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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
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To further improve the quality and transparency of China's foreign-related data and fully embody the fruits of the RMB internationalization, the People's Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) have recently disseminated the data on China's foreign exchange reserves, gold reserves and full-scale external debt as required by the Special Data Dissemination Standards (SDDS) of the International Money Fund (IMF). China's external debt includes external debt in RMB after the adjustment of the coverage of the external debt. Responsible persons of the PBC and the SAFE took questions from reporters. I. What is the SDDS? A: SDDS stands for the Special Data Dissemination Standard of the IMF, a global benchmark established in 1996 by the IMF for disseminating countries' economic and financial statistical data. To enhance the transparency of the macroeconomic statistical data of its member countries, the IMF has established two data dissemination standards, namely, General Data Dissemination Standard (GDDS) and Special Data Dissemination Standard (SDDS). The two standards are under similar overall frameworks, but the SDDS imposes higher requirements on data coverage, periodicity, timeliness, and quality, as well as access by the public. Countries that subscribe to the SDDS should disseminate the data on five sectors, namely, the real economic, fiscal, financial, external and socio-demographic sectors, as required by the SDDS. At present, 73 economies have subscribed to the SDDS, including all developed economies and major emerging market economies such as Russia, India, Brazil and South Africa. China has been a participating country of the GDDS to disseminate its macroeconomic data before. II. Why would China subscribe to the SDDS? A: As economic globalization deepens, a consensus has been achieved on improving data quality, narrowing data gaps, increasing data comparableness and enhancing data transparency. China has actively responded to the initiatives to get aligned with the universal data standards worldwide. In November 2014, President Xi Jinping officially announced at the G20 Summit in Brisbane that China will subscribe to the Special Data Dissemination Standards (SDDS) of the IMF. The conditions for disseminating the data required by the SDDS have been met after technical preparations. Compliant with China's demand for further reform and opening up, subscription to the SDDS is conducive to improving the transparency, reliability and global comparableness of the macroeconomic statistical data to perfect the statistical methods, to developing a deeper understanding of the macro-economy to provide grounds for making macroeconomic decisions and guard against and address economic risks, and to China's active participation in global economic cooperation to boost the confidence of the international community and the public in China's economy. III. What data on foreign exchange reserves should be disseminated as required by the SDDS? A: The data on foreign exchange reserves disseminated as required by the SDDS contain two parts, namely, "official reserve assets" and "data template for international reserves and foreign currency liquidity". The former includes foreign exchange reserves, reserve position in Fund, SDR, gold and other reserve assets, of which the foreign exchange reserves refer to the size of foreign exchange reserves China usually unveils. The latter is comprised of four forms, respectively on official reserve assets and other foreign currency assets, expected net outflow of foreign currency assets in the short term, contingent net outflow of foreign currency assets in the short term and MOU. Regarding data periodicity, these data will be disseminated on a monthly basis, of which the "official reserve assets" for the previous month will be disseminated no later than the seventh day of each month and the "data template for international reserves and foreign currency liquidity" for the previous month will generally be released at the end of each month. Since this is the first time we have disseminated the data, we release both parts at the same time for your reference, and will disseminate them separately in the future, in their respective time frame. The statistics collection will be conducted in line with the uniform standards of the IMF. IV. What are the highlights of the data disseminated this time, compared with the size of foreign exchange reserves previously disseminated? A: The highlights are as follows: (1) The foreign exchange reserves disseminated this time are identical to the foreign exchange reserves previously unveiled in terms of data coverage. The foreign exchange reserves previously unveiled were collected based on the methodology and standards required by the SDDS. As at the end of June 2015, China's foreign exchange reserves amounted to USD 3.69 trillion. (2) Other foreign currency assets are also disseminated. As at the end of this June, the PBC reported USD 232.9 billion in other foreign currency assets. (3) The size of gold reserves is increased. As at the end of this June, China's gold reserves were 53.32 million ounces (or 1,658 tons). V. China's gold reserves increased by 604 tons from the end of April 2009, according to the gold reserves data disseminated this time. Why did China increase its gold reserves? A:Gold reserve has been a key part of countries' diversified international reserves and many central banks have gold as part of their international reserves. So does China. As a special asset with properties of financial assets and commodities, gold, together with other assets, is conducive to adjusting and optimizing the overall risk and return characteristics of the portfolios of international reserves.From the long-term and strategic perspectives, we