China’s State Administration of Foreign Exchange has announced that it will permit the cash as well as physical settlement of foreign exchange forwards as part of efforts to make the system more market oriented.
Forex forwards in the reminbi had previously been settled on a physical basis, which entailed the delivery of the currencies for a given contract upon its maturation.
SAFE’s latest announcement now permits cash settlement, which means that the counter parties may settle net cash flows between themselves.
The forex regulator previously allowed the use of cash settlement during the purchase foreign exchange forwards in 2016.
According to SAFE cash settlement will be denominated in the renminbi, as well as reference to real and effective on shore market exchange rates, while all foreign exchange forward contract will be conducted under the premise of the principle of real needs.
SAFE head Pan Gongsheng recently wrote an essay claiming that China’s cross-border capital flows were trending towards stability, and that the macro-prudential policies previously adopted have been fully neutralised.
Pan said that the next step would be for foreign exchange regulators to push for the balanced management of cross-border capital flow.
“In terms of management targets, we will rationally treat gains and increases in foreign reserves, stress the liberalisation of trade and investment, and on a foundation of increased convenience, achieved an evening out of the balance of payments.”