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Moderator Xi Yanchun: Good morning, ladies and gentlemen. Welcome to the press conference of the State Council Information Office. We have organized several press conferences on economic data since the beginning of July. Today we are very glad to have with us Ms. Wang Chunying, press spokesperson and director of the Department of Balance of Payments of the State Administration of Foreign Exchange (SAFE). She will brief us on the foreign exchange receipts and payments for the first half of 2016 and take your questions. Now let me introduce you to Ms. Wang. 2016-07-21 09:47:51 Wang Chunying: Friends from the press, good morning. Welcome to today's press conference. I would first like to unveil foreign exchange receipts and payments for 2016 and then I will be taking your questions. In the first half of this year, the global economy was still undergoing profound adjustments, featuring heavy downward pressure and increasingly complex global financial markets; China's economic operation basically met expectations, with stable financial markets and RMB exchange rates. The SAFE continued to promote the foreign exchange administration reform to facilitate trading and investing activities by market players; and on the other hand, it was committed to enhancing monitoring of cross-border capital flows to guard against associated risks. Overall, the pressure on China from cross-border capital outflows was gradually eased in the first half. 2016-07-21 09:51:41 Wang Chunying: Banks settled foreign exchange of RMB 4.75 trillion (USD 726.7 billion) and sold foreign exchange of RMB 5.88 trillion (USD 900.5 billion) in the first half, with a deficit of RMB 1.13 trillion (USD 173.8 billion). Meanwhile, banks registered cumulative foreign-related income of RMB 8.85 trillion (USD 1.3545 trillion) and made external payment of RMB 9.95 trillion (USD 1.5233 trillion) for their customers, with a deficit of RMB 1.10 trillion (USD 168.8 billion), according to the data on banks' foreign-related receipts and payments for customers. 2016-07-21 09:54:12 Wang Chunying: China’s foreign exchange receipts and payments for the first half present the following characteristics: First, banks' foreign exchange settlements and sales, and foreign-related receipts and payments were both in deficit. In the first half, in US dollar terms, the foreign exchange settled by banks was down by 16% year on year, while the foreign exchange sold, down by 7% year on year, leading to a deficit of USD 173.8 billion. Banks' foreign-related receipts for customers went down by 18% year on year, and foreign-related payments made by banks for customers went down by 5%, indicating a deficit of USD 168.8 billion, including a deficit of USD 25.9 billion in the balance of foreign-related foreign exchange receipts and payments. Second, pressure from cross-border capital outflows was gradually eased. According to banks' foreign exchange sales and settlements data, China posted a deficit of USD 124.8 billion in the first quarter, which plummeted to USD 49 billion in the second quarter. In particular, the monthly deficit dropped from USD 54.4 billion in January to USD 12.5 billion and USD 12.8 billion in May and June respectively. According to the data on banks' foreign-related receipts and payments for customers, China posted a deficit of USD 112.3 billion in the first quarter, which contracted to USD 56.5 billion in the second quarter. In particular, the deficit in banks' foreign–related receipts and payments for customers dropped month-on-month from January to April to USD 20.1 billion, USD 10.5 billion, USD 5.9 billion and USD 2 billion respectively; But the deficit changed into a surplus of USD 200 million and USD 12.5 billion in May and June respectively. 2016-07-21 09:55:19 Wang Chunying: Third, foreign exchange sales rate dropped, and foreign exchange financing through some channels picked up. The foreign exchange sales rate, the measure of enterprises' motive to buy foreign exchange, or the ratio of foreign exchange customer bought from bank to customer's foreign-related foreign exchange payments, was 80% in the first quarter, and 74% in the second quarter, down by 6 percentage points quarter on quarter. In the first half, the outstanding domestic foreign exchange loans fell by USD 58.3 billion, including declines of USD 35 billion and USD 23.4 billion in the first and second quarters respectively. Further, the balance of cross-border financing for imports such as refinancing and forward L/C dropped by USD 34.9 billion in the first quarter, and by USD 5 billion in the second quarter. In particular, the balance of cross-border financing for imports has picked up for four straight months since March, indicating enterprises' deleveraging of external debt slowed down. Fourth, the foreign exchange settlement rate rose, indicating market players' willingness to hold foreign exchange was weakened. Foreign exchange sold by customers to banks as a percentage of their foreign-related foreign exchange receipts, or the foreign exchange settlement rate that measures the willingness of companies and individuals to settle foreign exchange, was 59% in the first quarter, and 63% in the second quarter, up by 4 percentage points quarter on quarter. In the first half, the balance of banks' foreign exchange deposits rose by USD 28.8 billion, including an increase of USD 38.6 billion in the first quarter and a fall of USD 9.8 billion in the second quarter. All of this pointed to a weakened desire among individuals and enterprises to hold foreign exchange. 2016-07-21 09:58:27 Wang Chunying: Fifth, banks registered a drastic decline in the deficit in forward settlements and sales of foreign exchange. In the first half, the number of clients contracting for forward foreign exchange settlement with banks was down by 61% year on year, while that of clients contracting for forward foreign exchange sales with banks was down by 55%, leading to a deficit of USD 37 billion in forward foreign exchange settlements and sales contracted with banks, down by 46% year on year. In particular, the deficit for the first quarter was USD 36.3 billion, and contracted to USD 800 million in the second quarter, indicating an equilibrium between foreign exchange supply and demand in forward markets, and stable expectations of the RMB exchange rate. These are the major statistical data I want to unveil regarding foreign exchange receipts and payments for the first half. Now I will answer your questions. 2016-07-21 10:01:36 Moderator Xi Yanchun: We are moving into the Q&A session. Please tell us what news agency you are from before raising your questions. Let's get started. 2016-07-21 10:03:00 Economic Daily: China's cross-border capital flows have been fluctuating violently these days. Will this be a normal in the foreseeable future? 2016-07-21 10:04:02 Wang Chunying: As internationally recognized, the Balance of Payments can fully reflect a country's cross-border capital flows. We have published the balance of payments data for the first quarter, and will be disseminating the data for the first half soon. 2016-07-21 10:04:47 Wang Chunying: China's balance of payments for recent years presents a pattern of surplus under the current account while deficit under the non-reserve capital and financial account. In making analysis, we usually remove reserves from the capital and financial account and observe the non-reserve capital and financial account. If reserves are included and net errors and omissions are not taken into consideration, the surplus under the current account can be offset by the deficit under the capital and financial account. First of all, the surplus under the current account lays a foundation for China's cross-border capital flows. According to the statistical principle of the balance of payments, the surplus under the current account is actually the basis for China's sustained exports of capital and accumulation of external claims. For example, China's foreign exchange receipts from exports of goods or services need to be used overseas through investments, among others, which will be shown in a deficit under the capital and financial account. Since the 1990s, China has witnessed continued surpluses under the current account. The surplus as a percentage of GDP for the first quarter was 1.6%, which was within the internationally recognized reasonable range, compared with the historical peak of 10% or so. 2016-07-21 10:09:58 Wang Chunying: Second, the non-reserve financial account is becoming the dominant force in China's cross-border capital flows. The non-reserve financial account reflects NGOs' cross-border capital flows. Around the second quarter of 2014, China witnessed dramatic changes under the non-reserve financial account. Except in a few quarters, China had registered continued surpluses under the non-reserve capital and financial account before 2014. Between 2003 and 2013 in particular, along with a tremendous influx of foreign capital, China reported fast growth in foreign exchange reserves. From 2014 onward, China's non-reserve capital and financial account has remained in deficit, which, however, was not caused by withdrawal of investment by foreign capital, but by the private sector's increasing outward investments for internationalization. In the first quarter, for example, the external financial asset of Chinese enterprises and individuals rose by RMB 109.8 billion, of which more than 50% was ODI. On the other hand, China's external debt fell by USD 13.5 billion, which is favorable for reducing the currency mismatch risk and lowering society's leverage ratio. In the meanwhile, China attracted a net inflow of USD 41.1 billion in FDI, indicating that overseas long-term capital is still optimistic about China. 2016-07-21 10:23:25 Wang Chunying: Going forward, China's cross-border capital flows will continue to reflect China's economic fundamentals. Along with the domestic economic transformation and upgrades, China's economy will maintain a mid and high growth rate, and the current account dominated by trade in goods will continue to remain in surplus. Meanwhile, China's foreign exchange reserves will remain abundant, and its ability to guard against cross-border capital flow risks will be strong. China will also remain highly attractive to long-term capital. As reform and opening up is pushed forward, domestic enterprises and individuals will become more sensible and reasonable about adjusting the asset and liability structures, which will guide China's cross-border capital flows towards a stable direction. Thank you. 2016-07-21 10:34:19 CCTV: According to the data you disseminated just now, the pressure from cross-border capital outflows facing China was eased in the first half. Could you tell us why? What would you say about China's cross-border capital flows in the future? 2016-07-21 10:43:18 Wang Chunying: Thank you for your questions. According to the data I disseminated, the pressure from cross-border capital outflows facing China was indeed eased, which reflected the changes in domestic and overseas market environments. First, the macro economic and financial environments remained stable. Externally, global financial markets were stable in most part of the first half, except at the beginning of the year and the end of June. The Fed was slow in raising interest rates, with the US Dollar Index falling by 2.6% in the period. Domestically, China's economic operation stayed within a reasonable range, with stable growth in the first quarter continuing in the second quarter, the roles of domestic demand further strengthened, reforms achieving positive progress, and some economic indicators performing well. For example, employment and prices stayed stable, sales grew steadily, and the official PMI fell within the expansion phase in most of the time. Second, market sentiment remained stable and reasonable, and expectations of RMB depreciation were weakened. As the RMB exchange rate was further marketized, market players had gradually adapted to the new mechanism and expectations of exchange rate had been stabilized. The daily average spread between CNY/CNH against the US dollars was shrinking from January to April, hitting 419, 111, 94 and 80 basis points respectively; the spread rose to 162 basis points in May but fell to 97 basis points in June. In all, the stabilization of market sentiment was a very exciting change. 