August 6, 2008 / 5:57 PM / in 11 years

FACTBOX - China's new forex rules

SHANGHAI, Aug 6 (Reuters) - China revised the basic rules governing its foreign exchange system on Wednesday for the first time in 11 years.

The changes are designed to cope with rapid growth in the country’s foreign reserves and increasingly heavy cross-border capital flows, the government said.

Here are major features of the new rules and key differences with the previous regulations. (for a related story, click [ID:nSHA279054])

CHINESE COMPANIES’ FOREX HOLDINGS

NEW RULES: Current account forex income can either be retained or sold to designated financial institutions.

OLD RULES: Current account forex income must be sold to designated banks or deposited in accounts at those banks.

OFFSHORE FOREX HOLDINGS

NEW RULES: No restrictions.

OLD RULES: All current and capital account forex income must be remitted to China, excluding income specially approved by the government.

INVESTMENT OUTSIDE CHINA

NEW RULES: Chinese companies and individuals conducting direct overseas investment, or issuing or trading overseas securities or derivatives, should register with foreign exchange authorities, and seek approval from government departments if required.

OLD RULES: Chinese require approval for foreign investment from government departments, which check the source of the funds.

FOREIGN INVESTMENT IN CHINA

NEW RULES: Foreign companies and individuals which want to issue or trade Chinese securities and derivatives should abide by Chinese market-entry regulations and register with foreign exchange authorities.

OLD RULES: No provisions for these activities.

NEW RULES:

* Authorities will conduct spot checks of forex business at financial institutions from time to time.

* Authorities can apply to courts to freeze assets in accounts found to have irregularities.

* Chinese companies conducting forex business must submit financial statements and data on the business to forex authorities.

* Financial institutions must report changes in clients’ forex income and payments to regulators.

* Illegal remittances of money outside China may face criminal charges.

OLD RULES: Less detailed provisions for supervision, focused on ensuring that export revenues are remitted into the country.

YUAN EXCHANGE RATE MECHANISM

NEW RULES: China operates “a managed float exchange rate system based on supply and demand”.

OLD RULES: China has “a single exchange rate system” with the central bank announcing the yuan’s value against major currencies on a daily basis. (Reporting by Lu Jianxin; Editing by Andrew Torchia)

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