China to explore use of blockchain for financial regulation

The Chinese foreign exchange regulator is studying the possibility of using blockchain and artificial intelligence technologies to enhance cross-border trade financing and prevent capital flow risks, according to a senior official on Sunday.

New technology emerging in the financial service sector has drawn attention from Chinese financial regulators. Authorities have listed improving regulation using blockchain – a decentralized digital ledger system used increasingly in the financial industry – on the work task list.

“Besides the traditional financial business, foreign exchange (issues), and financial market, we should especially pay attention to the fast development of digital finance and fintech,” said Lu Lei, deputy head of the State Administration of Foreign Exchange (SAFE), at the Bund Summit, a forum held by finance think tank China Finance 40 in Shanghai.

The recent discussions on Facebook’s launch plan for Libra, its digital currency network, has also sparked interest in Chinese observers, who have spoken of its potential influence on monetary policy, financial stability and the global monetary system.

“When we have not yet figured out the development direction of a certain new technology, we should pay attention to risk control, which depends on efficient financial infrastructures,” said Lu.

He said the country will further open the domestic bond market – the world’s second largest.

The SAFE official disclosed more new measures to further facilitate free cross-border capital flows, considered key to continually opening the onshore financial sector. Measures include expanding the pilot program of qualified domestic limited partnership scheme, or QDLP, in Shanghai, to allow more qualified domestic institutions investment overseas.

The country is also preparing to introduce the renminbi interest rate options, a financial derivative instrument to hedge interest rate risks, and to encourage investors to use more foreign exchange rate option products, according to Lu.

On Friday, SAFE issued 12 new measures to further ease cross-border trade and investment regulatory rules, such as simplifying the procedure of receipts and payments for trade in goods for small cross-border e-commerce companies and canceling restrictions on the use of foreign exchange settlement in domestic asset transaction accounts.

The administration will also allow foreign non-investment enterprises to carry out domestic equity investment with their own capital, Wang Chunying, SAFE spokeswoman, said at a news conference Friday.

“Foreign foldings of some Chinese financial assets have rapidly increased,” said Richard Cantor, chief credit officer at Moody’s. “And we realized that the financial liberalization progress continues.

“China has removed the quotas on foreign investors’ purchases of domestic stocks and bonds through the QFII and RQFII in September, however, quotas were not used in full in the recent past and other reforms, such as the removal of a 10 percent limit for foreign overshore of A shares, which would be more meaningful to foreign investors,” said Cantor.