2016-07-21 10:43:50 Wang Chunying: Overall, China's cross-border capital flows will remain basically stable in the future. On the one hand, there are many uncertainties in both domestic and foreign environments, which will challenge the stability of China's cross-border capital flows. But on the other hand, there are still many factors that support the stability of China's balance of payments. First, China's economy is operated within a reasonable range, its economic structure is being optimized, and economic growth is high at the global level. Moreover, China's fiscal position is sound, its financial system is robust, and the features of its economy, namely, strong resilience, great potential and broad room to maneuver, remain unchanged. According to the latest forecast issued by the IMF on July 19, the global economic growth will reach 3.1% this year, which is down by 0.1 percentage point from the forecast of April, but China's economic growth will be upped by 0.1 percentage point to 6.6%, the second time the IMF has upgraded its forecast of China's economy since the beginning of this year. Second, the current account remains in surplus, which is within the reasonable range. Third, there is still a gap between the return on assets both at home and abroad. For example, as at the end of this June, the yield of China's treasury bond due in one year was 1.8 percentage points higher than that of the US, and the yield of China's treasury bond due in a decade was 1.2 percentage points higher. Fourth, China still takes the top spot across the world by the balance of its foreign exchange reserves. Further, the global communication and coordination for guarding against risks are being strengthened, which will be favorable for maintaining stable markets. 2016-07-21 10:45:44 China Daily: Since Britain's exited from the EU, global financial markets have been struggling with heightened fluctuations. I wonder what impact Brexit has had on China's cross-border capital flows, and what moves China will take to guard against relevant risks? Thank you. 2016-07-21 10:48:57 Wang Chunying: Britain's exit from the EU has attracted wide concerns in society. China has doubled its efforts of highly frequent statistical monitoring and early warning before and after the referendum on Brexit. So far, no significant impact from Brexit has been spotted on China's cross-border capital flows. First, over the short run, the impact will be chiefly from the fluctuating global markets, but the pressure will be effectively unleashed, hence limited impact on domestic supply and demand. In the wake of the announcement of the Brexit referendum outcome, global financial markets experienced violent volatilities, with the US Dollar Index surging, and risk aversion rose dramatically, and the RMB exchange rate against USD was depreciated, while China's cross-border capital flows and supply and demand remained stable, which indicates that the exchange rate's role in adjusting supply and demand has been strengthened. 2016-07-21 10:49:58 Wang Chunying: Second, in the mid and long term, impact will be complex and rendered step-by-step, but will not change the stability of China's overall cross-border capital flows. Market evolution and conduction will be under great uncertainties after the Brexit referendum, and may affect the cadence of the Fed's adjustment of its monetary policy, which combined will impact China's cross-border capital flows. For example, if Brexit repeatedly impacts the market, China's cross-border capital flows may be affected by market volatilities, rising risk aversion and strengthened US dollars caused therefrom, but the progress of the Fed's interest rate hikes may slow down due to market volatilities. Further, Brexit's impact on the British and European economies, and then on the trade and investments of China, Britain and Europe will not be felt or lead to dramatic adjustments in the short run, and as a result, its impact on China's cross-border capital flows will not be rendered right away. 2016-07-21 10:51:18 Wang Chunying: Third, historically, China's cross-border capital flows have withstood external impact in recent years, suggesting a solid foundation for China to sustain stability. From the global financial crisis in 2008 to the European debt crisis in 2011, and to the exit of Fed's QE policy in 2014 and the first interest rate hike in 2015, global financial markets have experienced violent volatilities. China's cross-border capital flows, somewhat affected though, had been re-stabilized after short-term fluctuations, with relevant risks within control, which was closely related to China's sound economic fundamentals, robust external account and abundant foreign exchange reserves. This will hold true for the Britain's exit from the EU. With a robust internal basis, China's cross-border capital flows will remain stable. To be sure, we will continue to intensify monitoring, assess impacts in real time, and keep refining existing policy programs to guard against risks arising from cross-border capital flows. 2016-07-21 10:59:49 CBN Daily: According to China's foreign exchange reserves and banks' foreign exchange settlements and sales data, China's cross-border capital outflows are contracting. But in comparison, the depreciation pressure on the RMB exchange rate, especially in May and June, was heightened. This means that the RMB exchange rate depreciation was decoupled with cross-border capital flows, and the amount ran counter to the price of the RMB. Could you tell us why? Is this related to China's foreign exchange administration policy? 2016-07-21 11:04:44 Wang Chunying: We have noted this too. It is normal that the deficit in foreign exchange sales and settlements contracts, cross-border capital flows drop while the RMB exchange rate changes. In the 8·11 foreign exchange administration reform last year, the People's Bank of China refined the mechanism of the central parity rate of the RMB against the USD, and announced the RMB exchange rate index last December, thereby further improving the formation mechanism that is adjusted based on supply and demand and with reference to a basket of currencies, in a bid to better adapt to market changes. Under the dual impact of the recent changes in supply and demand, and in exchange rates of a basket of currencies, the RMB exchange rate against the US dollar has been depreciated, but remained stable against a basket of other currencies. The changes in the deficit in foreign exchange sales and settlements are actually subject to many factors. For example, just as mentioned earlier, along with the introduction of the new policies in favor of cross-border investment and financing, many enterprises will consider enhancing overseas financing, and reducing purchases of foreign exchange. Therefore, despite the foreign exchange rate depreciation, the deficit in foreign exchange sales and settlements may not necessarily rise. 2016-07-21 11:09:15 BTV: We noted that China's foreign exchange reserves rose in March and April, dropped in May and picked up in June. Could you tell us why foreign exchange reserves picked up in June? What's your view on the current levels of China's foreign exchange reserves? 2016-07-21 11:40:00 Wang Chunying: Four categories of factors will impact the changes in the size of foreign exchange reserves: first, reserve changes caused by the balance of payments transactions, including adjustments by the central bank to balance the supply and demand of foreign exchange, and operating revenues of reserves; Second, price fluctuations of investments with foreign exchange reserves, or price revaluation; Third, exchange rate conversion. Since China's foreign exchange reserves are denominated in US dollars and subject to diversified operations, the changes in the exchange rates of other currencies against the USD may lead to changes in the size of China's foreign exchange reserves; Fourth, as defined by the IMF, foreign exchange reserves used to support going global will be excluded from the entry of foreign exchange reserves in accounting. As at the end of June 2016, China posted USD 3.2052 trillion in foreign exchange reserves, up by USD 13.4 billion from the end of May, thanks to the rising prices of the assets invested with foreign exchange reserves. Certainly, the recent equilibrium of domestic supply and demand of foreign exchange and reserves income also helped stabilize foreign exchange reserves. 2016-07-21 11:41:40 Wang Chunying: For the moment, China still takes the first place worldwide by foreign exchange reserves, which are much higher than nearly USD 1.3 trillion in Japan, who ranks No. 2, and USD 600 billion in Switzerland and Saudi Arabia respectively, who rank No. 3 and No. 4. The IMF statistics show that China's foreign exchange reserves accounted for 30% of the world's total as at the end of the first quarter, which was still astonishing. There are various opinions on the suitable size of foreign exchange reserves, but traditionally, indicators such as imports for 3-6 months or 100% short-term external debt are used for measurement. Overall, measured by the absolute size of foreign exchange reserves or by other adequacy indicators such as the shares of foreign exchange reserves in imports and external debt, China's foreign exchange reserves are abundant, which lays a solid foundation for the government to withstand external impact. 2016-07-21 11:46:02 Wang Chunying: Going forward, it may be a normal that foreign exchange reserves will fluctuate around the reasonable level. The changes in foreign exchange reserves are the result of macroeconomic operations both at home and abroad. As China is deeply integrated into the world economy, it will face some uncertainties, but there are still many fundamental factors that support the stability of China's balance of payments, such as economic operation within the reasonable range, optimizing economic structure, continued surplus under the current account, and continued inflows of long-term capital. China's cross-border capital will continue to present a pattern of bidirectional fluctuations. By the same token, fluctuations of foreign exchange reserves around the reasonable level may also be a normal. 2016-07-21 11:48:32 Nihon Keizai Shimbun: This press conference is professional with many data disseminated. Could you give me some materials? Such a data dissemination press conference usually provides materials. 2016-07-21 11:49:43 Moderator Xi Yanchun: Let me make a clarification. Relevant data were disseminated at the website of the SAFE this morning. The Q&A session is also uploaded in real time. If you have any questions or want more detailed materials, please contact the news department of the SAFE. I am sure they will help you. 2016-07-21 11:52:28 Guangming Daily: The media has paid close attention to China's loss of the second largest creditor for a while. What's the SAFE's view about such attention? 2016-07-21 11:53:28 Wang Chunying: I would like to say something more to the previous reporter. We would like to provide some historical data in advance to help you understand. The data disseminated today are being uploaded to the website of the SAFE in real time, where you can also acquire the historical data already disseminated. 2016-07-21 11:54:58 Wang Chunying: Well, for this question, we should look at the relationship between the Balance of Payments and the International Investment Position. In 2015, China's ranking dropped by net external assets. The net external asset was USD 1.6 trillion in 2015, down by USD 6.3 billion year-on-year. As at the end of 2014, the figure was down by USD 393.2 billion year-on-year. The slump since 2014 was attributable to China's adoption of a new statistical method. The rise or fall in China's net external asset is subject to the financial account transaction under the balance of payments, the increase or decline in China's assets or liabilities arising from outward investment or attraction of capital and the non-transaction changes such as in price and foreign exchange rate. 2016-07-21 11:59:24 Wang Chunying: Judging from transaction factors, the net external assets under the financial account under the balance of payments rose by USD 311.8 billion in 2014 and 2015 combined, bringing the balance of China's net external assets up by USD 311.8 billion too, rather than bringing it down. This could be explained by the increased outward investments by China, or the significant increase in the non-reserve external assets. In the two years, China registered a net increase of more than USD 800 billion in outward investments. On the other hand, due to the changes in exchange rates and interest rates both at home and abroad, domestic players have voluntarily adjusted their asset and liabilities structures and serviced external debt, and non-residents also reduced their domestic deposits, thus bringing down China's external debt. 2016-07-21 12:03:39 Wang Chunying: In terms of non-transaction factors, the loss in valuation arising from the adjustment of statistical method and the changes in prices and exchange rates has been the major cause of the decrease in China's net external assets in recent years. First, the adjustment of statistical method led to an increase of nearly USD 300 billion in China's external equity and liabilities in the past two years. For example, an enterprise issued 10 shares in its IPO at RMB 1 per share, which were bought up by non-residents. In this way, China owed a total of RMB 10 to non-residents at RMB 1 per share. Two years later, the enterprise and non-residents did not make any deals, and the non-residents still held these shares, but the unit price rose to RMB 3 per share, which means China owed a total of RMB 30 to non-residents, representing an increase of RMB 20 in debt due to the valuation factor, thus bringing down China's net external assets. Likewise, with market capitalization replacing historical costs to measure China's external equity and debt, China's external equity and debt as at the end of 2015 rose by nearly USD 300 billion from the end of 2013, and its net external assets dropped by nearly USD 300 billion. 