAFE notices concern themselves with foreign

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