will dynamically adjust the configuration of the portfolios of international reserves when necessary, to ensure the security, liquidity, value preservation and appreciation of international reserve assets. VI. The global gold prices have been fluctuating sharply in recent years. When and through which channels did China increase the gold reserves unveiled this time? Will China continue to do so in the future? A:The global gold prices go up and down like those of other commodities and financial assets. Over the past few years, gold prices have declined after climbing to its historical peak. Based on our assessment of the asset value and analysis of the price changes of gold, we accumulated these gold reserves through multiple domestic and overseas channels, while making sure the market was not impacted and influenced. The channels include purification of mixed gold in China, production and storage of gold, and domestic and foreign trade. With special risk and return characteristics, gold is a desirable investment category in a given period. But as the capacity of the gold market is smaller than the size of China's foreign exchange reserves, the market will be impacted if plenty of gold is bought in the short run using foreign exchange reserves. In China, the largest gold producer and a major gold consumer worldwide, it is a commonplace that people buy and keep gold. In the future, we need to take into consideration both private demand for investments and the requirements for allocation of international reserve assets and take flexible measures. VII. Will the SAFE further enhance the transparency of foreign exchange reserves information after disseminating the data required by the SDDS? A: The transparency of the foreign exchange reserve information has been enhanced in recent years. Foreign exchange reserve information has been disseminated through the SAFE's website, press conference, media interviews, forums with experts, as well as the annual reports and the balance of payments reports by the SAFE. Changing from participating in the GDDS to subscribing to the SDDS is also a new measure to further enhance the transparency of the foreign exchange reserve information in line with international standards. We will continue to take into consideration the security of foreign exchange reserve assets and the requirements for operations to ensure the continued enhancement of the transparency of the foreign exchange reserve information, in accordance with the national laws and regulations and international standards. VIII. What are the background and implications of this adjustment of external debt coverage? A: According to the Interim Measures for the Administration of the External Debt, jointly released by the NationalDevelopmentandReformCommission, the Ministry of Finance and the SAFE in 2003, external debt in China refers to the debt owed by a domestic institution to a non-resident, which are denominated in a foreign currency and exclude external debt in RMB, indicating the coverage of China's external debt is narrower than the international standard coverage. As the external debt in RMB has increased in recent years along with the boom of the cross-border RMB business, the SAFE classified and collected statistics on China's external debt in the early stage as per SDDS and disseminated the full-scale total external debt while unveiling the international investment position (IIP) form, in a bid to fully reflect the overall size of China's external debt. To adopt the SDDS in an all-round way, the SAFE has disseminated the full-scale data on China's external debt on a quarterly basis since the beginning of 2015, so that the public could understand China's external debt in more detail. Including the external debt in RMB in the overall external debt is just an adjustment of statistical method and does not increase the amount of external debt to be serviced. Given this, the adjustment of the data coverage of external debt will not change China's liabilities to service its external debt. With the above adjustment, the data coverage of the external debt China unveils to the public will be further improved and get aligned with the latest international standards, which will be conducive to improving the standards and international comparableness of the data on China's external debt. IX. Why does the balance of the full-scale external debt rise? A: As at the end of March 2015, China's outstanding full-scale external debt amounted to RMB 10.2768 trillion (equivalent to USD 1.6732 trillion), due to the adjustment of the statistical coverage of external debt. To be specific, the amount of outstanding external debt in RMB that was included in the statistical scope for the first time was RMB 4.9424 trillion (equivalent to USD 804.7 billion), accounting for 48.1% of the outstanding full-scale external debt. Calculated by the coverage (external debt in foreign currencies) before the adjustment, China's outstanding external debt was down by 3% from the end of 2014. X. What would you say about China's external debt in RMB accounting for nearly half of its full-scale external debt? A:China is a highly open economy that ranks No. 2 worldwide. Since the initiation of the RMB internationalization in July 2009, RMB cross-border settlement has grown rapidly in size, with the value settled rising from RMB 3.6 billion in 2009 to nearly RMB 10 trillion in 2014. The cross-border receipts and payments in RMB has climbed year by year as a percentage of the cross-border receipts and payments in RMB and in foreign currencies in China, say, from 1.7% in 2010 to 23.6% in 2014 and further to 27.7% in January to May 2015, and RMB has become the second most used currency in cross-border receipts and payments in China. Statistics of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) show that RMB remained stable in its position as the world's No. 5 payment currency in May 2015, 14 places