PBoC Scrutinizes Cross-Border Transactions, Says Banks Increasingly Using SWIFT

Originally posted on July 28, updated with English coverage below.

The PBoC is strengthening supervision of cross-border financial transactions as yuan depreciation expectations pick-up and as monetary and fiscal stimulus policies are about to hit the economy, potentially attracting hot money from overseas. The announcement says domestic financial institutions are making greater use of the SWIFT system, not China's CIPS alternative, for cross-border transactions.

The full announcement can be seen here: 央行重磅发布！关于加强跨境金融网络与信息服务管理的通知！

As China's financial industry continues to deepen its opening up, Chinese banking financial institutions (hereinafter referred to as domestic users) are increasingly using overseas institutions such as the Global Banking Financial Telecommunications Association (SWIFT) (hereinafter collectively referred to as overseas providers). Cross-border financial networks and information services. In order to maintain cross-border financial networks and information security, and comprehensively implement financial market infrastructure supervision to effectively prevent systemic financial risks, the notice on strengthening cross-border financial networks and information service management will be notified as follows......

Zaobao summarizes the announcement: 中国央行加强跨境金融网络与信息服务管理

The People's Bank of China issued a notice on strengthening the management of cross-border financial networks and information services on Friday. The central bank, based on the macro-prudential management needs, conducts an assessment of the matters reported by overseas providers and the reporting of domestic users.

According to Reuters, the notice stated that overseas providers should not build special financial networks in China to provide financial information transmission and other services. An offshore provider may authorize an institution established in China to perform relevant reporting obligations.

The notice requires that overseas providers and domestic users should join the China Payment and Clearing Association and accept industry self-discipline management. The China Payment and Clearing Association shall, in accordance with the requirements of this Notice, formulate and improve the self-regulation of cross-border financial networks and information service industries, establish cross-border financial networks and information services risk protection and self-discipline and disciplinary mechanisms, and effectively safeguard member institutions in cross-border networks and information services. Legal rights.

The cross-border financial network and information services referred to in this notice refer to overseas providers providing services such as cross-border financial information for domestic users through special financial networks and using specific message standards. Domestic users and overseas providers shall abide by the laws, administrative regulations and relevant regulatory provisions of the People's Republic of China, and jointly defend against cyber attacks and maintain cross-border financial networks and information services in accordance with the service agreements signed by the two parties.

Here's an "unrelated" article discussing how Chinese SOEs have begun relying on overseas financing channels.

JRJ: 中央企业跨境融资政策运用分析与实践

Changes in cross-border capital flows have driven the capital account convertibility process, and the capital account convertibility process has created new opportunities for cross-border financing. “No. 9 Document” allows non-financial enterprises to establish a financing relationship directly with overseas financial institutions by using the net capital as the upper limit of the calculation, so that the overseas financing costs of enterprises are more transparent, and the funds are allowed to be transferred back to the territory and used for settlement within a reasonable use. The supplement of working capital opens up new channels.

Comparing and analyzing the comparable costs of the same currency and the same-term financing in the domestic and overseas financing markets since 2011, it can be divided into three stages.

Before 2014, "there was a clear distinction between the two." Integrated cross-border financing costs (including interest rates, exchange rates locked and withholding taxes) relative to the same period the territory of RMB financing cost advantage is obvious, but as mentioned earlier, quite a long time prior to 2014, our country in order to "control the inflow" for the Foreign Exchange Management The main tone, cross-border financing inflows and capital account convertibility are limited, funds cannot be repatriated, and domestic and overseas financing is still in isolation.

In 2014, “inflows into reforms and gradually became in line”. The domestic interest rate decline in the renminbi is obvious. After the renminbi continues to appreciate, the swap point gradually rises. At the same time, the reform of foreign exchange inflows has entered the fast lane, and the inflow of reforms has pushed domestic and foreign financings closer together, and domestic and foreign financing rates have gradually tended to converge.

After 2015, “both in parallel, seeking a window”. From 2015 to 2017, the cross-border financing window appeared in stages, and its causes were relatively complicated, but it provided an operational window for enterprises to reduce financial expenses through cross-border financing.

...The swap process is for the enterprise to transfer the foreign currency principal to the domestic bank on the transaction start date and obtain the RMB principal. Subsequently, the RMB interest and principal are repaid to the domestic bank on schedule, which is equivalent to the ordinary RMB interest-bearing loan. After the domestic bank obtains the foreign currency principal on the transaction start date, it will pay the foreign currency interest and principal to the enterprise on schedule according to the agreement, and the enterprise will immediately transfer it to the overseas bank to complete the foreign currency loan interest payment.

...In the transaction, the interest rate and exchange rate risk of foreign currency loans have been circumvented, but during the duration of cross-border financing, exchange gains and losses in accounting still exist.

The general principle of valuation accounting is to repay the foreign currency debt at the current market conditions and prices and to close the cross-currency interest rate swap transaction at the time of the statement. The company will use the cost or income obtained as the measurement standard. Foreign currency floating rate debts are measured at amortized cost and converted at current exchange rates to form exchange gains and losses. For the measurement of cross-currency interest rate swaps, the valuation is included in derivative financial instruments and gains and losses from changes in fair value. The fair value of the cross-currency interest rate swap is calculated by discounting the subsequent principal and interest cash flows.

To sum up, with the support of the full-caliber cross-border financing macro-prudential management policy, enterprises can comprehensively select commercial banks with strong domestic and overseas coordination capabilities, capital costs and transaction costs to establish credit cooperation, and choose overseas based on market window. Financing is a useful complement to the company's funding needs.

China has implemented strict capital controls and tight credit regulations. Use of the SWIFT system is rising. Occam's razor says Chinese have found a way around those regulations.

Updated

Yicai: PBOC Demands ID Check for Over USD1,000 Overseas Transfers to Stop Money Laundering

China’s central bank is tightening up capital controls to verify transfers that exceed USD1,000 to stop money laundering and has already fined firms failing to comply with the new rules.

The People’s Bank of China released four policies to stop criminally inclined capital outflows on July 26, after which it has fined some of China's securities firms, insurers and third-party payment platforms such as Alibaba's Alipay and Tencent's Tenpay for related wrongdoings.

The scope of the four notices included identity verification, the scale of cross-border payment transactions, management of high-risk businesses susceptible to money laundering or terrorist financing, as well as safekeeping of transaction records. In addition to financial institutions, also real estate developers and accounting firms must report to the central bank.

Regarding cross-border payments worth more than CNY10,000 (USD1,470) or USD1,000, or alternatively an equivalent amount in another foreign currency, the PBOC requires institutions to record the payers’ ID credentials and verify their personal information.

PBOC fined Alipay and Tenpay CNY600,000 (USD87,900) each on July 24 for processing cross-border payment transactions beyond the approved business scope, incorrect filings of these payments, and failures to report risks.