China Adjusts Forex Loan Management System

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Last updated at: (Beijing Time) Friday, December 20, 2002

China Adjusts Forex Loan Management System

The China State Administration of Foreign Exchange (SAFE) issued a circular Thursday announcing that a reformed management system for foreign exchange loans will take effect Jan. 1, 2003.

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China's foreign-exchange authorities Thursday announced an adjustment to the administration of the forex loan regime.

Commercial banks will take over some of the registration and monitoring functions in an attempt to improve regulatory efficiency.

Starting on January 1 next year, the lending bank - instead of the borrowing enterprise, as is the case now - will report forex loans to the State Administration of Foreign Exchange (SAFE). The bank rather than the administration will oversee related accounts, the administration said in a press release yesterday.

The adjustment only applies to Chinese banks lending to non-financial domestic institutions, it said. The rules governing other forex loans, including those that foreign banks provide to Chinese firms, will remain unchanged.

The simpler procedures will "help banks better manage and collect loans, promote the efficient use of domestic forex resources, ... help the SAFE shift its regulatory emphasis onto financial institutions, reduce administrative costs and improve the overall regulatory level," the administration said.

An official from the SAFE said: "Most importantly, this is a change in the regulatory mode. Banks have all the information (about borrowers), and we oversee banks. It's more efficient."

A forex manager with a major Chinese bank, who did not want to be named, said: "It means regulation is getting more flexible. We have greater latitude now, but we are also taking on greater responsibilities."

The move is also believed to be an effort to help Chinese banks utilize their growing forex deposits more efficiently by boosting lending.

Forex loans by domestic commercial banks dipped over the past few years largely due to lower lending rates on renminbi loans, while forex deposits kept growing.

Outstanding forex deposits with financial institutions in China (including foreign-owned ones) climbed by US$8.5 billion from the end of last year to US$148.4 billion at the end of November, according to official statistics.

But bank officials said the situation is changing as this year's interest-rate cuts, both in China and abroad, have made domestic forex loans more appealing than overseas bond issues and renminbi loans.

Competition among lenders has driven lending rates even lower, they said. China liberalized forex lending rates in 2000 but is still testing a rate-liberalization scheme for renminbi loans and deposits.

"Forex loans at my bank grew quite fast this year, as I know," said a manager with a Chinese bank.

The SAFE started trial operations of a similar reform in August last year. The administration said the trials were successful and backed the decision to launch similar measures nationwide.

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