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BIZCHINA / From the Watchdogs

China stops encouraging exporters to remit forex

(Reuters)
Updated: 2007-07-09 13:48

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it had rescinded, as of July 1, a set of rules dating back to 1999 that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.

(For more biz stories, please visit Industry Updates)

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