News updates: China Flexes Financial Interests Reporting Muscle

Late last year, China’s Premier Li Keqiang signed into law an Order of the State Council announcing the amended financial interests reporting requirements, “Measures for the Reporting of Statistics on International Receipts and Payments”, taking effect on 1st January 2014. Unbeknownst to Mr Li, his predecessor Mr Wen Jiabao would be having some hard time explaining his own family interests. 

The amended measures increase the reporting burdens of PRC residents and non-residents alike, and have the apparent objective of better monitoring the national economic transactions. Inadvertently, the amendments may also have the effects of discouraging offshoring of assets, or more likely, encouraging the emigrations of its wealthy citizens.

Administered by the State Administration for Foreign Exchange (SAFE), the new measures were amended to include the following major changes:

1. Expanded reportable range to include “PRC Residents’ foreign assets and liabilities”

2. “PRC non-residents” obliged to report their economic transactions in China

3. Institutions based in China that provide registration, clearance, and custodial services required to report their economic transactions

4. New confidentiality and data protocols for reporting entities

5. Clarified penal regulations 

The new measures were in line with the latest international guidelines for recording cross-border transaction, as set out in the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) released by the International Monetary Fund (IMF) in 2009.

For PRC non-residents working or living in China, regards should be had to their new obligations to report their economic transactions. “PRC non-residents” for purposes of the new requirements include natural persons who have lived in China for less than a year, not including foreign students, medical personnel, foreign staff at embassies in China and their families.

The confidentiality and data protocols for entities that report their transactions in accordance with the new requirements are added to the amended rules. The previous measures only required that the data collected shall be only used for the purpose of statistic analysis relating to “international receipts and payments”. A new requirement for banks, traders and other financial institutions that provide registration, clearance and custodial services is that from now on they shall maintain strict confidentiality in the course of collecting and reporting the information.

The amendments also pose new challenges to the SAFE which is responsible for the implementation and compliance of the amended requirements. The SAFE is expected to amend its existing reporting system for direct reporting of offshore financial assets and debts to accommodate the new changes at the lowest administrative costs possible.

The Chinese government has a legitimate economic goal in mind in issuing the new measures. A lesson was gleaned from recent international financial crises: countries will be able to formulate better-informed economic policies if they have more accurate and complete information of economic transactions within their own realms. In light of this, these new requirements were introduced in response to new challenges and significant changes in the international economic and financial environment since the original measures were released in 1995.

Recording economic transactions aside, anti-corruption may also be on the mind of policy makers. Ironically, shortly after the signing of the amended measures, it was revealed that the government itself may be engaged in shady offshore deals. The International Consortium of Investigative Journalists, an international network for reporters, exposed the use of secretive entities in tax havens by China’s political elites and executives of state-owned companies, including the son-in-law of the former premier Wen Jiabao. They have ever since been embroiled in corruption scandals. This is all the more controversial in a country whose citizens are increasingly angered by widespread corruptions and widening wealth inequality.

Whether the new measures are a precursor to China’s future muscle flexing to rival the power of FATCA of the US to impose taxes on foreign assets in a regulatory arms race remains to be seen. All those can happen in the name of social harmony. As Mr Wen put it 3 years ago, “If in a country, most of the wealth is concentrated in the hands of the few, then this country can hardly witness harmony and stability.”