Regional Focus

In SAFE hands

Published: Jan 2015
Padlock on door

Based in Beijing, China’s State Administration of Foreign Exchange (SAFE) has responsibility for monitoring the country’s balance of payments and foreign exchange positions. Its duties include: participating in the drafting of laws concerning foreign exchange administration, monitoring external credit and debt and cross-border capital flows and managing the foreign exchange reserves, gold reserves and other foreign exchange assets belonging to the State.

How the SAFE came into being

Until 35 years ago, there was no state authority specifically tasked with the management of foreign exchange in China. In fact, the Bank of China had for a long time looked after the country’s foreign exchange management. But in the spirit of Chinese economic reform under Deng Xiaoping, in February 1979, the People’s Bank of China (PBoC) put forward a reform programme for Bank of China that would see the creation of what we now know as the State Administration of Foreign Exchange.

The overall aim of Deng Xiaoping’s economic reforms was to open the country up to the outside world and to reverse the Maoist commitment to the ideal of self-reliance (although many were opposed to this radical change in cultural values). China was keen to purchase foreign equipment and technology in order to modernise its economy, but this so-called ‘opening up’ also led to foreign exchange inflows through tourism, exports, and arms sales. The PBoC quickly recognised the importance of establishing an entity to deal with the new foreign currency flows the country would be exposed to and the decision was taken to create the State Administration of Exchange Control (renamed in 1996 to be the State Administration of Foreign Exchange) as a separate entity from the Bank of China, although both would still be part of the larger PBoC.

In March 1979, the Chinese authorities also introduced a foreign exchange retention system as a means of providing incentives to exporters. Under this system, domestic exporters were permitted to retain a certain portion of their foreign exchange earnings, which could be used to import goods over and above the state import plans. Nevertheless, the official exchange rate that the country operated under made exporting expensive, and it became clear that something needed to change.

Soon, the authorities introduced a RMB Internal Settlement Rate (ISR) effective from 1st January 1981. According to a paper by Lin Guijun, School of International Trade and Economics, University of International Business and Economics, Beijing and Fulbright Scholar, Department of Economics, Columbia University, New York, “The ISR would cover trade-related foreign exchange transactions. At the same time, the authorities also retained the more appreciated official exchange rate to cover mainly non-trade foreign exchange transactions such as overseas Chinese remittance, tourism, expenditure by foreign diplomatic and business representative offices in China and Chinese diplomatic and business offices abroad, foreign investments, and foreign trade transportation and insurance charges. The adjustments to the official exchange rate were determined by the changes in the value of a basket of currencies.”

Major functions of the SAFE

  1. To study and propose policy suggestions on the reform of the foreign exchange administration system, prevention of the balance of payments risks, and promotion of the balance of payments equilibrium; to study and implement policy measures for the gradual advancement of the convertibility of the RMB under the capital account and the cultivation and development of the foreign exchange market; to provide suggestions and a foundation for the People’s Bank of China to formulate policy on RMB exchange rate.
  2. To participate in the drafting of relevant laws, regulations, and departmental rules on foreign exchange administration, releasing standard documents related to the carrying out of responsibilities.
  3. To oversee the statistics and monitoring of the balance of payments and the external credit and debt, releasing relevant information according to regulations and undertaking related work concerning the monitoring of cross-border capital flows.
  4. To be responsible for the supervision and management of the foreign exchange market of the state; to undertake supervision and management of the settlement and sale of foreign exchange; to cultivate and develop the foreign exchange market.
  5. To be responsible for supervising and checking the authenticity and legality of the receipt and payment of foreign exchange under the current account according to law; to be responsible for implementing foreign exchange administration under the capital account according to law, and to continuously improve management work in line with the convertibility process of the RMB under the capital account; and to regulate management of overseas and domestic foreign exchange accounts.
  6. To be in charge of implementing supervision and checking of foreign exchange according to law, and punishing behaviours that violate the foreign exchange administration.
  7. To undertake operations and management of foreign exchange reserves, gold reserves, and other foreign exchange assets of the state.
  8. To arrange development planning, standards, and criteria for IT-based foreign exchange administration and organising relevant implementation; to realise supervision of information-sharing with the relevant administrative departments according to law.
  9. To take part in relevant international financial activities.
  10. To undertake other matters as assigned by the State Council and the People’s Bank of China.

Source: The State Administration of Foreign Exchange

The ISR was operational until 1984, when the challenges caused by a dual exchange rate system became too much and the Chinese authorities gave in to pressure from the International Monetary Fund to abolish the ISR. This marked the beginning of the next round of reform, which although too wide-reaching to explain in this article, saw the establishment of a foreign exchange swap market in China.

A series of further reforms saw the country work towards current account convertibility, whilst also laying some of the groundwork for capital account convertibility. In 1994, for example, China reformed its foreign exchange system, combining the renminbi exchange rates, and launching the China Foreign Exchange Trading System (CEFTS) – a unified inter-bank foreign exchange market.

Then, on 1st December 1996, after a series of pilot schemes, as well as the promulgation of the “Regulation on Foreign Exchange Sale, Purchase and Payment,” China formally accepted Article Eight of the IMF’s Agreement on International Currencies and Funds, and realised the goal of current account convertibility. To mark this milestone and herald the beginning of a new era, the State Administration of Exchange Control was renamed the State Administration of Foreign Exchange.

Since then, we have seen a greater variety of financial businesses being established in China. New sub-sectors have also been introduced into the Chinese financial industry such as consumer credit, securities investment funds and investments linked with insurance.

