China’s foreign exchange policies and regulations are overseen by the State Administration of Foreign Exchange (SAFE), an agency under the direct leadership of the People’s Bank of China (PBOC). As China has grown into the world’s second largest economy and a major player in global trade and finance, SAFE has become increasingly important in managing cross-border capital flows and ensuring overall financial stability.

Introduction to SAFE

The State Administration of Foreign Exchange was established in 1979 as the State Administration of Exchange Control. It was later renamed to SAFE in 1996 as China moved towards current account convertibility and a managed floating exchange rate system.

SAFE is responsible for drafting rules and regulations governing foreign exchange transactions under China’s foreign exchange control regime. It oversees the balance of payments and manages official foreign currency reserves. SAFE also regulates and supervises banks and other financial institutions’ foreign exchange operations.

Some of SAFE’s major duties include:

  • Formulating foreign exchange policies in conjunction with the PBOC
  • Regulating foreign exchange receipts and payments
  • Managing China’s foreign exchange reserves
  • Supervising foreign exchange market operations
  • Overseeing cross-border capital flows and foreign direct investment
  • Combating money laundering and terrorism financing
  • Participating in international foreign exchange policy cooperation

Within China’s foreign exchange administrative system, SAFE works in coordination with other government agencies like the Ministry of Commerce (MOFCOM), National Development and Reform Commission (NDRC), and the China Banking and Insurance Regulatory Commission (CBIRC).

Evolution of SAFEPolicies

SAFE’s policies and focus have evolved significantly over the years as China gradually liberalized its foreign exchange system.

Cautious Opening in the 1980s-90s

In the 1980s, as China opened up its economy to foreign trade and investment, SAFE imposed strict controls on buying and selling foreign exchange. All foreign exchange transactions had to be approved by SAFE through a complex bureaucratic process. This was designed to conserve China’s limited foreign currency reserves.

During this period, the renminbi (RMB) was pegged to the US dollar at a highly overvalued official exchange rate. SAFE enforced stringent capital controls as China was wary of speculative capital inflows that could destabilize its fragile banking system. Residents and firms needed SAFE approval to hold foreign currency onshore or transfer funds overseas.

Managed Liberalization from the Late 1990s

China’s accession to the World Trade Organization (WTO) in 2001 was a watershed moment. SAFE gradually eased many restrictions on routine foreign exchange transactions. It abolished Foreign Exchange Certificates, unified the official and market exchange rates, and moved to a managed floating exchange rate regime.

SAFE began actively encouraging foreign investment inflows while monitoring short-term speculative capital. It streamlined regulatory approvals for current account foreign exchange transactions related to trade, services, travel, etc. SAFE also relaxed rules for firms to retain foreign currency earnings offshore.

However,China still maintained strict control over capital account transactions like overseas direct investment (ODI) and cross-border lending. SAFE aimed to find a balance between supporting economic development and maintaining financial stability.

Further Opening Up from 2009

The 2008 global financial crisis highlighted the need for further exchange rate and capital account liberalization. Starting 2009, SAFE accelerated the pace of RMB internationalization.

It allowed more flexibility in cross-border trade settlement and overseas direct investment in RMB. SAFE also permitted more channels for RMB cross-border flows like the Qualified Foreign Institutional Investor (QFII) program. Shanghai’s launch of an international board for trading shares denominated in RMB represented a major step.

SAFE continued pushing incremental reforms throughout the 2010s to gradually relax controls and expand channels for two-way capital flows. This was done to promote RMB internationalization and financial market development.

Key Focus Areas for SAFE

As China’s economy and global footprint grows, SAFE is prioritizing reforms and risk management in several key areas:

Foreign Exchange Market Development

SAFE supports the steady development of onshore and offshore RMB foreign exchange markets. Onshore, it is pushing for market-oriented interest rate and exchange rate reform to improve the mechanism for RMB rate determination.

Offshore, SAFE is promoting the internationalization of RMB through channels like the Cross-Border Interbank Payment System (CIPS) and direct trading between RMB and other major currencies. It is also increasing investment channels for foreign institutional investors.

Capital Flow Management

With rising cross-border capital flows, SAFE is balancing between liberalization and prevention of systemic financial risks.

It has tightened reporting requirements and oversight on suspicious cross-border transfers to crack down on irregularities. But SAFE is also gradually expanding channels for two-way portfolio investment by foreign institutions.

Prudent macroprudential management, differentiated treatment of capital flows, and orderly opening are key priorities.

Foreign Exchange Reserve Diversification

China’s foreign exchange reserves exceeded $3 trillion in 2020. SAFE is focused on diversifying reserves into other currencies and tangible assets to hedge against US dollar volatility risk.

It has increased gold reserves holdings significantly since 2019. SAFE is also ramping up Euro and Yen-denominated assets to optimize reserve safety, liquidity and returns.

RMB Exchange Rate Flexibility

SAFE supports the PBOC in improving the RMB’s exchange rate formation mechanism to make it more flexible and market-oriented.

It aims to facilitate two-way fluctuations in the RMB rate based on market supply and demand. This will also help China meet IMF requirements for SDR basket inclusion and avoid criticism of currency manipulation.

Forex Risk Management

With closer global integration, Chinese firms face growing balance sheet risks from foreign currency exposure. SAFE has taken measures such as encouraging enterprises to hedge forex risks through derivatives while warning against speculative activity.

