To effectively control the cross-border flow of funds, to crack down on the inflow of hot moneyin violation of the relevant regulations, and to maintain the security of the foreign-related economy and finance, the State Administration of Foreign Exchange (SAFE) recently promulgated the Circular on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Operations (Hui Fa [2010] No. 59) (hereinafter referred to as the Circular).

The Circular deals with seven issues: (i) strengthening administration of the banks comprehensive positions in the settlement and sales of foreign exchange, and implementing a minimum level of management of the banks balance of positions calculated on a cash basis; (ii) making adjustments to the policies on the administration of online inspections of foreign exchange collections and settlement for exports, reducing the proportion of foreign exchange collection from the processing of imported materials for the online inspections of foreign exchange collections and settlement for export, and strictly handling the procedures for the settlement or transfer of foreign exchange funds in accounts to be verified; (iii) strengthening administration of the quotas on the short-term external debts and the balance of external guarantees of financial institutions, and imposing tight restrictions on banks operations in excess of the quotas; (iv) strengthening administration of capital contributions by foreign-funded enterprises in overseas countries and regions, and further clarifying the requirements for the examination and verification of foreign exchange under circumstances when the actual payer is inconsistent with the overseas investor; (v) strengthening examination of the authenticity of the settlement of funds which are repatriated as capital raised from overseas listings in accordance with the requirements for tightening foreign exchange settlement for payments; (vi) regularizing administration of overseas incorporation of companies with special purposes by domestic institutions and individuals, and imposing penalties on enterprises and individuals operating in violation of the regulations in accordance with the law; (vii) increasing penalties on banks operating in violation of the regulations in the form of imposing fines,  terminating relevant operations, circulating notices of criticism, and so forth, and investigating the responsibilities of the senior management staff who are directly liable for the violations.

The promulgation of the Circular will further regularize cross-border flows of funds through such channels as trade, foreign direct investment, round-tripping investment, overseas listings, and so on, particularly administration of the bankscomprehensive positions for foreign exchange settlement and sales and short-term external debts. Promulgation of the Circular will strengthen the banks obligation to carry out examinations of authenticity in the handling of foreign exchange business, which will be conducive to further cracking down on the inflow and settlement of foreign exchange funds in violation of the laws and regulations, preventing financial risks caused by cross-border inflows of hot money,and thereby promoting the healthy and orderly development of Chinas economy and finance.