Recently the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have jointly issued a circular on stopping the business of handling foreign exchange settlement. Starting from 27 May 2009, SAFE has ceased to handle forex settlement.
According to the circular, all local SAIC offices are required to apply to SAFE before 30 June 2009 for closing all forex settlement accounts. This signifies that the historic role played by SAFE as China's forex settlement agency will come to an end. Commercial banks will take over all forex settlement business in the country.
The circular also requires that all local SAIC offices complete the account clearing and closing procedures in strict compliance with the steps stipulated. After the local SAIC offices have completely closed their forex settlement business, they have to undergo a forex settlement business audit conducted by the central bank and SAFE. Before all this work is done, none of the personnel involved in the forex settlement business may be transferred from their posts.
It is understood that the call for SAFE to halt forex settlement business mainly stems from the need to give full play to market forces. Before, interbank forex settlement and clearing within the Chinese territory were mainly conducted through such channels as offshore agent banks, mainland agent banks and SAFE.
In July last year, China launched its first nationwide interbank forex real-time gross settlement system supporting several currencies and a number of clearing banks were chosen to do the settlement work. These included: the Industrial and Commercial Bank of China, the clearing agent for euro and Japanese yen payments in China; the Bank of China, the agent for US dollar settlement; the China Construction Bank, the agent for Hong Kong dollar settlement; and the Pudong Development Bank, the agent for the settlement of pound sterling, Canadian dollar, Australian dollar and Swiss franc.
In recent years, both China's economy and financial market have grown rapidly. With import and export trade, forex reserves and the number of financial institutions engaging in forex business all increasing, the volume of interbank foreign currency flows is huge. The lack of a unified interbank forex settlement platform has made it difficult for the demand of society for a highly efficient and secure forex settlement service to be met.
To regulate the forex settlement business, SAFE issued the circular on launching forex settlement business and its relevant detailed measures in 1994 and 2000 respectively. By July 2008, when China's nationwide forex settlement system was fully established, four mainland-funded banks - the Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Shanghai Pudong Bank - became the first batch of banks granted qualification to act as agent banks for settling forex payments in the mainland.
Under the old regulations, forex settlement business adopted the membership system. Financial institutions allowed to engage in forex business must obtain approval from their supervisory SAIC office before they could become forex settlement members. Local SAIC offices were responsible for providing a unified venue and platform for the conduction of forex settlement business.
Following the issue of the recent circular, SAFE and all its local offices will gradually withdraw from their previous role in handling forex settlement, while commercial banks will eventually fully take over forex settlement business within the Chinese territory.
