Legal Regulations On Cross-border Capital Flows

In the process of financial liberalization and globalization, cross-border capital flow more and more increasingly and frequently in the world, pushing forward the development of manufacturing and financial industries in every country. As a member of the WTO, China has gradually reduced restrictions on market access as well as improved market transparency, and continues to reduce the threshold of cross-border capital into China. China’s rapid development in recent years has enhanced the attractiveness of its national market, so more foreign capital flows into our country, including some short-term abnormal capital flows (called "hot money") which are hard to control. The hot money could pose a potential economic crisis and bring financial security risks. Therefore, this paper tries to deal with these unusual short-term cross-border capital flows, which flows into China in unusual ways by making use of our foreign exchange regulation.Chapter Ⅰ explains the definition of cross-border capital flows. UNCTAD has published the annual amount of foreign direct investment flows and merchandise trade. Hot money is part of the short-term capital flows, and it has no fixed investment area. It has high risk and fluidity, and usually is controlled by institutional investors and transnational corporations. So it is a potential risk for financial industry. The international regulations of cross-border capital flows are usual indirect and abstract, such as Agreement of IMF and Basel Ⅲ. So the direct and effective way is to examine the nation regulation, especially the foreign exchange regulation. China now implements free convertibility of current account and limited convertibility of capital account. Due to the BITs China has signed with other countries, foreign direct investment and its profits are free to exchange.Chapter Ⅱ introduces the way to calculate the amount of hot money. A large sum of hot money may influence RMB exchange rate policy and affect our securities and real estate price. The 2012 Monitoring Report announced by China’s Administration of Foreign Exchange analyses the constitution of hot money, and points out that it is difficult to get an accurate number of hot money, so the data is only for reference. Hot money flows in a variety of ways, such as false trade, transfer price, false foreign debt and investment profit. There are also some illegal ways such as illegal private bank and currency smuggling.Chapter Ⅲ introduces our national regulation system, including the laws and regulations and the institutions that apply these regulations. Our law consists of foreign exchange regulation, bank law, securities regulation and other department rules, most of which are published by China Administration of Foreign Exchange. These departments and other organizations such as CBRC, CSRC jointly monitor and control the cross-border capital flows. This chapter discusses the regulation of current account and capital account respectively.Finally, Chapter Ⅳ contemplates the suggestions in order to improve our regulation system. Current regulations should be integrated and foreign exchange regulation should be reformed that based on the body of capital. Banks, especially those appointed foreign exchange bank should impose strict internal rules to withstand risks. China’s Administration of Foreign Exchange must integrate monitoring projects, share information with banks and customs. Foreign capital should be controlled to flow into securities and real estate markets.