Then and now

Today, the SAFE is a deputy-ministerial-level state administration. Apart from its Communist Party of China (CPC) Committee, the SAFE Head Office consists of eight functional departments. These are:

  1. General Affairs Department (Policy and Regulation Department).
  2. Balance of Payments Department.
  3. Current Account Management Department.
  4. Capital Account Management Department.
  5. Supervision and Inspection Department.
  6. Reserves Management Department.
  7. Human Resources Department (Internal Auditing Department).
  8. Science and Technology Department.

There are also four institutions affiliated with the SAFE, including the Central Foreign Exchange Business Centre, Information Centre, General Services Centre, and the Editorial Office of the Foreign Exchange of China journal.

Branch network

According to its website, the SAFE sets up branches and administrative offices in different provinces, autonomous regions and municipalities either directly under the Central Government or with a vice-provincial status. In addition, the SAFE establishes a number of central sub-branches and sub-branches in some cities and counties across China. As of the end of 2013, the SAFE network consisted of the following:

SAFE network Number of institutions
Branches (administration offices) 36
Central sub-branches 307
Sub-branches 519

Elsewhere, the SAFE has a subsidiary in Hong Kong called the SAFE Investment Company which was formed in 1997. Another avenue for managing the country’s growing foreign currency reserves (see Chart 1), the fund is able to invest in a wide variety of instruments including foreign and domestic equities and fixed income securities.

SAFE also has subsidiaries in Singapore, London and New York. The newest of these is the US branch, which analysts believe invests mainly in private equity, real estate and other alternative asset classes.

Chart 1: Scale of China’s foreign exchange reserves ($100m)


Source: PBoC website

People behind the institution

In early 2014, the financial press was shocked to learn that Zhu Changhong, an American-trained fund manager who returned to his native China to help invest the world’s largest foreign exchange reserves, had left his position as Chief Investment Officer at the Beijing office of the State Administration of Foreign Exchange.

One of Zhu’s main tasks had been to assist with finding alternative investments that offered similar safety and security to US Treasuries. The Wall Street Journal, reporting on Zhu’s departure, noted that “In June 2010, just after Zhu started at the agency, about 45% of China’s reserves, or $1.11 trillion, were invested in US government bonds, according to an analysis by ChinaScope Financial, a provider of financial data. Since then, China’s overall purchases of US debt increased, but Zhu steadily helped reduce the percentage devoted to Treasuries to about 35%, or $1.29 trillion, in September 2013, the most recent figures available.”

Although both sides declined to comment on the departure, some analysts cited internal politics as a catalyst. And Yi Gang, Deputy Governor of the People’s Bank of China (PBC) and Administrator of the State Administration of Foreign Exchange (SAFE), is no stranger to this. Professor Yi Gang has long argued that China should slow the growth of the country’s foreign reserves or even reduce them. He has suggested allowing the market to play a bigger role in determining China’s exchange rate, for example. But these suggestions have largely fallen on deaf ears.

Other key members of the SAFE’S Management Team include Deng Xianhong, Fang Shangpu, Wang Xiaoyi and Li Chao – all of whom have the title ‘Deputy Administrator of the State Administration of Foreign Exchange (SAFE)’. Finally, Yang Guozhong is the Head of the Discipline Inspection Group of the CPC Leadership of the State Administration of Foreign Exchange. Their biographies (which can be found on the SAFE’s website certainly make for impressive reading.

Behind closed doors

What this management team discusses inside the SAFE is, unsurprisingly, largely secret. While the size of the country’s foreign exchange reserves may be public knowledge, for example, analysts can only speculate on how they are invested. One area where there is a great deal of communication around the SAFE’s activities, however, is on updates to often highly detailed rules and regulations. Treasurers operating the region will be more than familiar with the institution’s circulars which inform them of the latest changes.

And in recent months, some of these changes have been extremely high profile. As of 1st June 2014, for instance, companies based anywhere in China can establish, with relative ease, centralised foreign currency cash management programmes. While MNCs who accumulate foreign currency onshore previously had the ability to perform two-way transactions independent of the Shanghai Free Trade Zone (SFTZ), the latest measures ease the documentary burdens that were limited to approved companies.

Now, there is no longer a need for each individual entity to submit supporting documents to the SAFE for each and every trade transaction. Instead, qualified multinationals in China can set up a payment-on-behalf-of (POBO) or receipt-on-behalf-of (ROBO) structure simply by filing a single request at their local SAFE branch. The local SAFE branch co-ordinates the filing with the SAFE HQ and certification process in the specified time frame.

This easing of the rules was seen as a huge step forward – not only for the corporates, but also for the SAFE – which is often criticised for its slow and onerous procedures and for stretching the ‘phase by phase’ approach to deregulation too far. But in the SAFE’s defence, with the significant burden of responsibility on its shoulders, it is understandable that the regulator wants to be thorough – and the detailed nature of the SAFE’s rule changes is often easier for treasurers to follow than the somewhat ‘grey’ announcements from the PBoC.

Getting the most out of the SAFE therefore requires patience and understanding. It also requires a good relationship – the SAFE (and the PBoC for that matter) operates in consultation with banks and corporates. Therefore, having the right lines of communication, whether through your bank, or direct with the regulator, can be a significant advantage in building an effective treasury function in China.

As PWC says in its guide to doing business in the country, “Companies in good standing with SAFE may have better insight into managing the approval process and may be able to contribute to new policies as they are developed and introduced. In addition, as the government is inclined to experiment with new liberalisation policies, working closely with SAFE may provide some perspective, in assisting SAFE in its reform efforts, while also improving treasury’s effectiveness.”

Contact details:
State Administration of Foreign Exchange
Huarong Plaza
No.18 in Fucheng Road
Haidian District
Informants’ hot-line: +86-10-68401188

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