Generally, RMB was, and still is, convertible for current account payments. Before August 1998, no SAFE prior approval was required for these transactions. SAFE has had the right to verify the authenticity of the current account payments after they were made. In order to prevent illegal acquisition of Forex (Tao Hui, or "evasion of Forex") through uncontrolled current account payments, SAFE released another new regulation in August 1998 making certain current account transactions subject to its prior approval. Examples of these transactions requiring prior approval include: (1) early payment of imported goods more than 90 days ahead of delivery; (ii) advance payment of imported goods which exceeds 15% of the total contractual amount and which exceeds US$ 10,000; and (iii) payments to import duty-free equipment to be used by FIEs.
Another important change is that interest payments on Forex loans, which used to be viewed as a current account item, now require SAFE approval. For other ordinary current account payments, RMB is still convertible. However, the new rules require Chinese banks to double-check certain documents with various government authorities in fulfilling certain ordinary payments. This complicated process may cause unexpected delay.
The new regulations were aimed at easing what China hopes are short-term economic difficulties. However, for the time being, in restricting the outflow of Forex from China, they are complicating many transactions which may affect China's Forex reserves. On the other hand, recent news indicates that the Chinese Government will introduce measures to help foreign investors hedge their exposure to RMB denominated assets.