It is also pushing banks to strengthen forex risk management and provide hedging products and solutions to high risk sectors.

SAFE Organizational Structure

SAFE has a functional organizational structure aligned to its major responsibilities governing cross-border transactions and foreign exchange flows.

High-Level Departments

SAFE is headed by the SAFE Administrator who is appointed by the Premier of the State Council. Under the leadership team are several high-level departments:

  • General Affairs Department – Coordinates administrative functions
  • Legal Affairs Department – Drafts FX rules and regulations. Conducts enforcement investigations into violations.
  • Policy Research Department – Researches trends in foreign exchange management and formulates policy proposals.
  • Balance of Payments Department – Collects and compiles balance of payments data. Conducts analysis on FX flows.
  • Reserve Management Department – Manages China’s official foreign currency reserves.

Regional Supervision

SAFE has over 40 regional offices in China’s provinces, autonomous regions and special economic zones. These offices supervise foreign exchange collection, payments and market transactions within their geographical purview.

They serve as an important bridge between SAFE headquarters and local enterprises, banks and other institutions that engage in foreign exchange activities.

Regulatory Bureaus

Several bureaus oversee different aspects of foreign exchange regulation:

  • Current Account Management Bureau – Formulates policies on trade, services, travel,etc. related FX flows.
  • Capital Account Management Bureau – Regulates cross-border capital, direct investment, lending, securities investment, etc.
  • Foreign Exchange Market Management Bureau – Oversees interbank FX market, bank trading operations, risk controls, etc.
  • Foreign Exchange Reserves Management Bureau – Responsible for reserve asset allocation, risk management and operations.

Major SAFE Regulations

SAFE periodically issues new regulations and notices to govern foreign exchange activities in line with China’s policies. Some key regulations enforced by SAFE include:

Foreign Exchange Administration Rules

First issued in 1996, these Rules establish China’s foreign exchange regulatory framework and penalties for violations. They delineate SAFE’s role in drafting forex regulations and enforcing control measures.

The Rules also codify approval requirements for foreign currency purchases, overseas fund transfers and other cross-border transactions. They have been regularly amended to keep pace with policy changes.

Administration of Foreign Exchange for Cross-Border Guarantees

Issued in 2009, this regulation governs overseas guarantees provided by domestic institutions for offshore lending and business activities.

It stipulates conditions for Chinese banks and enterprises to provide forex guarantees, approval procedures, and required risk controls. This prevents build up of excess hidden debt obligations.

Administration of Foreign Exchange for Overseas Direct Investment

First released in 2009, this regulation covers ODI application, verification, registration, fund transfers, and profit repatriation. It standardizes ODI approval based on factors like sensitivity of the destination country and industry.

The regulation also governs overseas funding operations and cross-border transactions between parent firms and overseas subsidiaries.

Administration of Foreign Exchange for Domestic Individuals

Issued in 2007, this regulation liberalized restrictions on individuals’ foreign currency holdings, overseas investments, etc. to support growing private wealth.

It increased the limits for individual foreign exchange purchases. Citizens also no longer needed SAFE approval for many routine transactions like overseas tuition payments.

Impact of SAFE Policies

SAFE policies have far-reaching impact on China’s global integration, financial development and economic growth:

Supporting Trade and Investment Growth

By steadily reforming and simplifying approval-based FX controls, SAFE has enabled rapid expansion in cross-border trade, services, and two-way investment over the past decades.

Macroeconomic Stability

SAFE regulations have maintained general balance of payments equilibrium and avoided destabilizing capital flows even as external shocks caused short periods of deficits. This has supported China’s economic development and financial stability.

Gradual Financial Opening

While imposing prudential limits on risky flows, SAFE has nonetheless nurtured the gradual development of onshore forex derivatives, outbound portfolio investment channels, and RMB internationalization.

Compliance Burden on Firms

However, opaque SAFE approval processes impose heavy compliance burdens on Chinese enterprises engaged in global business. Sudden rule changes disrupt operations and add uncertainty.

Opportunities and Challenges Ahead

SAFE faces major strategic challenges in coming years as China balances greater global financial opening with risks:

RMB Internationalization

Further progress on major goals like expanding RMB’s global usage and facilitating two-way portfolio flows requires significant SAFE reforms on multiple fronts.

Rising Cross-Border Risks

Issues like dollar shortages at banks, growing overseas debt hidden from regulators, and disguised illicit outflows increase financial stability risks as flows multiply. SAFE needs to balance liberalization with more vigilant data-driven oversight.

Policy Coordination

As the economy becomes more complex, SAFE has to coordinate better with other agencies like PBOC and financial regulators to ensure consistent policies.

Talent and Technology

SAFE must keep attracting expertise in macroeconomics, capital markets, derivatives, etc. It also needs major tech upgrades to enable real-time monitoring of cross-border flows and risks at the enterprise level.


China’s State Administration of Foreign Exchange plays a vital role in the economy by regulating cross-border transactions, managing reserves, and supporting RMB internationalization. As China continues opening its financial system, SAFE will need to strike a balance between facilitating growth and minimizing risks through prudent reforms. With the right strategies, SAFE can help secure China’s influence in global finance and trade in the coming decades.