During the planned economy period, due to the shortage of foreign exchange, China implemented strict mandatory planning management of foreign exchange receipts and payments. Since the reform and opening up, in order to adapt to the requirements for China to establish a socialist market economy system, the reform of the foreign exchange administration system has been advanced in an orderly fashion, the residents’ autonomy to utilize foreign exchange has steadily expanded, and the levels of trade facilitation and investment have continuously improved. In January 1994, China cancelled the examination and approval procedures for foreign exchange utilization plans under the current account, such as enterprise imports, and began to allow enterprises to directly purchase foreign exchange from designated foreign exchange banks upon the strength of valid documents. In December 1996, China announced realization of current account convertibility and lifted restrictions on overseas payments and transfers under the current account; however, foreign exchange from such sources as the export income of the enterprises, in principal, still had to be sold to the designated foreign exchange banks.

Since entry into the WTO, China ’s foreign economy has developed rapidly, and the principal contradiction in its balance of payments gradually changed from the past shortage of foreign exchange to a rapid increase in foreign exchange reserves. From 2002 to 2011, China ’s foreign exchange reserves increased by nearly USD 300 billion annually, 12 times the annual increment from 1994 to 2001. Conforming to the change in the situation and the actual requirements of the market players, from 2001, by improving management of the opening of foreign exchange accounts and management on the basis of limits, China has gradually expanded the autonomy of enterprises to retain foreign exchange.

First, it relaxed the conditions for enterprises to open foreign exchange accounts and to retain foreign exchange. In 2001, enterprises which satisfied such conditions as the foreign exchange receipts from exports during the year were above the equivalent of USD 2 million and the foreign exchange payments of the year were above the equivalent of USD 0.2 million began to be allowed to open foreign exchange settlement accounts to retain their foreign exchange income from such matters as goods exports and trade in services within certain limits, subject to the approval of the foreign exchange authorities. In 2002, the restrictions on the conditions for account opening were lifted, and all enterprises with foreign trade operation rights or foreign exchange revenue under the current account were allowed to open foreign exchange accounts under the current account upon the approval of the foreign exchange authorities. In 2006, the ex-ante approval procedures for account opening were cancelled, and the enterprises may now open foreign exchange accounts under the current account directly with the banks without the approval of the foreign exchange authorities.

Second, it raised the limit on the foreign exchange allowed to be retained in foreign exchange accounts. In 2002, the limit was 20 percent of the enterprises’ foreign exchange revenue under the current account during the last year. In 2004, the limit was raised to 30 percent or 50 percent. In 2005, the limit was further raised to 50 percent or 80 percent. In 2006, the original method whereby the limit was ratified only on the basis of the revenue that was changed, the limit was ratified on the basis of the sum of 80 percent of the foreign exchange revenue under the current account and 50 percent of the foreign exchange payments under the current account of the enterprises during the last year, thus, further raising the limit of foreign exchange that may be retained by the enterprises. In 2007, management of the account on the basis of such limits was cancelled, and enterprises began to be allowed to the keep foreign exchange on their own based on their operating needs.

In 2008, the amended Regulations of the People’s Republic of China on Foreign expressly provided that the enterprises and individuals may retain the foreign exchange in accordance with the relevant provisions or sell the foreign exchange to the banks. Since 2009, in order to further promote facilitation of trade and investment and to improve policy transparency, the foreign exchange authorities have energetically carried out a cleaning-up of the regulations, and announced that a total of over 400 normative documents concerning foreign exchange administration were repealed and invalidated. It was announced that the normative documents concerning compulsory foreign exchange settlement and sales would be repealed, invalidated, or amended. At present, all the policies and regulations concerning compulsory foreign exchange settlement and sales are no longer in effect and are no longer implemented.

Overall, the Compulsory Foreign Exchange Settlement and Sales System, as an administrative arrangement in the era of a shortage of foreign exchange, played an important role in supporting the development of the real economy and safeguarding the economic and financial security of China . As the foreign economy develops, the foreign exchange authorities have timely adjusted and abolished the Compulsory Foreign Exchange Settlement and Sales System, consistent with the concepts and purposes of foreign exchange administration keeping up with the times and serving the overall situation of economic development. In the future, foreign exchange administration will abide by the risk limits and further promote facilitation of trade and investment and actively serve the development of the real economy.