2016-07-21 12:07:35 Wang Chunying: Second, changes in asset prices and exchange rates led to the changes in external asset valuation. In 2014 and 2015, China's external assets fell by USD 396.9 billion due to the changes in asset prices and foreign exchange rates But China was not extraordinary. Our observations of Japan and Germany, who ranked No. 2 and 3 by net external assets, show that similar changes in valuation had taken place in the two countries. For example, at the end of 2015, Japan's net external assets fell by nearly USD 500 billion, and Germany, more than USD 200 billion, due to the valuation factor. After the adjustment of incomparable factors such as historical valuation and improvement of data sources, the change in valuation as a percentage of net assets was similar in China, Japan and Germany. 2016-07-21 12:26:44 Wang Chunying: Since such changes in valuation reflect the changes in the carrying value at different points of time, and do not represent actual losses, the increase or decrease in net assets arising from changes in exchange rates and asset prices should be looked at rationally. Last but not least, we also should be sensible about the size of China's net claims. On the one hand, the size of net external claims should be appropriate, which should be analyzed in combination with the return on investment and the domestic demand for capital. On the other hand, it would be economical and reasonable if foreign investments are attracted and overseas low-cost financing is rationally used. Many developed economies including the US are net debtors who attract massive investments to develop their economies. Therefore, we should be sensible about this issue. 2016-07-21 12:31:48 Moderator Xi Yanchun: As time is running short, I have to end today’s conference here. Please allow me to thank Ms. Wang for her professional and detailed explanations, and thank you all. 2016-07-21 12:39:27 (The original text is available at china.com.cn) 2016-11-08/en/2016/1108/1214.html
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The State Administration of Foreign Exchange (SAFE) has recently published the data on banks' foreign exchange sales and settlements as well as the foreign-related receipts and payments via banks for July 2016. The SAFE press spokesperson answered media questions on recent cross-border capital flows. Q: The pressure from cross-border capital outflows has been relieved in the first half of this year. What would you say about July? A: China's cross-border capital flows fluctuated within a normal range in July. First, the deficit in banks' foreign exchange sales and settlements represented a month-on-month increase, but that of non-banking sectors such as enterprises and individuals remained relatively stable. In July, the banking sector recorded a deficit of USD 31.7 billion in foreign exchange sales and settlements, higher than the monthly average of USD 16.3 billion in the second quarter, but lower than the monthly average of USD 41.6 billion in the first quarter. In particular, the non-banking sectors registered a deficit of USD 19.8 billion in foreign exchange sales and settlements, up by 12% month-on-month, but at a low level in the year to date. Second, the non-banking sectors registered a deficit in foreign-related receipts and payments again, but the deficit was low. In July, the deficit was USD 31.9 billion, including a deficit of USD 1.3 billion in foreign exchange receipts and payments. In the first four months, China posted a deficit of USD 20.1 billion, USD 10.5 billion, USD 5.9 billion and USD 2 billion in foreign exchange receipts and payments respectively, but registered surpluses in May and June. The short-term impact from Britain's exit from the EU and seasonal factors contributed to stronger net demand for foreign exchange in July. In July, Britain's exit from the EU led to volatilities in international financial markets and helped strengthen the dollars but dragged down the RMB exchange rate. Under such circumstances, Chinese market players became less willing to settle foreign exchange. In the month, the ratio of foreign exchange sold by bank customers to foreign-related foreign exchange receipts was 58%, down by 3 percentage points from June. As global markets tended to be stabilized, the supply and demand for foreign exchange in China was less impacted and fell within control. On the other hand, as July is traditionally the month when foreign-funded enterprises remit out profits and overseas listed companies distribute dividends and bonuses, the ROI-related demand for foreign exchange rose, which is also a key cause behind the heavy deficit in foreign exchange sales and settlements of banks themselves who hold overseas listed shares; what's more, as individuals' purchases of foreign exchange for overseas travel and study are high during the summer vacation, foreign exchange purchases under travel went up by 12% month-on-month in July. Positive factors in favor of the equilibrium of supply and demand for foreign exchange continued to emerge. First, the foreign exchange sales rate, or the ratio of purchases of foreign exchange from banks to the payments of foreign-related foreign exchange was 69% in July, down by 5 percentage points month-on-month. In particular, although individuals' purchases of foreign exchange presented seasonal rises, yet purchases of foreign exchange under travel dropped by 7% year-on-year in the month, indicating stable market sentiment for the moment. Second, foreign exchange financing through certain channels continued to pick up in the month, and the balance of cross-border foreign exchange financing for imports such as refinancing and forward L/C rose by USD 3.4 billion from the end of June, representing the fifth month of bouncing back, and showing enterprises' deleveraging of external debt continued to slow down. In conclusion, China's cross-border capital flows have fluctuated within a normal range recently, without changing the pattern of mid and long-term stability, and will continue to develop toward a stronger equilibrium between inflows and outflows in the future. 2016-11-08/en/2016/1108/1222.html
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Q:What are the new changes to the external debt data for June 2016 that were just disseminated by the State Administration of Foreign Exchange (SAFE)? A: In general, China's outstanding full-scale external debt picked up by the end of June. Since the beginning of 2015, China has disseminated full-scale quarterly external debt data by the IMF's Special Data Dissemination Standard (SDDS). According to the changes to external debt for 2015, the outstanding external debt as at the end of September and December fell by 8.9% and 7.4% quarter-on-quarter respectively, except a marginal increase by the end of June. As at the end of March 2016, China's outstanding full-scale external debt fell by a smaller margin, say, 3.6% quarter-on-quarter. As of the end of June 2016, China's outstanding full-scale external debt went up by 2% quarter-on-quarter, preliminarily reversing the slump in total external debt since the second quarter of 2015, which somehow shows that China's deleveraging of external debt is coming to an end. Q: What are the measures to facilitate borrowing of external debt by domestic institutions? A: Since the beginning of this year, the People's Bank of China (PBC) and the SAFE have introduced a series of reformative measures to facilitate cross-border financing by domestic players. First, efforts have been made to promote macro-prudential management of full-scale cross-border financing. As at the end of April 2016, the SAFE and the PBC jointly published the Circular on Implementing Nationwide Macro-prudential Management of Full-scale Cross-border Financing, which stipulates that the integrated macro-prudential management of full-scale cross-border financing in domestic and foreign currencies will be implemented nationwide starting from May 3, 2016, allowing financial institutions and enterprises to independently conduct cross-border financing in both domestic and foreign currencies within the ceiling of cross-border financing that is linked with their capital or net assets. Second, the policies for managing settlement of foreign exchange under external debt for Chinese and foreign-funded enterprises have been unified. At the end of April 2016, the SAFE released the Circular of the State Administration of Foreign Exchange on Further Promoting Trade and Investment Facilitation and Improving Authenticity Reviews, to allow Chinese non-financial institutions to settle foreign exchange under their external debt in accordance with the existing regulations on managing external debt of foreign-funded enterprises, and provide equal treatment to Chinese and foreign-funded enterprises in the policies for managing foreign exchange settlement under external debt. Third, the policies for managing foreign exchange settlement under the capital account have been unified and simplified. Starting from June 2016, discretionary settlement of foreign exchange under external debt has been implemented, allowing enterprises to freely choose the time to settle foreign exchange under external debt, and a common negative list approach has been adopted with regard to use of receipts under the capital account, with relevant negative lists dramatically slashed. These reformative policies have facilitated cross-border investment and financing, further diversified the financing channels of domestic players, especially Chinese enterprises, lowered financing costs, and practically boosted the efforts to address the financing difficulties and cut heavy costs of financing to support the development of the real economy. Q: What would you say about the future situation of external debt? A: I expect that China's external debt will be further stabilized. Based on the changes in China's full-scale external debt since the beginning of this year, it is expected that China's external debt will be further stabilized along with the implementation of the reformative measures for external debt management. The PBC and the SAFE will continue to refine the external debt and capital flows management system under the macro-prudential management framework, and will strengthen ongoing and ex-post monitoring and analysis while further promoting cross-border investment and financing facilitation, so as to guard against external debt risks and safeguard China's economic and financial security. 2016-11-08/en/2016/1108/1225.html
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The State Administration of Foreign Exchange (SAFE) recently disseminated the data for February 2016 on banks' settlement and sales of foreign exchange and their foreign-related receipts and payments for customers. The press spokesperson of the SAFE answered media questions on recent cross-border capital flows. Q: Could you brief us on China's recent cross-border capital flows? A: The pressure from cross-border capital outflows from China has been significantly eased. The deficits in foreign exchange settlement and sales and in foreign-related payments and receipts by the non-banking sectors, companies or individuals, have contracted since the beginning of this year. In February, the non-banking sectors recorded a deficit of USD 35 billion in foreign exchange settlement and sales, down by 50% month on month, or by a daily average of 37% month on month if calculated by trading days after the adjustment of the impact from the Chinese New Year holiday. The non-banking sectors also registered a deficit of USD 30.5 billion in foreign-related payments and receipts, down by a daily average of 39% month on month. In particular, the deficit in foreign-related payments and receipts of foreign exchange was USD 10.5 billion, down by a daily average of 42% month on month. Chinese market players' adjustment of their structure of assets and liabilities in domestic and foreign currencies has become smoother. On the one hand, efforts have been made to steadily encourage people to hold more foreign exchange. The balance of foreign exchange deposits grew by USD 8.3 billion in February, which was down by USD 11.3 billion month on month. On the other hand, companies slowed down debt servicing. For example, the balance of cross-border financing for imports dropped by USD 2.5 billion in February, which was down by USD 7.2 billion month on month. The changes in domestic and external market environments have helped ease the pressure from cross-border capital outflows. First, global financial markets are being stabilized after fluctuations. The US dollar index has sustained small fluctuations after being downgraded at the end of January, and the VIX that reflects market aversion has dropped from the peak in mid-February. Second, the domestic RMB exchange rate has stayed stable. In February, the RMB exchange rate against a basket of currencies fluctuated slightly, but the central parity rate of the RMB against the USD and domestic and overseas trading prices rose, and the spread between the CNY and the CNH further narrowed, indicating market players' weaker desire to buy foreign exchange. In addition, no adjustment has been made to the foreign exchange administration policy except the requirement on the authenticity and compliance of foreign exchange transactions has been highlighted to curb speculations, which stabilizes market sentiment. China's cross-border capital flows are expected to stay stable in the near future. China will continue to register a large trade surplus and heavy use of foreign capital, and companies' external debt will be more stable after more than one year's deleveraging. As for internal and external environments, market expectations of the Fed's interest rate hikes have been lowered recently, and the Fed's adjustment of the monetary policy, if meeting market expectations, will be favorable for stabilizing international financial markets and capital flows. China's GDP growth target for 2016 is 6.5%-7%, which is high at the global level, indicating the fundamentals for attracting inflows of foreign capital have not changed. 2016-08-30/en/2016/0830/1204.html
