The State Administration of Foreign Exchange (SAFE) has recently disseminated the data on bank’s foreign exchange settlement and sales as well as their foreign-related receipts and payments for customers for 2018. The SAFE spokesperson and Chief Economist Wang Chunying answered media questions on relevant issues.
Q1: Could you brief us on the new characteristics of China’s foreign exchange receipts and payments situations in 2018?
A: In 2018, China’s cross-border capital flow was stable on the whole, and foreign exchange supply and demand was basically balanced. Below are the major characteristics:
First, banks registered a small deficit in foreign exchange settlement and sales as well as foreign-related receipts and payments for customers, which narrowed substantially as compared with that of 2017. In 2018, in dollar terms, foreign exchange settlement by banks was up by 15% year on year, and foreign exchange sales by banks, up by 11%, indicating a deficit of USD 56 billion, shrinking by 50%; banks' foreign-related receipts for customers were up by 16% year on year, and the payments up by 14%, leading to a deficit of USD 85.8 billion, shrinking by 31%. Specifically, foreign-related foreign exchange receipts and payments posted a deficit of USD 10.6 billion, narrowed by 48% from the 2017 level. Overall, due to the small deficit recorded by foreign exchange settlement and sales as well as foreign-related receipts and payments in 2018, combined with other foreign exchange trading factors on the inter-bank foreign exchange market, China’s foreign exchange market maintained basic equilibrium in terms of supply and demand, which served as the foundation of the overall stability of China’s foreign exchange reserves.
Second, foreign exchange fund flow maintained slight bi-directional fluctuations, reflecting the stability of China's foreign exchange market operation. In 2018, according to statistics on banks’ foreign exchange settlement and sales, the first quarter witnessed a deficit of USD 18.3 billion, which turned into a surplus of USD 32 billion in the second quarter. A deficit of USD 41.8 billion was posted for the third quarter, which narrowed to USD 27.9 billion in the fourth quarter. Specifically, A deficit of USD 7.1 billion was recorded in December, narrowed down by 60% month on month; Statistics on bank’s foreign-related foreign exchange receipts and payments for customers indicated a surplus of USD 15.8 billion in the first quarter, a surplus of USD 4.6 billion in the second quarter, a deficit of USD 37.7 billion in the third quarter and a surplus of USD 6.8 billion in the fourth quarter. Specifically, a surplus of USD 8.2 billion was recorded in December.
Third, foreign exchange sales rate was unchanged from 2017, while cross-border corporate financing remained relatively stable. In 2018, the foreign exchange sales rate that measures the willingness to buy foreign exchange, or the ratio of foreign exchange purchased by customers from banks to the customer's foreign-related foreign exchange payments was 65%, basically the same as in 2017. The sales rate was 64%, 63%, 68% and 67% respectively from the first quarter to the fourth quarter. Besides, the cross-border financing of enterprises was relatively stable, with the balance of cross-border financing for imports such as refinancing and usance letter of credit as of the end of 2018 witnessing a slight increase of 0.2% from the end of 2017.
Fourth, the foreign exchange settlement rate rose, indicating market players' willingness to hold foreign exchange was weakened. In 2018, the foreign exchange settlement rate that measures the willingness to settle foreign exchange, or the ratio of the foreign exchange sold by customers to banks to the customers' foreign-related foreign exchange receipts was 65%, up by 2 percentage points from 2017. From the first to the fourth quarter of the year, the foreign exchange settlement rate was 62%, 70%, 68% and 62% respectively. As of the end of 2018, the balance of domestic foreign exchange deposits of banks dropped by USD 73 billion from the end of 2017.
Fifth, in recent months, banks’ forward foreign exchange settlement and sales of banks turned into a surplus, and market expectations become more stable. In 2018, the value of contracts signed between banks and customers in respect of forward settlement of foreign exchange rose by 44% year on year, and the value of contracts signed between banks and customers in respect of forward sales of foreign exchange went up by 38%, indicating a deficit of USD 28.3 billion, slightly up by 9%. Since September, the forward foreign exchange settlement and sales contracts have maintained surplus continuously, with the surplus growing month by month to reach USD 9.6 billion in December.
Q2: How do you view China's foreign exchange market operation in 2018 under the complex international situations? How do you judge the trends in 2019?
