Question: Please introduce China ’s balance of payments status in the first half of this year.

Answer: According to the preliminary statistics, China ’s balance of payments status in the first half of this year continued to improve. First, receipts and payments under the current account more closely approached an equilibrium. In the first half of the year, the current account surplus was USD83.2 billion, a year-on-year decrease of 5 percent, and the proportion of the current account surplus to GDP was 2.3 percent, a decrease of 0.5 percentage points compared with that in the last year. Second, cross-border capital flows presented a bi-directional change. In the first half of the year, the deficit in the capital and financial account (including net errors and omissions, the same below) was USD20.3 billion. In the first quarter, as the international market environment recovered, international capital flowed back into China , and in terms of the capital and financial account, there was a surplus of USD51.1 billion compared with the USD48 billion deficit registered in the fourth quarter of 2011. In the second quarter, there was again a net outflow of USD71.4 billion due to the combined influence of domestic and foreign factors. Third, the increase in foreign exchange reserves slowed down. In the first half of the year, the capital account deficit and the current account surplus offset each other, reserve assets calculated on the basis of the balance of payments coverage (excluding the influence of changes in non-trade value, such as the exchange rate and price) only increased by USD62.9 billion, with the growth rate decreasing by 78 percent compared with the same period of the last year; of this foreign exchange reserve assets increased by USD63.6 billion, with the growth rate decreasing by 77 percent compared with the same period of last year.

Question: In the first half of the year, there appeared to be a deficit under the capital account of China . Does this mean that a large volume of foreign capital was withdrawn from China ?

Answer: In the first half of the year, China indeed experienced an outflow of capital to some extent, but this does not mean that there was a large-scale and collective withdrawal of foreign capital. Theoretically, the current account surplus exceeding the increment of foreign exchange reserves means that the capital of China ’s domestic institutions and individuals presented a situation of a net output (i.e., a capital account deficit in the Balance of Payments Statements) and an increase in net foreign assets. In terms of other statistical data reflecting cross-border receipts and payments of enterprises and individuals and the banks’ foreign exchange credit receipts and payments, the main change in the current foreign exchange situation is that the holder of assets in foreign exchange has shifted from the central bank to domestic institutions and individuals and that foreign exchange is to be held by the people; any sign of a proactive withdrawal of foreign capital is still not obvious.

First, in terms of the banks’ data on cross-border receipts and payments on behalf of clients under the capital account, in the first half of the year China’s domestic enterprises and individuals still maintained a net inflow of capital of up to USD77.6 billion. Second, in terms of the banks’ data on foreign exchange settlement and sales on behalf of clients under the current account and capital account, in the first half of the year the surplus of foreign exchange settlement and sales by domestic enterprises and individuals was USD29.5 billion, far less than the cross-border receipts and payments surplus of USD79.1 billion. The main reason for the above difference is that under the influence of the market environment, at present domestic enterprises and individuals have shifted from short dollar to long dollar and have begun financial operations whereby they are “incurring liabilities in domestic currency and holding assets in foreign currency.” Third, in terms of bank data on foreign exchange credit receipts and payments, in the first half of the year there was a new increase of USD130.1 billion with respect to various types of foreign exchange deposits with banks; this was used for domestic foreign exchange loans as well as for international loans and external investments. Such uses are reflected in the increase in the banks’ net foreign assets during the same period, and in the balance of payments statements they are recorded as an “outflow” item under the capital account. Fourth, in terms of detailed data on cross-border receipts and payments, cross-border payments in the first half of the year increased by 24 percent compared with the same period of the last year, of which the capital outflows under overseas direct investments in which the Chinese parties have control increased by 74 percent, whereas the capital outflows through the main withdrawal channels for foreign capital, such as the withdrawal of foreign direct investments and securities investments, and remittances of investment earnings of foreign investors and so forth only increased by 15 percent.

Question: How should we regard the changes in the current situation of China ’s balance of payments?

Answer: The current situation for China ’s balance of payments should be comprehensively recognized on the basis of the following: First, the decrease in the balance of payments surplus and the slowdown in foreign exchange reserve growth conform to China ’s macro-control direction and are beneficial for maintaining China ’s balance of payments equilibrium. Second, against the background of the slow recovery of the global economy and the worsening international financial turmoil, the major new emerging markets are generally experiencing an outflow of capital, a decrease in reserves, and a depreciation of the domestic currency, and it is unavoidable that China ’s cross-border capital flows are affected. Third, after the balance of payments and the RMB exchange rate approach an equilibrium and a reasonable level, the bidirectional fluctuation situation whereby there are inflows and outflows of cross-border capital and increases and decreases in the RMB exchange rate are unavoidable. Fourth, notwithstanding the fact that the trend of a unilateral appreciation of the RMB exchange rate against the US dollar is ending, the RMB continues to become stronger against most currencies, the nominal effective exchange rate and the real effective exchange rate of the RMB published by the Bank for International Settlements for the first half of the year appreciated 1.6 percent and 0.9 percent respectively. Meanwhile, the RMB spot exchange rate differential between home and abroad has narrowed; the dollar premium indicated by the forward exchange rate mainly reflects the interest rate spread between the RMB and foreign currencies rather than any depreciation expectations, and also indicates that the current RMB exchange rate is at reasonable level accepted by domestic and overseas parties and by market clearing. Fifth, China is able to tolerate the impact of cross-border capital flows due to its relatively rapid economic growth, sound financial condition, continuous surplus of trade in goods, abundant foreign exchange reserves, and the fact that foreign capital mainly consists of direct investments with high stability rather than securities investments with high volatility.

Question: In the second half of the year, will China be exposed to the risk of a capital flow reversal?

Answer: The SAFE still maintains its basic judgment made at the beginning of the year that China ’s balance of payments hopefully will maintain a basic equilibrium this year.

Notwithstanding the fact that there are many unstable and uncertain factors at home and abroad in the second half of the year, some positive factors in favor of China ’s balance of payments equilibrium are gradually accumulating. First, a series of recently issued pre-adjustment and fine-adjustment policies will help strengthen  market confidence and help maintain steady economic growth. Second, in consideration of the depressed world economy and the fact that the drop in international bulk commodity prices depressed import costs of domestic parties, China ’s trade surplus may further expand in the second half of the year. Third, each of the major economies has placed high priority on the maintenance of economic growth, and the relevant countries and regions have certain resources and a determination to prevent the debt crisis from becoming worse.

Overall, as long as there are no major emergencies at home or abroad, China ’s balance of payments hopefully will still achieve a basic equilibrium. Even though capital net outflows will occur, they are tolerable and they conform to policy goal of “foreign exchange to be held by the people,” which has always been advocated by China and remains a part of the scope of the basic equilibrium in the balance of payments.