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The State Administration of Foreign Exchange (SAFE) has recently disseminated the data on banks' sales and settlements of foreign exchange and on foreign-related receipts and payments via banks for their customers for August 2016. The SAFE press spokesperson answered media questions on recent cross-border capital flows. Q: What new changes were there to the cross-border capital flows for August? A: The pressure on China from cross-border capital outflows was relieved in August. First, a narrower deficit was recorded under banks' sales and settlements of foreign exchange. The deficit was USD 9.5 billion for the month, down by 70% month-on-month and the lowest monthly level since July 2015. Second, a lower deficit was registered under the non-banking sector's foreign-related receipts and payments. The deficit was USD 8 billion for the month, down by 75% month-on-month. In particular, the balance of foreign exchange receipts and payments turned from a deficit of USD 1.3 billion in July to a surplus of USD 19.7 billion in the month. A deficit of USD 27.7 billion was posted under the RMB receipts and payments, down by 10% month-on-month. The factors that boost supply and demand towards an equilibrium continued to play an active role. First, the willingness of market players to settle foreign exchange was being stabilized, with the share of foreign exchange sales dropping further. In the month, the ratio of bank customers' sales of foreign exchange to the foreign-related foreign exchange receipts was 59.2%, up by 0.9 percentage point from July; the ratio of bank customers' purchases of foreign exchange to the foreign-related foreign exchange payments was 67.4%, down by 1.3 percentage points from July. Second, cross-border foreign exchange financing through some channels continued to pick up. As at the end of August, the balance of cross-border financing for imports such as refinancing and forward L/C jumped by USD 7.9 billion from the end of July, marking the 6th consecutive month of growth. Also in the month, a net inflow of USD 6.1 billion was registered under enterprises' cross-border foreign exchange loans, remarkably higher than the net monthly average inflow of USD 700 million from May to July. Third, seasonal demand for purchasing foreign exchange like ROI waned. In history, June and July were the peak months for outward remittances of profits by foreign-funded enterprises and for distribution of bonuses and dividends by overseas listed companies, followed by downturns. In August, foreign exchange purchases under ROI fell by 31% month-on-month. In addition, August remained the month witnessing strong purchases of foreign exchange under overseas travel and study, but the foreign exchange purchases under travel dropped by 3% month-on-month or 16% year-on-year in the month, which suggests that a large part of individuals' demand for foreign exchange purchases was unleashed in the early phase, and that individuals are sensible in purchasing foreign exchange at present. Overall, China's economy operates smoothly, the RMB exchange rate against the USD is fluctuating bi-directionally, and market sentiment is stable now, which is favorable for a stronger equilibrium between supply and demand of foreign exchange. 2016-09-19/en/2016/0919/1211.html
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The State Administration of Foreign Exchange (SAFE) recently published the statistics on banks' foreign exchange settlement and sales, and their foreign-related receipts and payments for customers for May 2016. A press spokesperson for the SAFE answered media questions on the recent cross-border capital flows. Q: The pressure on China from cross-border capital outflows has been eased since the beginning of this year. What is the case for May? A: China witnessed further balanced foreign exchange supply and demand in May. First, the deficit in banks' foreign exchange settlement and sales continued to shrink. In May 2016, the deficit hit USD 12.5 billion, down by 47% month-on-month, and the daily average deficit declined for the fifth consecutive month. The deficit was USD 54.4 billion, 33.9 billion, 36.4 billion and 23.7 billion in the four months from January to April respectively. Second, the deficit in foreign-related receipts and payments of the non-banking sectors expanded but the foreign exchange receipts and payments turned around from deficits. In May, the deficit was USD 23.5 billion, compared with USD 55.8 billion, USD 30.5 billion, USD 26.1 billion and USD 8.9 billion respectively from January to April. But foreign exchange receipts and payments of the non-banking sectors posted a slight surplus of USD 200 million in May, versus the deficit of USD 20.1 billion, USD 10.5 billion, USD 5.9 billion and USD 2 billion respectively from January to April. Chinese market players continued to steadily adjust their foreign-related receipt and payment behaviors. First, their desire to purchase foreign exchange was further weakened, and some channels' foreign exchange financing rose remarkably. In May, the foreign exchange sales rate that measures the motive to buy foreign exchange, or the foreign exchange purchased by customer from banks as a percentage of their foreign-related foreign exchange payments, was 73%, 2 percentage points lower than that of April. Meanwhile, the balance of import financing such as refinancing and forward L/C rose by USD 300 million, of which, the balance of foreign exchange financing climbed by USD 7.4 billion, 113% higher than that of April. This was the third consecutive month the balance had picked up, suggesting slow deleveraging of external debt of enterprises. Second, market players' desire to settle foreign exchange continued to rise and domestic foreign exchange deposits dropped. In May, the foreign exchange settlement rate that measures the desire to settle foreign exchange, or the foreign exchange sold by customers to banks as a percentage of their foreign-related foreign exchange income, was 67%, 4 percentage points higher than that of April. Meanwhile, the balance of foreign exchange deposits contracted by USD 8.8 billion, compared with an increase of USD 900 million in April. All these show companies' and individuals' desire to hold foreign exchange was weakened. Since the beginning of this year, the pressure on China from cross-border capital outflows has been eased gradually, which further reflects China's economic fundamentals. This also indicates that China's overall economic operation that is within expectation, its further optimized economic structure and mid and high economic growth will provide a solid foundation for China's cross-border capital flows to sustain mid and long-term stability. 2016-08-30/en/2016/0830/1207.html
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Q: What would you say about the changes to the data on China's external debt as at the end of March? A: Overall, China's external debt has dropped more slowly and its solvency risk is within control. First, the decrease in outstanding external debt has slowed down significantly. As at the end of March 2016, China's outstanding full-scale external debt was equivalent to USD 1.3645 trillion, down by USD 51.7 billion or 3.6% from the end of 2015, or by 3.8 percentage points quarter on quarter. Second, the term structure of external debt has been further optimized. As at the end of March 2016, short-term outstanding external debt was down by 8% from the end of 2015, while that of mid- and long-term external debt was up by 4% from the end of 2015. Third, the decrease in external debt is closely related to the declines in foreign trade. China registered RMB 5.2 trillion in trade value under trade in goods in the first quarter of 2016, down by 5.9% year on year. Accordingly, the balance of trade credit and prepayments dropped as at the end of March, contributing 66% to the total decrease in external debt. Last but not least, as China's economic restructuring deepens, some companies' external debt such as inter-company loans has bottomed out after preliminary debt deleveraging. As at the end of March 2016, the outstanding inter-company loans rose by USD 14.9 billion or 7% from the end of 2015. Further facilitation will be provided for cross-border financing by financial institutions and companies. According to the Circular on Rolling out Nationwide Macro-prudential Management of Full-scale Cross-border Financing (Yinfa No. 132 [2016]), the pilot program for macro-prudential management of full-scale cross-border financing in domestic and foreign currencies will be rolled out to financial institutions and companies across the country starting from May 3, 2016. From then on, the People's Bank of China and the State Administration of Foreign Exchange (SAFE) will not conduct ex-ante approval for external debt to be owed by financial institutions and companies, and these institutions and companies will be allowed to make cross-border financing in domestic and foreign currencies independently within the upper limit that is linked with their capital or net assets. China's external debt is expected to be stabilized. Given the changes to the external debt data, it is expected that China's external debt will be stabilized as the macro-prudential management policy for full-scale cross-border financing is implemented. Next, the SAFE will continue to build and improve the external debt and capital flow management system under the macro-prudential management framework, and enhance ongoing and ex-ante monitoring and analysis to guard against the risks arising from unusual cross-border capital flows. 2016-08-31/en/2016/0831/1209.html
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The State Administration of Foreign Exchange (SAFE) has recently disseminated the data on banks' sales and settlements of foreign exchange and their foreign-related receipts and payments for customers for November 2016. Its press spokesperson has thus answered media questions on the recent cross-border capital flows as follows: Q: Could you brief us on the changes to cross-border capital flows in China in November? A: Despite changing external environment, China's cross-border capital flows stayed within a stable range on the whole in November. Due to the heightened expectations of the Fed's interest rate hikes, the strengthening US foreign exchange rate, and the depreciation of non-USD currencies worldwide, China came under heavier pressure from cross-border capital outflows in November than in October, which, however, remained much lower than the level before the first interest rate hike by the Fed in the same period last year. In November, a deficit of USD 33.4 billion was registered under banks' sales and settlements of foreign exchange, down by 39% year-on-year, and higher than the deficit of USD 14.6 billion in October. A deficit of USD 24.6 billion was registered under the foreign-related receipts and payments of non-banking sectors including individuals and enterprises, down by 42% year-on-year, and higher than the deficit of USD 14.1 billion in October. The positive changes in the preliminary cross-border capital flows continued to take place in November. First, enterprises' demand for cross-border financing in foreign exchange was further strengthened. At end-November, the balance of cross-border financing denominated in foreign currencies by importers such as refinancing and forward L/C went up by USD 5.2 billion month-on-month, continuing to recover for nine straight months. Second, the pressure to repay foreign exchange loans made in the country in a centralized manner was significantly relieved. In the month, enterprises bought USD 5.1 billion in foreign exchange to repay domestic foreign exchange loans, which was consistent with that of October, and down by 57% year-on-year, reaching the three year low. Third, overseas institutions continued to buy domestic bonds. The statistics from China Central Depository & Clearing Co., Ltd. show that the balance of domestic bonds held by overseas institutions went up by RMB 15.8 billion month-on-month as at end-November, growing for nine consecutive months. Overall, the recently strengthening US dollars have had strong impact on global currencies and international capital flows, but the RMB exchange rate against the US dollars depreciated slightly, and remained stable against a backset of currencies. With the positive factors in its cross-border capital flows continuing to play their roles, China could better adapt to the changing external environment. 2016-12-16/en/2016/1216/1231.html