A: China’s foreign exchange market remained basically balanced under the complex circumstances in 2018. In the past year, China’s foreign exchange market operated in a stable and orderly manner in spite of major changes in international environment and increased turbulence in emerging markets. It’s mainly reflected in the following aspects. Firstly, the RMB exchange rate is relatively stable as compared with other emerging market currencies. Due to the 4.4% rise in the US Dollar Index in 2018, the exchange rate of most non-USD currencies against the USD showed a downward trend. The emerging market currency index dropped by over 10%, the middle rate of RMB against USD depreciated by 4.8%, and that against the CFETS basket of currencies declined slightly by 1.7%. Secondly, cross-border capital flows were stable on the whole, and foreign exchange supply and demand maintained basic equilibrium. In 2018, the deficit of foreign exchange settlement and sales as well as foreign-related receipts and payments narrowed remarkably from the 2017 level, the domestic foreign exchange supply and demand was basically balanced on the whole and foreign exchange reserves maintained overall stability. Thirdly, the expectations and trading behaviors of market players were rational and orderly, and a sound market order was maintained. In 2018, enterprises’ utilization of foreign capital, investment abroad, cross-border financing as well as onshore guarantees for offshore loans remained basically stable. Foreign exchange purchases by individuals continued to remain stable with a slight decline in 2018, down by 7% from the 2017 level.
In 2019, China’s foreign exchange market operation is expected to maintain the development trend of overall stability. Overall, the stable operation of China’s foreign exchange market in 2018 is mainly attributed to the sound foundations in terms of economy, policy and market, and such situations are expected to remain in 2019. Firstly, China’s good economic prospects in the long run will not be changed. China’s economy is still resilient enough and has great potential. China’s economic growth rate is expected to remain high with a larger base of economic aggregate, which will provide a solid economic foundation for effectively coping with changes in the external environment. Secondly, China's course of promoting all-around opening-up will remain unchanged. In 2019, China will provide greater support and more facilities in terms of market access, intellectual property rights protection, trade and investment facilitation as well as capital market opening, which will provide a solid foundation for overseas capital investment in the domestic market. Thirdly, the trend that China’s foreign exchange market operation mechanism will become increasingly mature will not be changed. Presently, the bi-directional floating of RMB exchange rate has been intensified, which is conducive to strengthening a more diversified and rational market expectation; Integrating macro-prudential and micro-regulatory approaches for cross-border capital flow can help maintain the healthy order of foreign exchange market, which will lay a sound market foundation for promoting the autonomous equilibrium of the balance of payments.
Q3: What's your view of the impact of the Fed interest rate hike on China's foreign exchange market and cross-border capital flows? What will be the impact of a slowdown in Fed rate hike in 2019?
A: In the past several years, external environment has undergone major changes such as adjustments in monetary policies by major developed economies, but China’s foreign exchange market has withstood such ordeals and has gradually improved its capabilities to make adjustment and take countermeasures. Since the Fed pulled out of the quantitative easing policy in the second half of 2014 and raised interest rates for the first time at the end of 2015, the monetary policy adjustments of the Fed has indeed created a strong spillover effect. Emerging economies in general are affected, especially those with fragile fundamentals, where their currency depreciation is large and capital outflow is aggravated. In some periods, China’s foreign exchange market and cross-border capital flow underwent apparent fluctuations as well. However, thanks to the high growth rate of China’s domestic economy, overall social stability, tremendous market potential, sustained advancing of opening-up and reform, as well as the proactive and effective macro-prudential and micro-regulatory measures, China successfully coped with challenges brought about by external shocks and achieved outstanding performance on the whole among emerging markets and even on a global scale. In recent years, China’s foreign exchange market has become more mature in the process of continuous development, making adjustments and coping with various situations. The expectations and behaviors of market players have become more rational, and their experience of taking countermeasures has been accumulated and enriched.
In 2019, China’s foreign exchange market still has the solid internal foundation for smooth operation, and the slowdown in Fed interest rate hike and other external factors are also expected to provide more favorable conditions. In 2018, the Fed raised interest rates four times consecutively, which pushed up USD interest rate and exchange rate, making some emerging economies suffer considerable shocks. In 2019, if the Fed slows down its pace of interest rate hike, the marginal increase of USD interest rate will surely be reduced. In this scenario, monetary policy divergence between the US and other major developed economies may weaken, and the USD exchange rate will tend to stabilize as well. Of course the monetary policy adjustment of the Fed only constitutes one aspect of external environment, and there are many other factors which will influence the international environment in 2019. However, China’s economy will maintain sound development trend in the long run, efforts will be made to further advance reform and opening-up unswervingly, and the foreign exchange market is expected to become more mature and rational, thus better adapting to any changes in external environment.
Q4: The structure of China’s balance of payments changed substantially in 2018. The surplus under the current account fell and the surplus under the financial account (excluding reserve assets) increased. How do you comment on this change? What would you say about the future trends?
