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China’s FX Regulator Reprimands Nine Banks For Irregularities

The foreign exchange regulator in China has taken the rare step of penalizing banks for irregularities related to cross-currency transactions.

According to an official statement, these banks were negligent in monitoring transactions that involved movement of capital offshore.

The State Administration of Foreign Exchange (SAFE) stated last week that local branches of nine banks had failed to stop violations of existing capital laws in several transactions amounting to nearly $360 million.

SAFE has imposed penalties on banks in the past as they were involved in fake deals with firms and individuals as well as relying on underground banks to carry out transactions. However this is the first time that the regulator has published the names of the banks and their wrongdoings.

One of the branches of Industrial Bank Co. failed to carry out a thorough due diligence for 15 trade deals worth $162 million, which later turned out to be fake. The regulator has levied a fine of 900,000 yuan ($133,470) on the erring bank.

More than 12 employees at China Minsheng Bank purchased foreign exchange from their annual quota in order to provide it to an executive working at the branch and the executive’s friends.

Some of the other banks that were disciplined include Agricultural Bank of Chinaand Bank of Ningbo Co. Since last year, SAFE has established a comprehensive program to stem the outward flow of capital as a measure towards boosting the yuan value and protecting the country’s foreign exchange reserves. .

The yuan fell by over 6 percent against the dollar in 2016, the sharpest drop since 1994 for the currency. As the central bank sought to bolster the yuan, reserves took a beating and fell below the $3 trillion. The yuan and the reserves have since rebounded, but Chinese authorities are keen to maintain their control on capital movements in the country.

According to the commerce ministry’s data, China’s non-financial outbound direct investment (ODI) was down by nearly half in the first six months of 2017. SAFE released a statement which said that it will be continuing its crackdown on foreign exchange violations and underground banks in order to mitigate risks from cross-border capital flows.

SAFE said that it will continue to support and encourage legitimate overseas investments made by domestic firms as well as the country's ambitious international project known as ‘One Belt And One Road’. The regulator has also reaffirmed its intention to support the opening up of the Chinese markets to foreign investors in a steady manner.

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