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Recently,the State Administration of Foreign Exchange (SAFE) has released the external financial assets and liabilities data of China's banking industry (excluding the central bank, the "banking industry") for the first time. Statistics show that China's banking industry recorded external financial assets of USD 721.6 billion, external liabilities of USD 943.7 billion, and net external liabilities of USD 222.1 billion including net RMB external liabilities of USD 378.3 billion and net foreign currency assets of USD 156.2 billion as at the end of December 2015. Of the external financial assets of the banking industry, deposits and loans were USD 574.7 billion, bonds investment, USD 48.4 billion, and other assets including equity, USD 98.5 billion, accounting for 80%, 7% and 14% of the industry's total external financial assets respectively. By currency, RMB assets were USD 57.9 billion, USD assets, USD 528.5 billion, and other currency assets, USD 135.2 billion, accounting for 8%, 73% and 19% respectively. Of the banking industry's external liabilities, deposits and loans were USD 485.8 billion, bonds investment, USD 137.5 billion, and other liabilities including equity, USD 320.4 billion, accounting for 51%, 15% and 34% of the industry's external liabilities respectively. By currency, RMB liabilities were USD 436.2 billion, USD liabilities, USD 229.8 billion, and other currency liabilities, USD 277.7 billion, accounting for 46%, 24% and 29% respectively. At the end of 2015, the SAFE wrote to the Bank for International Settlements (BIS), confirming its official participation in the International Banking Statistics (IBS), which is part of the G20 Data Gaps Initiative. The compiling principle of the IBS is consistent with the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) published by the IMF. The external financial assets and liabilities data of China's banking industry, compiled in line with IBS, will be released by the SAFE on a quarterly basis. Publishing the data helps to reflect the foreign-related business operations of China's banking industry, and the global allocation of their assets and liabilities, which are significant for further enhancing statistical data transparency and monitoring cross-border capital flows and stocks of assets and liabilities. 2016-08-30/en/2016/0830/1205.html
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Theme: Interpretation of China’s Operation and Management of Foreign Exchange Reserves Time: 10 a.m., June 12, 2014 Guests: Huang Guobo, Chief Economist, SAFE Guan Tao, Director of the Balance of Payments Department, SAFE Introduction: During his visit to Africa, Li Keqiang, premier of the State Council, noted: “Excessive foreign exchange reserves have already become a great burden for us because they will become the monetary base of our country and will affect inflation.” According to data of the People’s Bank of China (PBOC), by the end of Q1 2014 China’s foreign exchange reserves were the highest in the world, at US$3.95 trillion, accounting for one-third of the world’s total. In order to balance receipts and payments under the current account, the State Council recently issued Several Opinions on Supporting the Stable Growth of Foreign Trade, which points out the need to further enhance imports. How can we revitalize stock assets and control incremental investments? How can transform this burden into wealth? How should we properly operate and manage our foreign exchange reserves? At 10 a.m. on June 12, 2014, Huang Guobo, chief economist of the SAFE, and Guan Tao, director of the SAFE’s Balance of Payments Department, accepted an exclusive interview with www.gov.cn to interpret China’s operation and management of its foreign exchange reserves. · [Host] Dear Netizens, you are welcome to watch the online interview on www.gov.cn. Foreign exchange reserves, an issue frequently mentioned by State Council Premier Li Keqiang during his visit to Africa, have become a great burden for us because they will become the monetary base of our country and will affect inflation. How can we revitalize our stock assets and control incremental investments? How can we transform this burden into wealth? How should we properly operate and manage our foreign exchange reserves? Today we have invited two guests— Huang Guobo, chief economist of the SAFE, and Guan Tao, director of the SAFE’s Balance of Payments Department, to interpret China’s management of its foreign exchange reserves and to respond to relevant topics about which Netizens are concerned. 2014-06-12 10:02:45 · [Netizen SS] During his recent visit to Africa, Premier Li Keqiang indicated that “our huge foreign exchange reserves are a heavy burden.” What makes the reserves a “burden”? Can you list the pros and cons? 2014-06-12 10:03:12 · [Huang Guobo, Chief Economist of the SAFE] This question can be seen from two perspectives. First, the maintenance of massive foreign exchange reserves is of great significance to our country. For example, since 1997 there have been a number of global crises, such as the subprime crisis and the European sovereign debt crisis, but they had little influence on our country. A very important contributing factor was that we had massive and adequate foreign exchange reserves. Both the strength and position of our country were improved during the crises. 2014-06-12 10:07:00 · [Huang Guobo] Since 2007, Western central banks have pursued a quantitative easing monetary policy and have pumped a large amount of capital into the market. But foreign exchange reserves have served as a “flood discharge area,” effectively isolating our real economy and the external impacts, sustaining favorable external conditions for our economic restructuring, transformation, and upgrading, and providing a precious window for time. Therefore, in recent years, our foreign exchange reserves have actually played a significant role in the smooth and effective operation of our macro economy. On this basis, we should see that our country is a big developing country, with our total volume of international trade approaching US$4 trillion, foreign debt of over US$800 billion, and foreign direct investments (FDI) of over US$2 trillion per year. Our outward direct investments (ODIs) are also growing very rapidly. Financial and real economic activities both require huge foreign exchange reserves to enhance confidence and provide payment guarantees. Hence, it is necessary to have adequate foreign exchange reserves. 2014-06-12 10:07:22 · [Huang Guobo] However, the excessively rapid growth of foreign exchange reserves reflects the imbalance in China’s international payments and presents a series of challenges: first, it increases macro-control difficulties. On the one hand, excessive foreign exchange reserves increase the supply of domestic currency and pose potential inflationary pressures at home. On the other hand, they raise the reserve requirement ratio (RRR) and increase hedging pressures on the central bank and further restrict monetary policy. Second, they increase the asset-liability risks of the central bank. Since foreign exchange reserves account for over 80 percent of the total assets of the central bank, there is a mismatch in the monetary mechanism of its assets and liabilities, thus presenting huge exchange-rate risks and hedging pressures. 2014-06-12 10:09:14 · [Huang Guobo] Third, foreign exchange reserves increase our operational challenges. Compared with the large amount of foreign exchange reserves, the capacity of the international financial market is limited and there are constraints on large-scale investments; asset safety and price risks are caused by the frequent outbreaks of international financial crises, as well as by the freezing of assets and other extreme risks triggered by political and diplomatic conflicts. Fourth, resource, environmental, and other costs are also growing; for instance, exports of some raw materials and labor-intensive products may easily increase pollution and place additional pressures on resources and the environment. 2014-06-12 10:10:15 · [Netizen Gao Yuan Mu Chang] Director Yi Gang has repeatedly indicated that the marginal costs of further increases in our foreign exchange reserves surpass their marginal revenue. Does this mean that China’s foreign exchange reserves have already exceeded a reasonable size? How does one determine what is a reasonable size? 2014-06-12 10:11:55 · [Huang Guobo] This is actually a tough question, about which various parties may have different views and measurement criteria. But, in general, when size is considered, it is necessary to also take into account a country’s macro-economic conditions, including its economic openness, its capability to utilize foreign capital and to engage in international financing, and the maturity of its economic and financial systems. 2014-06-12 10:11:27 · [Huang Guobo] Specifically, the basic function of foreign exchange reserves is to guarantee a country’s external payments. If the domestic currency is an internationally-accepted hard currency, then it can be the currency of payment. But in the case where the RMB is not yet a generally-accepted “hard currency,” we need foreign exchange to guarantee our payments. With sufficient guarantees, we can prevent difficulties in external payments and risks of a significant devaluation of the RMB exchange rate. We have noted that an IMF study has proposed a package of the following composite indicators: foreign exchange reserves shall be equivalent to 100 percent 150 percent of the sum of 30 percent of the short-term external debt, 15 percent of portfolio investments, 10 percent of exports, plus 10 percent of broad money. 2014-06-12 10:12:16 · [Huang Guobo] This is one of numerous concepts. We think that this indicator is relatively comprehensive because it considers the needs for payments of imports, repayments of external debt, and foreign exchange outflow channels, such as securities redemptions and foreign exchange purchases by domestic residents. But when applied to China, it still ignores some special national circumstances. For instance, China has such large-scale FDI (i.e., foreign direct investments) and some of the principal and profits of the FDI may need to be remitted. But this is omitted from the indicator. In addition, it does not take into account our need for ODI and the need for foreign capital to support China’s economic and financial systems reforms. In terms of the concept, a reasonable size is still open to discussion, but a broad consensus must be reached. 2014-06-12 10:14:12 · [Huang Guobo] For more than a decade, the massive foreign exchange reserves have prevented an overly rapid appreciation of the exchange rate and have effectively supported fast economic growth, employment growth, and growth of income and fiscal revenue. The deep problems from the sustained growth of foreign exchange reserves include the persistent imbalance in international payments and the continuous serious overdrawing of scarce domestic resources and serious environmental pollution. The huge costs of the foreign exchange reserves cannot be absorbed by the real economy so they are held mainly in the form of financial assets and flows overseas. The direct and indirect national benefits are obviously insufficient to offset the problems and costs. The foreign exchange administration departments will deeply implement the spirit of the 18th CPC National Congress and the 3rd Plenary Session of the 18th CPC Central Committee, further accelerate transformation of the economic development mode, focus on the central task of maintaining a basic equilibrium in the balance of payments, and insist on “expanding domestic demand, making structural adjustments, reducing the surplus, and promoting a balance” to maintain a reasonable and stable size of foreign exchange reserves. 2014-06-12 10:16:43 · [Host] Some Netizens have asked whether there are excessive foreign exchange reserves. How can we change this situation? 