China stops encouraging exporters to remit forex

Updated: 2007-07-10 08:31

China has scrapped a set of rules that provided incentives for exporters to bring home as much foreign currency as they could, signifying another step in its efforts to ease capital inflows.

In the wake of the Asian financial crisis in the late 1990s, China introduced a series of measures encouraging exports and inflows of foreign exchange, to help boost its financial footing.

Its capital and current account surpluses have since soared, and the central government is now trying to reverse the situation to ease the upward pressure on the yuan created by such inflows.

The State Administration of Foreign Exchange (SAFE) said on Monday that it had rescinded, as of July 1, a set of rules dating back to 1999 that had provided incentives for exporters to exchange their forex earnings with banks in a timely manner, as well as punishments for those that did not.

The agency said that while the rules had been appropriate at the time and played a big role in encouraging the country's accumulation of foreign exchange, they were now being cancelled "in line with the present needs of economic development".

The rules had allowed for preferential treatment in customs procedures and bank lending for export firms with good track records in remitting foreign exchange, and penalties as severe as revoking of export licenses for the worst offenders.

The removal of such incentives complements initiatives to encourage capital outflows, such as the Qualified Domestic Institutional Investor (QDII) scheme, which allows financial institutions to invest client funds overseas.

Economists say that with massive inflows of foreign currency from the trade surplus and investment, it will be increasingly difficult for the central bank to control growth in money supply if it continues to attempt to keep the yuan from appreciating too sharply.

The foreign exchange regulator has accordingly been adjusting its supervision of capital flows, stepping up oversight of speculative inflows betting on yuan appreciation while also making it easier for companies with good track records.

To that end, SAFE last year earmarked 5,300 firms as "needing special attention" -- meaning they were suspected of dealing in "hot money" through disguised trade flows.

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