A: In 2018, China’s balance of payment presented a pattern of autonomous equilibrium. Based on preliminary statistics, China’s current account showed surplus of a certain scale in 2018 on the whole. Quarterly changes show that, although the current account posted a deficit in the first quarter, it maintained a surplus from the second quarter to the fourth quarter, which increased quarter by quarter. As a result, the surplus under the current account still remained within a reasonable range for the whole year. Meanwhile, the current account and financial account (excluding reserve assets) maintained autonomous equilibrium. Under this structure of balance of payments, China’s reserve assets remained basically stable in 2018 on the whole, and the RMB exchange rate throughout the year held relatively steady on a global scale.
In the future, China is expected to maintain the development trend of basic equilibrium of current account and autonomous equilibrium of balance of payments. China’s current account balance will still remain within a reasonable range. Firstly, the domestic manufacturing industry boasts of mature infrastructure, complete industrial chain, and a large number of skilled workers. Coupled with continuous promotion of transformation and upgrade, the above advantages can facilitate relevant products to maintain strong international competitiveness and continue to own big market both at home and abroad. Secondly, with the improvement of domestic product quality, ecological environment, education and other soft power, domestic residents’ cross-border consumption will become more rational and stable, which is conducive to the smooth operation of current account.
The overall stability of cross-border capital flows will remain relatively high, and capital inflows for medium- and long-term investment under the capital account have a large room for improvement. Based on data from the first three quarters of 2018, among all types of foreign capital inflows, the net inflow from FDI accounted for 36%, up by 9 percentage points year on year. With the further expansion of China’s opening-up areas and increasing importance of the domestic market, China will still have big potential in attracting direct investment. According to statistics of the United Nations Conference on Trade and Development (UNCTAD), China’s stock of FDI was 12% of GDP at the end of 2017, while the global average was 39%, and the average of developing countries was 33%. Besides, in the first three quarters of 2018, the net inflow from foreign securities investment in China accounted for 37%, representing an increase of 11 percentage points year on year. Specifically, debt securities investment increased more, which included inflow of funds from foreign central banks and other institutions for the purpose of medium- and long-term asset allocation. At present, the proportion of foreign investors in the domestic capital market is on the low side. In the future, with the policy of further opening-up and facilitation, China will become an important destination for the diversified asset allocation of international capital.
Q5: What are the priorities of foreign exchange administration work in 2019? What measures will be taken in foreign exchange administration system reform, liberalization of the capital account and the management of cross-border capital flow?
A: In 2019, the foreign exchange authorities will carry out the decisions and deployment of the CPC Central Committee and the State Council in an all-around manner, adhere to the key guideline of seeking progress in stability, stick to the structural reform on the supply side as the main line, persist in deepening market-oriented reform, expand high-level opening-up, deepening the reform of “delegation, regulation and service”, and thoroughly advance opening-up and reform in foreign exchange area according to the requirements of the “Six Stabilities”, so as to vigorously serve the sustained and sound development of the real economy.
On the one hand, we will deepen reform and opening-up in the foreign exchange area. Efforts will be made in a steady and orderly manner to advance liberalization of the capital account, further improve qualified foreign institutional investor system, and make research on the foreign exchange administration framework for foreign-invested enterprises under the management system based on pre-establishment national treatment and negative list. The SAFE will further open up the foreign exchange market in both directions, enrich trading instruments, broaden trading entities, and build an open and competitive foreign exchange market. Efforts will be made to deepen foreign exchange administration reform of “delegation, regulation and service”, optimize foreign exchange administration services, promote trade and investment liberalization and facilitation at a higher level, further support the development of pilot free trade zones and Guangdong-Hong Kong-Macao Greater Bay Area, and support Hainan in deepening reform and opening-up in an all-around manner.
On the other hand, the capabilities of preventing and resolving risks from cross-border capital flow should be enhanced. Efforts will be made to improve the two-pronged administration framework featuring macro-prudential and micro-regulatory approaches for cross-border capital flow, and adjust foreign exchange market fluctuations in a market-based and counter-cyclical manner, so as to maintain the stability, consistency and predictability of foreign exchange micro-regulation across the cycles. The SAFE will reinforce foreign exchange administration inspection and enforcement, crack down upon all kinds of illegal and irregular conducts, carry forward construction of digital foreign exchange administration” and “secure foreign exchange administration", improve foreign exchange reserve operation and management, so as to ensure the security, liquidity, value preservation and appreciation of foreign exchange reserves, maintain a sound order of the foreign exchange market and safeguard the national economic and financial security.