2014-06-12 10:17:37 · [Guan Tao, director of the SAFE’s Balance of Payments Department] This question can be answered in the following way. First, the Chinese government has long made it clear that it does not seek more foreign exchange reserves, an increase or decrease of which will be reflected in the country’s balance of payments. At the end of 2002, the 16th Party Congress included for the first time that maintaining a balance of payments is one of the four objectives of macro control. It was pointed out at the Central Economic Work Conference in late 2006 that the major contradictions in China’s balance of payments have shifted from a shortage of foreign exchange to an excessive trade surplus and overly rapid growth of foreign exchange reserves. Therefore, in the past years our primary work has been “to make structural adjustments, expand domestic demand, reduce the surplus, and promote a balance,” and the Chinese government has been making efforts in this direction. We can see that this policy has brought about certain results, for instance, in recent years the current account surplus (mainly trade in goods and trade in services) as a proportion of GDP has declined from its peak level of 10.1 percent in 2007 to about 2 percent, which is much lower than the internationally-accepted rational standard. This shows that we have made great achievements in improving the external equilibrium in our economy and in our balance of payments. 2014-06-12 10:19:16 · [Guan Tao] Second, we should take a two-pronged approach to cope with the excessive foreign exchange reserves, which are embodied in both high flows and high stocks. Our foreign exchange reserves have now basically reached US$4 trillion. Thus, to resolve the flow problems and control the balance of payments, we must take a major measure by accelerating the transformation of the mode of economic development and the restructuring and transformation of the mode of economic growth from being driven by investments and exports to being jointly driven by consumption, investments, and exports. Another measure is to increase imports while stabilizing exports to promote a trade balance. While improving the quality of foreign capital utilization, we shall also steadily expand capital outflow channels, increase capital exports, and facilitate a two-way, orderly, and rational flow of cross-border capital. Moreover, we shall continue to improve the market-oriented RMB exchange-rate formation mechanism, cultivate the domestic foreign exchange market, give further play to price leverages in the exchange rate to adjust the balance of payments, strengthen the monitoring of cross-border capital flows, and fine-tune the response plans. We shall guard against shocks of large capital inflows as well as the possible risks of concentrated capital outflows, carry out two-way monitoring and early warnings, and maintain our bottom line. 2014-06-12 10:21:41 · [Guan Tao] Another feature is to revitalize our stock assets. Given that we have such a large quantity of foreign exchange reserves, in order to improve their operation and management systems, we shall constantly make innovations and widen the channels and methods for applying foreign exchange reserves and shall raise their utilization efficiency according to the principles of “complying with the law, paying for use, improving benefits, and regulating effectively,” as well as in accordance with the overall national plan for reform and opening up and the objective requirements for economic development. All of these things cannot be accomplished overnight. Many domestic reforms, especially structural reforms, will be a long-term process. In addition, some reforms in the foreign economic sector should not be carried out in haste, but rather they need to be coordinated and matched with other domestic reforms. 2014-06-12 10:24:11 · [Guan Tao] Also, when promoting an equilibrium in the balance of payments, we shall give due consideration to our growth, employment, and inflation objectives instead of only focusing on the foreign exchange or an equilibrium. Furthermore, now that the balance of payments is also an international financial problem, it is constrained by the external environment; changes in the external environment will affect the evolution of the balance of payments. As a result, regarding the issue of promoting an equilibrium in the balance of our international payments, we must have confidence and courage as well as patience and perseverance. 2014-06-12 10:26:59 · [Host] Now let’s look at how foreign exchange serves the real economy. China has noted that finance must serve the real economy; then how do such huge foreign exchange reserves serve the real economy? Why don’t we use our large foreign exchange reserves to invest in domestic infrastructure or to solve the pension and health-care problems of our citizens? 2014-06-12 10:27:27 · [Huang Guobo] As I see it, the foreign exchange reserves must first of all guarantee our normal needs for foreign exchange purchases in the foreign exchange market, meet the needs of residents and enterprises in all respects, and play a supporting role in basically balancing supply and demand in the foreign exchange market. On this basis, due to various reasons such as the previous strong expectation that there would be an appreciation in the RMB exchange rate and the high interest rate spreads between China and other countries, people are unwilling to hold foreign exchange and foreign exchange reserves are increasing. Aside from guaranteeing the people’s needs for foreign exchange purchases in the foreign exchange market, there is the problem of how the foreign exchange reserves can support the real economy on such a basis. 2014-06-12 10:27:57 · [Huang Guobo] We have done some work on this. During the past few years, we have been considering what the foreign exchange reserves can do based on the requirements of the CPC Central Committee and the State Council and on the layout of the economic and financial reforms and the actual needs of the real economy. We have thereby applied the foreign exchange reserves at multiple levels. On the one hand, the PBOC and the SAFE have actively adjusted the foreign exchange surpluses and deficits of banks and the capital market by making many innovations in the instruments of the foreign exchange market (such as the spot exchanges and foreign exchange options) and in some platforms (such as the entrusted loan platform for foreign exchange reserves), and by supporting banks that have insufficient foreign exchange positions and adjusting their capital surpluses and deficits by means of loans. 2014-06-12 10:28:50 · [Huang Guobo] Nevertheless, foreign exchange funds have been offered to back up some key foreign cooperative projects and industries with national support. We have provided substantial financial support not only to SOEs but also to banks (including private banks), private enterprises, and small and micro enterprises to “go out” and “bring in” so as to mitigate their shortages of foreign exchange funds. In addition, we have cooperated with some international financial agencies, with a focus on the economies in the emerging markets, to meet local needs for investment and financing and to create a favorable international environment for Chinese enterprises to “go global,” to make investments, and to develop local trade. 2014-06-12 10:33:38 · [Huang Guobo] Since foreign exchange reserve investments are also much needed in many areas at home, such as infrastructure construction and development, there is a common concern whether the foreign exchange reserves can be used in these areas. Foreign exchange reserves are mainly intended for imports and investments, and if they are to be pumped into the domestic sectors, the primary focus should be on whether foreign exchange or RMB is needed in these sectors. If foreign exchange is needed, we can purchase foreign exchange in certain ways and some investment entities can invest with foreign exchange capital. This issue can be addressed in such ways. 2014-06-12 10:36:46 · [Huang Guobo] But if RMB is needed for domestic infrastructure projects, some problems may be created because if the foreign exchange reserves are converted into RMB, there will be a secondary settlement of foreign exchange, RMB will be arbitraged, and the foreign exchange reserves will not decline substantially. During these years, in response to this problem, the SAFE has, on the one hand, met the needs of the real economy (including that of infrastructure investments) for foreign exchange funds and demands by the general public for foreign exchange purchases; on the other hand, we have supplied abundant foreign exchange funds through the banking system to address the needs for infrastructure investments. Another issue of common concern is whether the foreign exchange reserves can resolve the pension and health-care problems for our citizens. As mentioned above, in addition to the “secondary settlement of foreign exchange,” this also involves the problem of uncompensated distribution and use of the central bank’s liability-backed foreign exchange assets. 2014-06-12 10:38:47 · [Huang Guobo] What are foreign exchange reserves? In our country, foreign exchange reserves are now held by the central bank and are formed by foreign exchange purchases supported by the PBOC’s liabilities. These funds correspond to the PBOC’s liabilities, and if they are used to cover pension and medical expenses without compensation, the central bank will be left with a mountain of debt and no assets and it will lose its robustness. Therefore, when talking about uncompensated use of foreign exchange reserves, we must keep in mind that foreign exchange reserves actually correspond to liabilities; in other words, we borrow funds to buy foreign exchange. But how can this debt be repaid if you divest these assets? This issue should be taken into consideration. 2014-06-12 10:44:47 · [Host] Is it because of large inflows of hot money that our country now holds so much in foreign exchange reserves? Will foreign exchange reserves increase significantly in the future? 2014-06-12 10:48:50 · [Guan Tao] We have also paid great attention to this issue. If hot money is the main source of our foreign exchange reserves, there will be high volatility and there will be a lot of impact. This issue has been under discussion since I first started to work at the SAFE. Our foreign exchange reserves doubled in 1994 and at the time everyone was discussing the source of these foreign exchange reserves—whether they came from a trade surplus or from hot money inflows. We have been tracking and monitoring this issue. The foreign exchange reserves reflect the balance of payments, namely the composition of the surplus in the balance of payments. So we can conclude that the increase in foreign exchange reserves basically comes from the surplus in the current account and direct investments. 2014-06-12 10:48:18 · [Guan Tao] We have calculated that during the thirteen years from 2001 to 2013, the current-account surplus and net inflows under direct investments amounted to US$3.8 trillion, while during the same period the foreign exchange reserve assets from trade increased by US$3.7 trillion. This means that trade and investment activities can basically account for the foreign exchange reserve growth during the past thirteen years, which is closely related to our real economic activities. This has strong policy implications for us; specifically, with the goal of reducing the surplus in the balance of payments and the accumulation of foreign exchange reserves, it is insufficient to simply rely on hot money controls. We have to find the structural reasons and accelerate the transformation of the economic development mode and the restructuring of the domestic economy. Therefore, this is not only an academic question, but also a question that has strong policy implications. 2014-06-12 10:52:29 · [Guan Tao] Concerning the issue of hot money or arbitrage fund flows, based on our analysis and practical knowledge, this is mainly associated with the pro-cyclical financial operations of domestic enterprises. In good economic times, there are RMB appreciation expectations, so enterprises convert foreign currencies into RMB and hold them in RMB. When foreign exchange is used, they either owe it to their overseas counterparts or borrow it from the bank to make external payments. In the aftermath of the 2008 crisis, there was a critical economic phenomenon whereby the major developed countries successively resorted to a quantitative easing monetary policy, which led to strong global liquidity and low interest rates for the major currencies. Thus before the crisis, the JPY was the arbitrage currency, but now the USD and EUR are both arbitrage currencies. The European Central Bank has just expanded its monetary policy and EUR arbitrage will be further improved. Under these circumstances, because of the generally expected appreciation of the RMB and the high interest rates for the RMB in China, enterprises engage in arbitrage behavior. There are inflow pressures during good times, but in the case of the volatile situation and downturn in the domestic economy in late 2011, expectations were changed and there were outflow pressures. 