In January this year, the People’s Bank of China, or Central Bank, issued a notice that from March, local banks will need to register the source of funds when depositing and withdrawing more than $10,000 value in foreign currency from personal accounts. But early this week, the bank issued a “suspended implementation” announcement.
On its website, the People’s Bank of China issued an announcement on Monday, Feb. 21, that the “Administrative Measures for Customer Due Diligence of Financial Institutions and Preservation of Customer Identity Information and Transaction Records” originally scheduled to be implemented on March 1, 2022, was suspended due to technical reasons, and that relevant business shall be handled under the original regulations.
A representative of the People’s Bank of China stated that some small and medium-sized financial institutions proposed putting forward specific norms and requirements for different financial products and business models after the standards were released. In addition, financial institutions need to revise and improve internal management systems, information systems, business processes, and conduct personnel training. To this end, after research, it decided to suspend the implementation measures.
In late January, the People’s Bank of China and other departments issued a notice that commercial banks, rural cooperative banks, rural credit cooperatives, village banks, and other financial institutions that handle a single cash deposit and withdrawal of more than $10,000 in foreign currency from personal accounts must investigate the transaction as to its fairness and legality from March 1.
The policy would be a disaster for the Chinese economy
According to the official explanation, the move is to combat money laundering and strengthen the monitoring of capital flows. However, regarding the “suspend” announcement issued by the People’s Bank of China on Monday, Cai Shenkun, a financial scholar, said in an interview on Tuesday, Feb. 22, that it would, once the policy is implemented, be a disaster for the Chinese economy.
“The real vitality of China’s economy is the gray economy. There are many transactions with unknown components in the gray economy. If the loopholes in those transactions are completely plugged, China’s economy will become a stagnant pool and fully return to the same model of the planned economy of the past.”
The above-mentioned regulations started as a two-year pilot program with two provinces and one city as early as last July. Still, they were implemented only eight months later, in March this year. Cai Shenkun said that China’s economic development has a lot of rent-seeking costs and corruption factors. If these “lubricants” are lost, there will be no new growth points.
“It should be the central bank who realized the seriousness of the problem. They didn’t think before that there would be huge economic and even political consequences to rushing out such a policy. So at this time, the rush to stop may also be due to consideration of this aspect.”
Some scholars questioned the bank’s practice of requiring customers to deposit and withdraw $10,000 in cash for registration. They believed that it was a disguised restriction on citizens’ deposits and withdrawals, which involved substantial constraints on citizens’ property rights and relied on the administrative offices to issue notices to implement them, violating the basic principles of the legislation law.
Another expert believes that the bank requests depositors to explain whether the source and purpose of the funds are self-evident, which inherently means a “problem” with the source of citizens’ funds.
In this regard, Ms. Li, an employee of the Zhongshan Branch of the Industrial and Commercial Bank of China, said that the new measures monitor the flow of illegal funds.
“The most important thing is to prevent the deposit and withdrawal of hidden, illegal funds from unknown sources. Also, worry about too much outflow of funds because you withdraw cash, it is difficult for banks to control the flow of funds. Therefore, the new measures are easy to control the flow of funds.”
New measures would collapse the foreign trade system
Cai Shenkun said that most of China’s huge trades consist of small trades, “Its settlement is often paid in foreign currency from abroad, and RMB is used for domestic transactions. This method is common, and it is a rule of thumb, and the scale is huge. If a new supervision method is adopted, the entire foreign trade system will collapse.”
The financial scholar said that the bank’s new policy for customers to deposit and withdraw cash has little impact on ordinary customers. Still, for small enterprises that can bring vitality to China’s economy, it will lead them to abandon the banking system and switch to direct cash transactions, directly affecting the circulation of RMB, thus causing colossal damage to the Chinese economy.
For the SMEs affected by the epidemic, Chinese Vice Finance Minister Xu Hongcai said Tuesday that the scale of new tax cuts and fee reductions last year reached $170 billion. It focused on upgrading the manufacturing industry, developing small and medium-sized enterprises, and industrial and commercial households. The measures appear to reduce the Beijing authority’s revenue. Still, they can stimulate market vitality, driving new tax-related market entities to grow by 15.9% year-on-year during the period in exchange for economic growth and subsequent increase in fiscal revenue.