ahead of the ranking for the beginning of 2012; its market share was 2.18%, 8.7 times that of the beginning of 2012; and RMB also remained stable in its position as the second most used currency in trade finance. At the end of this March, non-resident deposits and external debt in RMB under trade finance constituted the majority of China's external debt in RMB, making up nearly 60% of the nation's total external debt. The non-resident deposits refer to the external debt incurred by the RMB deposits of overseas institutions in domestic banks. Considered as external debt in statistics, these deposits differ largely from the external debt directly owed by domestic institutions to overseas parties, indicating non-residents are very willing to hold RMB assets, which is conducive to pressing ahead with the RMB internationalization. Against the backdrop of import and export trade, external debt in RMB under trade finance refers to the external debt incurred by provision of financing products by a domestic financial institution to importers and exporters. In essence, the external debt is a natural result of the increased percentage of RMB settlement in China’s cross-border trade. As the international use of the RMB is expanding in terms of area and scope, which has injected new life into the global financial market, overseas players' demand for holding RMB assets is surging, thus improving the position of the RMB in the global market. This embodies the global confidence in China's economic development and confirms the results of China's reform and opening up, indicating that the RMB internationalization is speeding up. Along with the fast economic and financial development, and the deepening of the reform and opening up in China, especially the implementation of the One Belt and One Road strategy, the RMB internationalization will go deeper, and the external debt in the form of RMB assets held by non-residents will continue to grow. XI. What are the differences between external debt in RMB and that in foreign currencies? A:The external debt in RMB and that in foreign currencies are essentially different in quote currency and payment currency, and in impact on a country's foreign exchange reserves due to the sharp fluctuations of exchange rate and servicing of external debt, thus resulting in different impacts on the economic operation and financial system of the country. To be specific, external debt in foreign currencies is vulnerable to the fluctuations of exchange rate and may increase burden on the debtor to service debt amid a crisis, while the external debt in RMB is immune from the monetary mismatch risk and the foreign exchange rate risk, especially the risk associated with foreign exchange payments, and does not consume foreign exchange reserves directly. At the international level, since the currencies of developed economies such as Europe and the US are highly internationalized and have become the major international reserve currencies, their external debt in domestic currency takes up a large percentage. In US and Germany for example, their external debt in domestic currency accounted for 93% and 72% respectively in their total external debt as at the end of 2014. In other economies with a low level of currency internationalization, the external debt in foreign currencies constituted the majority of their external debt, with a low proportion of external debt in domestic currency. In comparison, the percentage of China’s external debt in RMB, 48.1%, is lower than those of developed economies such as Europe and the US but higher than the major emerging market economies in Asia. Given this, the external debt in domestic currency of a debtor, especially a developing debtor country, is less vulnerable to the changes in exchange rate, exposed to lower external uncertainties and less risky than the external debt in foreign currencies (see table 1). XII. How risky is China's external debt? Will the high percentage of China's short-term external debt expose China to a structural risk? A: According to the Global Development Finance 2012 and the Little Data Book on External Debt 2012 released by the World Bank, the average external debt ratio, debt ratio, debt servicing ratio, and the ratio of foreign exchange reserves to short-term external debt in middle-income countries in 2010 were 69%, 21%, 10% and 137% respectively, compared with 35%, 8.6%, 1.9% and 562% in China in 2014 (see table 2), indicating the sustainability of China's external debt measured by those indicators is high and the overall risk is modest. In terms of debt maturity, the percentage of China's short-term external debt by the end of this March was higher than 70%, but of the debt that matures within one year, more than half is credit associated with trade. Since China is a foreign trade giant, the percentage of credit associated with trade, such as inter-company trade credit, trade finance of banks, and debt for financing like short-term notes associated with trade, is also high. Of China's short-term external debt, this part of external debt has genuine trade background, indicating the solvency risk is limited. Moreover, given the small size of China's short-term external debt versus the sizes of foreign trade and foreign exchange reserves, the risks associated with short-term external debt are within control. Table 1 External Debt Position of Selected SDDS Subscribers by the End of December 2014: Debt in Foreign Currencies and Domestic Currency In USD 100 million Country Debt in foreign currencies Debt in domestic currency Total external debt Balance Percent Balance Percent Argentina 1440 96% 64 4% 1504 Bulgaria 477 97% 15 3% 492 Colombia 956 94% 56 6% 1012 Croatia 528 93% 39 7% 567 Georgia 126 94% 9 6% 134 Germany 15765 28% 40147 72% 55912 Hungary 1396 77% 423 23% 1819 India 3398 74% 1221 26% 4619 Kazakhstan 1372 97% 44 3% 1416 Republic of Korea 2973 70% 1282 30% 4254 Moldova 2778 66% 1439 34% 4217 Philippines 752 97% 24 3% 777 Romania 1015 89% 130 11% 1145 Russia 4911 82% 1061 18% 5973 South Africa 675 46% 776 54% 1451 Thailand 997 71% 410 29% 1407 Turkey 3740 93% 284 7% 4024 Ukraine 1242 98% 21 2% 1263 US 10493 7% 141879 93% 152372 Source: Quarterly External Debt Statistics of World Bank Table 2 Major Indicators of External Debt Risks in China by the End of 2014 Before the adjustment of external debt coverage (external debt in foreign currencies) Debt ratio (outstanding external debt/GDP) 8.64% External debt ratio (outstanding external debt/foreign exchange receipts) 35.19% Debt servicing ratio (external debt serviced/foreign exchange receipts) 1.91% Ratio of foreign exchange reserves to short-term external debt 562.43% Source: National Bureau of Statistics, State Administration of Foreign Exchange 2015-08-12/en/2015/0812/1165.html