2014-06-12 10:53:36 · [Guan Tao] So the hot money we refer to is different from that which is understood internationally. Internationally, hot money refers to asset and currency speculation by “financial conglomerates.” But in China, hot money refers to capital that is manipulated by our enterprises and ordinary people based on the interest-rate spreads. Hence, in late 2008 and early 2009 there were acute fluctuations in China’s foreign debt, with heavy inflows during the first three quarters of 2008 and substantial outflows later in the year, but we did not face a crisis because we had large foreign exchange reserves and adequate solvency. Additionally, unlike elsewhere many of our arbitrage activities were based on actual operations instead of entry into speculative fields, so we were relatively stable. 2014-06-12 10:58:14 · [Guan Tao] Whether vast foreign exchange reserves will be accumulated in the future depends on how we predict the future balance of payments. According to our basic judgment, on the one hand receipts and payments under the current account will tend to be more balanced due to the acceleration of the economic restructuring and the transformation of the economic development mode. On the other hand, we encourage enterprises to go global. This will also increase the export of capital and direct investments, thus contributing to a gradual transition from the past net inflows to a more balanced state. 2014-06-12 11:00:09 · [Guan Tao] Third, as the RMB exchange rate becomes more market-oriented, the market will believe that the RMB exchange rate has basically reached a balanced and reasonable level, which will trigger two-way fluctuations and will restrain risk-free arbitrage activities. Just like the situation since this February, as a result of two-way fluctuations, expectations will diverge and corporate financial operations will be adjusted, thus also relieving the stresses of capital inflows. Furthermore, there are many instabilities and uncertainties worldwide, making two-way fluctuations of cross-border capital flows a new normal. Therefore, the future balance of payments will move closer to an equilibrium and the momentum of accumulating foreign exchange reserves will tend to slow down. 2014-06-12 11:00:53 · [Host] What is the investment income from the foreign exchange reserves? What are the measurement criteria for high or low investment income? Is it sufficient merely to just exceed the rate of inflation? · [Huang Guobo] During these years, foreign exchange reserves operations have faced low interest rates in the global environment. This implies low income from bond purchases or deposits because the central bank has flooded the market with capital and has lowered interest rates. Owing to a fairly low rate of return and a volatile global financial market, foreign exchange reserves have faced a low-income and high-risk environment. In the past several years, including last year, China’s foreign exchange reserves have maintained stable growth and have realized fairly good operating earnings in this low-income environment. Perhaps you will ask why good operating earnings have been realized in a low-income environment. This shows that the diversified asset allocations that have been vigorously promoted in recent years have exerted a waxing and waning hedging effect among the various currencies, markets, and financial assets, which is a major reason for the generally fairly good earnings. In addition, confronted with a complex and ever-changing market, the reserves managerial personnel have actively seized all kinds of opportunities to reap profits, and the team has stood the test of several crises and the impact of significant market volatility. The excellent operations and management team for foreign exchange reserves investments has been very helpful. 2014-06-12 11:02:46 · [Huang Guobo] Another issue of common concern is why we should compare the income of the foreign exchange reserves with inflation. We often consider the safety of foreign exchange reserves and whether their value is preserved or increased from a basic starting point – that is, whether their purchasing power is maintained – but how can we measure this? We should compare the rate of return on the foreign exchange reserves and the inflation rate, and if the former is higher than the latter, purchasing power is maintained. In China today, the rate of return on foreign exchange reserves is far above the inflation rate in the invested countries, which suggests that the purchasing power of the foreign exchange reserves has been maintained, or has even been improved, and their safety is guaranteed. 2014-06-12 11:07:49 · [Huang Guobo] I want to make two points about how to treat the rate of return on the foreign exchange reserves. Significantly different from the management of general investments, foreign exchange reserves must have sufficient liquidity because their primary function is not to make a profit from investments but to guarantee China’s ability to make external payments under normal and extreme circumstances. Therefore, the fundamental principles for reserves management are safety, liquidity, and then appreciation. What does liquidity mean? Just like cash in your hands, the liquidity yield is very low. For example, if you compare demand deposits and time deposits, the yield of the former is low whereas that of the latter is much higher and the revenue from some wealth management products may be even higher. Foreign exchange reserves must first have sufficient liquidity, which will lower their overall rate of return. After their liquidity requirements are met, longer-term and more diversified investments with much lower liquidity but with much higher income can be made. This is basically a structural consideration. 2014-06-12 11:08:49 · [Huang Guobo] I would like to add one thing. An internationally and domestically accepted investment benchmark management mode has been introduced to foreign exchange reserves during these years. What is an investment benchmark? An investment benchmark is used to analyze the historical market data according to the objectives and requirements of the foreign exchange reserves and actual market conditions and to constantly optimize the analysis based on predictions of trends in future economic and market developments to determine the investment structure and the investment tools for the foreign exchange reserves. It has been shown that the investment benchmark mode for foreign exchange reserves, which has its own features and also draws upon the experience of domestic and overseas peers, accommodates current needs for large-scale operations and management. Such an investment benchmark system has helped the operations and administration team for foreign exchange reserves withstand the tests of all crises and over the years has generated extra income from the foreign exchange reserves. 2014-06-12 11:11:58 · [Netizen Sha Bo Tou Xiao Wai] Since there are many uncertainties and great risks in the current international financial market, how can we prevent risks in the operation and administration of our foreign exchange reserves? 2014-06-12 11:14:25 · [Huang Guobo] The international market is highly volatile. Facing an uncertain market, we shall first set clear and efficient authorization mechanisms with distinct authorization boundaries and make rapid responses and effective decisions. Now there is a set of clear-cut and explicit authorization mechanisms that guarantees highly effective administration and operation of our foreign exchange reserves. On this basis, we have been operating our foreign exchange reserves based on the principles of safety, liquidity, value preservation, and appreciation, always placing priority on risk prevention and safety assurances and then engaging in prudent, standard, and positive investment operations. 2014-06-12 11:13:50 · [Huang Guobo] You may wonder what our specific measures are to prevent risks. On the one hand, the most important means to prevent the risks of large-scale financial assets is always diversification. Don’t put all of your eggs in one basket; when one door shuts, another opens. Not everyone can judge the market accurately, but whatever risks may occur, they can be tolerable and can be compensated for by other investment income. During these years, the foreign exchange reserves team has done a lot of work in this respect and its most fundamental response has been to diversify the reserves in terms of currency, assets, and investments. 2014-06-12 11:16:10 · [Huang Guobo] Furthermore, the foreign exchange reserves team has always adhered to a prudent investment philosophy, avoided making investments without first making accurate judgments or thorough analyses, observed a very rigorous risk management system, and carefully assessed and prospectively analyzed the various possible risks to the foreign exchange reserves. In the case that all risks could be identified, advanced risk management technologies have been applied to carry out early warnings, timely tracking, and all-round and multi-dimensional monitoring and management of a wide range of risks. Over the past years, we have accumulated an excellent and effective risk management system. What role has it played? For example, when the subprime crisis erupted, we did not have any product with a subprime mortgage problem in our foreign exchange reserves. 2014-06-12 11:17:30 · [Huang Guobo] Moreover, in addition to investment risk prevention, internal controls are critical. Great importance has been attached to internal controls, and an internal control system of checks and balances has been established according to the requirements of standardization, routinization, and institutionalization, and various regulations and operating procedures have been constantly improved. Meanwhile, the foreign exchange reserves administration department has been regularly audited by the relevant departments and has actively accepted external supervision and increases in the transparency of policy and administration in a variety of ways. 2014-06-12 11:21:13 · [Netizen Xiao Xiao Dou Ya Cai] Despite such huge foreign exchange assets, ordinary people know very little about how to manage and utilize them. Can information on the operation and administration of the foreign exchange reserves be more transparent? 2014-06-12 11:21:28 · [Huang Guobo] During these years, the transparency of information about the foreign exchange reserves has been continually improved due to quite a number of channels to distribute information. For instance, as per the Regulations on the Disclosure of Government Information, we have distributed information through the SAFE’s Web site, press conferences, exclusive media interviews, expert forums, and so forth. Additionally, relevant information is also regularly released in such publications as the Annual Report of the State Administration of Foreign Exchange and the Report on the Balance of Payments. Overall, the degree and standards for disclosure of information regarding our foreign exchange reserves meet the IMF’s General Data Dissemination Standard (GDDS). We are also certainly aware that information transparency can be further enhanced. So we will gradually raise the transparency of information about our foreign exchange reserves in line with international norms, continue improving the channels and means of information disclosure, and increase communications with Netizens and the general public. 2014-06-12 11:22:50 · [Huang Guobo] I would like to stress one point. The scale and trading volume of our foreign exchange reserves are so large that if we disclose too much investment information, it may trigger market fluctuations, imitation, and speculation, which, on the one hand, will destabilize the international financial market, and, on the other, will affect the management, investment, and normal operations of our foreign exchange reserves. So we have prudently mastered the methods and degree of disclosure. The following is a counter-example. Amid the subprime crisis, some countries frequently disclosed structural data about investments based on their own systems. When these countries were coping with the crisis, realizing assets, and stabilizing financial market operations, information was expected by the market in advance because it had been too transparent, which increased the difficulties in the crisis response and the volatility of the financial market. Therefore, we have to give overall consideration to these issues. 2014-06-12 11:23:50 · [Netizen Lou Shang Ren Jian] China’s foreign exchange resources are centralized in the hands of the state in the form of foreign exchange reserves. Why do we not vigorously promote the policy of “foreign exchange held by the people”? On a number of occasions, the SAFE has proposed “allowing the people to hold foreign exchange.” Isn’t that the case of transferring some foreign exchange reserves to the people? 2014-06-12 11:24:24 · [Huang Guobo] The SAFE encourages private application and investment of foreign exchange funds and the realization of “foreign exchange held by the people” to alleviate the pressures of centralizing foreign exchange in the state. Over the years, the SAFE has constantly improved the foreign exchange management system to guarantee the legal demands for foreign exchange purchases by banks, enterprises, and residents. Now foreign exchange is not limited to import payments by Chinese enterprises. In the foreign exchange link with enterprises “going global,” the SAFE has imposed no limits and basically has adopted an open policy. Individuals can hold foreign exchange in many ways and are allowed to purchase up to US$50,000 of foreign exchange per year. There are QDIIs and other channels for outward investments. And the travel, shopping, overseas study, visits, and other swap channels are all open. 2014-06-12 11:24:39 · [Huang Guobo] During these years, there has been much policy space for “foreign exchange held by the people.” The problem with the policy was there were strong expectations for a one-way appreciation of the RMB, so people were unwilling to hold foreign exchange. The foreign exchange inclination toward liabilities and the local currency inclination toward assets were similar cases, suggesting that residents and enterprises were both reluctant to hold foreign exchange. Given this situation and the large current-account surplus and the continuous inflows of foreign investment over the years, the accumulation of foreign exchange was centralized in the foreign exchange reserves. The current scale of foreign exchange reserves is not the objective of the PBOC or the SAFE, but the foreign exchange reserves should execute macro policies and undertake the task of market stabilization. Efforts must now be made to further advance the policy of “foreign exchange held by the people,” further fine-tune foreign exchange management policies, and, more importantly, continue to improve the RMB exchange-rate formation mechanism and enhance the flexibility of two-way exchange-rate fluctuations. In this way, people will not expect a one-way appreciation and will be more willing to hold foreign exchange, thus gradually allowing the policy to be achieved. There is optimism in the future as current exchange rates are expected to take on two-way trends and the appetite for holding foreign exchange will tend to rise. 2014-06-12 11:26:08 · [Host] One Netizen asked that since the price of gold has been falling recently, is gold bargain-hunting under consideration? 2014-06-12 11:29:19 · [Huang Guobo] We have just talked about the issue of “foreign exchange held by the people.” As far as holding gold is concerned, China now has a rational structure with both official gold reserves and active holding and purchase of gold among the people. Hence, the policy of “gold held by the people” has been well achieved. Let me quote some basic data. China is now the world’s largest producer of gold, with annual output of about 400 tons. It has not only produced its own gold, but it has also imported gold in large quantities. Data from the Census and Statistics Department of the Hong Kong SAR Government show that in 2013, Hong Kong exported a total of 1,495 tons of gold to Mainland China, with net imports of 1,158 tons from Mainland China. The imports and exports basically reflect private purchases and demand. Therefore, private investment and consumption needs are growing rapidly in China and “gold held by the people” is being realized. 2014-06-12 11:30:20 · [Huang Guobo] How does one purchase and import gold? Actually, gold is purchased with foreign exchange. In other words, this not only realizes the goal of “gold held by the people,” but also helps ease pressures from the growth foreign exchange reserves. So it has produced very good momentum. Because foreign exchange reserves are huge whereas the gold market is relatively small, both in terms of annual production and capacity, the investment of foreign exchange reserves will have a significant influence on the gold market. For example, if the price of gold is pushed up, then people will have to pay more for gold and the cost of gold will also go up, which will be unfavorable in terms of our high consumption of gold. Because of this, when planning to invest foreign exchange reserves in the gold market, we must take into consideration its influence on the market and whether it will be beneficial for consumer groups in China that import a large quantity of gold. 2014-06-12 11:31:56 · [Huang Guobo] From another perspective, private demand for gold purchases is actually large but it is fragmented and intangible, and it is conducted through multiple channels and by multiple subjects that have less influence on the market, so this is more efficient in terms of the gold trade. In addition, gold held by the people has both investment and consumption roles with higher allocative efficiencies. Therefore, overall consideration must be given to the increase and investment of official gold holdings by our country as well as to private gold holdings. 2014-06-12 11:34:19 · [Host] A Netizen asked that since China possesses massive foreign exchange reserves, but enterprises are often cash-strapped to launch overseas investments, how can we better support enterprises to “go global”? 2014-06-12 11:35:04 · [Huang Guobo] We have taken a series of key initiatives during these years. First, the SAFE and the state macro-control departments have actively promoted a basic equilibrium in the balance of payments. Under the architecture of a basic equilibrium, enterprises and various investment subjects and consumer groups will increase their investments abroad and the consumption of imports and foreign exchange will be used more by the real economy. On this basis, the SAFE has done a lot of work, such as removing the policy obstacles for enterprises to purchase foreign exchange in order to “go global.” During the past few years, we have set up the entrusted loan office, greatly alleviating the banks’ shortages of foreign exchange funds and providing them with strong backing. In order to better support enterprises to “go global,” we have supported the banks’ foreign exchange reserves to fund the creation of a macro environment with an improved balance of payments and balanced fluctuations of the RMB as well as some advanced micro policies, such as further deregulating the capital account. 2014-06-12 11:35:24 · [Huang Guobo] By the way, “going global” refers to both many opportunities as well as many risks, so it is critical that one make money with one’s capital, do things within one’s capabilities, and clarify rights and responsibilities. In the international market, whether opportunities can be seized depends on your capital strength and the cost of funds. Zero-cost and low-cost funds must be short. Bad for fair competition, these funds may cause blind and vicious competition and may undermine corporate profitability. The support of foreign exchange for enterprises to “go global” must be based on the premise of effective risk preventions and clear liability subjects, and must adhere to market-oriented operations with the aim of safeguarding fund security and fair returns. 2014-06-12 11:39:12 · [Host] The size of the foreign exchange reserves is so large, but investment income is always negative. Does this mean our foreign exchange reserves are operating at a loss, and how can we improve the level of returns on outward investments? 2014-06-12 11:43:25 · [Guan Tao] For this question, Mr. Huang just provided an explanation. China’s return on foreign exchange reserves investments is higher than the inflation rate in the invested countries, so foreign exchange reserves operations and administration have effectively attained the targets of value perseveration and appreciation, without incurring losses. Beginning from when our external financial assets and liabilities were publicized in 2004, by subtracting liabilities from assets China has been a net external creditor with net external assets. Except for 2007 and 2008 when investment income registered a small surplus, in the other years there was always a deficit. Such a situation did exist, for example, in late 2003 when China was the second largest net creditor, next only to Japan, as reflected in its net external assets of US$1.97 trillion. But its investment income was US$-59.9 billion. However, the negative income did not mean that our outward investments were in the red. 2014-06-12 11:43:46 · [Guan Tao] Because investment income differences reflect the return of foreign investments minus the income of outward investments, they are different business entities. We make profits by investing in other countries and vice versa. Just because they make money does not mean we lose money. Take FDI in China for example. Profits are repatriated after the investment and management. Nevertheless, they bring us funds, technologies, and management experience, create job opportunities, increase our tax revenue, and expand our international market. As a result, it is not the case that we lose money. The balance of payments statement shows that our return on investments abroad amounted to US$167.7 billion in 2013, with a considerable part being derived from the investment income of foreign exchange reserves. As we have calculated, from 2005 to 2013, China’s return on outward investments averaged 3.3 percent, almost the same as that of the developed countries. 2014-06-12 11:54:43 · [Guan Tao] As to why our investment income is negative after offsetting the balance, this reflects the structural problems in China’s opening up. For one thing, we make use of foreign investments (mainly FDI) and the return on foreign investments in China is high, which is a direct reason for our negative investment income. From 2005 to 2013, the return on foreign investments in China averaged 6.7 percent while that in the developed countries was 1 percent to 3 percent. Why is that? Because 60 percent of the foreign investment that we utilized was FDI. As equity investment, FDI has high stability but poor liquidity. Risks are shared and normally there is a demand for a high risk premium. 2014-06-12 11:58:47 · [Guan Tao] In addition, the advantage is that such kinds of capital inflows are long term and stable and thus they avoid monetary and debt crises that are brought about by the introduction of foreign capital by many emerging countries through foreign debt or portfolio investments. Another reason lies in the mismatch of the subjects of our external assets and liabilities. It can be seen from the external balance sheet that our country is a creditor and the private sector is a debtor. If the foreign exchange reserves are excluded, the external net liabilities of the private sector would total approximately US$2 trillion. At the national level, China is an immature net creditor, but from the perspective of the private sector, it is a mature net debtor. From the development stage of a net debtor, we conform to a reasonable pattern in the balance of payments, featuring a current-account and trade surplus and an investment deficit. 2014-06-12 12:02:16 · [Guan Tao] However, our investment income is negative and China is a net creditor, which indicates that there is much room for improvement in the utilization efficiency of our foreign exchange reserves. Based on this, the financial openness of a country should be measured by the ratio of its financial assets and liabilities to GDP. We are now the world’s second largest economy, but our financial openness is low. In 2013 external assets and liabilities were 1.1 times GDP, as compared with the following figures in some developed countries: 3.2 times (in the US), 2 times (in Japan), 3.7 times (in the Eurozone), 1.2 times (in Russia), and 1.4 times (in South Korea). Also, a considerable part of our outward investment assets is foreign exchange reserves and the ratio would be lowered to 0.65 times if they were to be removed, so there is much room in this regard. 2014-06-12 12:07:30 · [Guan Tao] Therefore, on the one hand, we must further promote the policy of “foreign exchange held by the people” and expand private outward investments to develop decentralized, diversified, and market-oriented modes and channels for outward investments and application of foreign exchange funds in the future. On the other hand, we must utilize foreign capital in a more active, rational, and efficient way. Based on financial openness, market tolerance, and risk management ability, we shall work along both lines further improving the quality of FDI utilization and trying to use foreign capital in other forms because of the lower costs to change our negative investment income. 2014-06-12 12:11:08 · [Host] Thank you, and thanks for the attention of our Netizens. See you next time. 2014-06-12 12:13:43 (The original text was published on www.gov.cn) 2014-07-07/en/2014/0707/1121.html