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FILE: No. 1 of the Publicity Material Series on the Balance of Payments and International Investment Position Manual (Sixth Edition)——Overview of the Balance-of-Payments Statistics and the Revision of the Manual 2014-12-04/en/2014/1204/1136.html
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FILE: No. 3 of the Publicity Material Series on the Balance of Payments and International Investment Position Manual (Sixth Edition)—Relevant Requirements of the IMF and China’s Preparatory Work and Implementation Plan 2014-12-04/en/2014/1204/1138.html
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Q: How do you view the changes in the data on foreign exchange settlement and sales by banks in August? A: Despite fragile recovery of the world economy, China's economy has been growing slowly but stably and confidently since the beginning of this year, with positive factors on the rise. Due to the impact of multiple domestic and overseas factors, the short-term cross-border capital flows have been fluctuating more sharply as the supply of and demand for foreign exchange in China have been basically balanced. In August, banks recorded a deficit of RMB 274.5 billion (equivalent to USD 43.5 billion) between foreign exchange settled and sold. The factors that impacted this deficit include: first, market players were more willing to hold foreign exchange, with the USD deposits held by domestic residents and enterprises with domestic banks on the rise. Second, market players optimized the arrangements for assets and liabilities in domestic and foreign currencies. Companies adjusted the structure of foreign currency liabilities and RMB assets that was popular in the past few years, making the US dollars and the renminbi more matched in the assets and liabilities, thereby reducing the foreign exchange rate risk. Third, trading and investment activities resulted in the increase in external payment, including foreign trading companies accelerating foreign exchange payments and actively repaying debt incurred by trade finance as well as seasonal factors like purchase of foreign exchange for travel and for return on investment. August is the peak season for overseas travel and studying abroad by Chinese residents as well as for distributing dividends and purchasing foreign exchange by enterprises. Generally speaking, the recent changes in foreign exchange receipts and payments have been driven primarily by economic and market factors and show the bidirectional volatility of cross-border capital flows, which is normal and affordable. While continuing to vigorously facilitate trading and investment activities by market players that do business in compliance with laws and regulations, the SAFE will further enhance monitoring and warning of cross-border capital flows, accelerate building and improving the external debt and capital flow management system under the macro-prudential management framework, and increase counter-cyclical policy tools, so as to stick to its bottom line of guarding against systematic and regional financial risks. 2015-11-10/en/2015/1110/1174.html
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FILE: No. 2 of the Publicity Material Series on the Balance of Payments and International Investment Position Manual ( Sixth Edition)--Interpretation of the Changes in Balance of Payments Forms and Statistics 2014-12-04/en/2014/1204/1137.html
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In early 2009 the International Monetary Fund (IMF) published the revised sixth edition of the Balance of Payments and International Investment Position Manual (“BPM6” or “the sixth edition of the Manual”). BPM6 is the latest international standard for the balance of payments (BOP) statistics, and all member countries (economies) of the IMF are obliged to carry out BOP-related statistics and to prepare BOP statements in line with these standards. In order to facilitate the general public and the declaring entities to learn about and study the latest international standards and requirements regarding the BOP statistics, to recognize the significance of implementing the sixth edition of the Manual, to enhance awareness of the BOP statistical declaration, and to better support improved work in terms of the BOP statistical system and to carry out systemic construction to implement BPM6, the State Administration of Foreign Exchange (SAFE) has compiled a series of BPM6 interpretation materials: 1). A brief introduction to the BOP statistics and an overview of the revisions to the Manual;2.) Interpretations of the changes in the forms and data on the BOP statistics; and 3). Relevant requirements of the IMF and China’s preparatory plans and work for implementation. The major contents include: introduction to the basic concepts in the BOP statistics, background, major content, and the impact of BPM6 revisions; interpretations of the meaning of the latest forms, statistical changes in the statistical statements, as well as differences in the forms from the fifth edition; time arrangements and implementation schedule for BPM6 as determined by the IMF and the major economies, China’s preparatory work and work plan in all aspects for BPM6 implementation, and; answers to questions related to BPM6, and so forth. 2014-12-04/en/2014/1204/1139.html
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To make the release of foreign exchange administration data more transparent and facilitate the general public to obtain and use the balance of payments data and related data, the Timetable for the Release of Major Statistical Data 2015 is hereby published (see the appendix for details). FILE: Timetable of the SAFE for the Release of Major Statistical Data, 2015 2015-03-31/en/2015/0331/1151.html
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To further increase the transparency of the balance of payments data and make better use of the social benefits of statistics, the State Administration of Foreign Exchange (SAFE) will release the data under the two subitems of foreign-related receipts and payments by banks on behalf of customers, namely trade in goods (by the Customs statistical standard) and other investments, monthly data on trade in goods under China's balance of payments, and monthly data on the overview of transactions in the Chinese foreign exchange market, based on the standards and types of data released every month, and stop releasing the quarterly data on non-residents' RMB deposits starting from 2015. To facilitate the use of the time series data, the SAFE will update the historical data on foreign-related receipts and payments by banks on behalf of customers since 2010. 2015-03-31/en/2015/0331/1152.html
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In recent years, in order to adapt to the new situation and new requirements of China’s opening up, the foreign exchange authorities, in light of the changes in the balance of payments situation, has actively carried out policy adjustments and systemic innovations, with a focus on expanding capital outflow channels, and has introduced a series of policies and measures on foreign exchange administration reform, thus, significantly improving the capital account convertibility level. The convertibility for direct investment is basically realized, and the level of investment facilitation is significantly improved In recent years, the foreign exchange authorities, by deepening the reform, streamlining administration and instituting decentralization, and optimizing processes, have created a favorable policy environment for attracting foreign investors to make direct investments in China, and have effectively supported the “going global” efforts of various types of domestic institutions to participate in international competition and cooperation. In terms of overseas direct investments, since 2006 the foreign exchange authorities have gradually lifted limits on the amount of foreign exchange purchases for overseas investments, and, at present, have realized the “supply of foreign exchange on the basis of needs” for overseas direct investments throughout the country. In 2009, the foreign exchange authorities further deepened the foreign exchange administration reform of overseas investments, changed the two procedures for administrative examination and approval, i.e., that for the examination of the source of the foreign exchange funds for overseas direct investments and that for approval for outward remittances of capital, into the procedure of ex-post registration, expanded the source of foreign exchange funds for overseas direct investments by domestic institutions, and began to allow domestic institutions to remit early stage expenses during the preparatory stage before formal establishment of their overseas projects. After the above reforms, in terms of foreign exchange administration of overseas direct investments, there are no prior approval procedures and convertibility is basically realized, which significantly facilitates enterprise participation in international economic and technological cooperation and competition. In terms of direct investments in China , the main procedures are registration administration and authenticity examination. In recent years, the foreign exchange authorities have defined and regulated foreign exchange administration in such areas as settlement of the foreign exchange capital of foreign-invested enterprises, foreign capital utilization in the real estate industry, and return investments, and have promoted the reasonable and effective utilization of foreign capital. The international investment position statistical data from the foreign exchange authorities indicate that as of the end of September 2011, the asset balance for direct investments in China by foreign investors was USD 1625.6 billion, and the asset balance for overseas direct investments was USD 345.5 billion, an increase by 1.65 times and 2.81 times respectively compared with the end of 2006. The level of convertibility for securities investments has improved significantly, and cross-border securities investments have become active In 2002 and 2006, China introduced the Qualified Foreign Institutional Investor (QFII) system and the Qualified Domestic Institutional Investor (QDII) system respectively; the former allows qualified foreign institutional investors to make investments in the domestic securities market, and the latter allows qualified domestic institutions to make investments in overseas securities markets. In 2007, the total QFII investment quota was increased from USD 10 billion to USD 30 billion upon the approval of the State Council. Thereafter, the foreign exchange authorities issued a series of normative documents and further improved foreign exchange administration of cross-border securities investments. As of March 9, 2012, the foreign exchange authorities had approved a total of USD 24.55 billion in investment quotas to 129 QFIIs (excluding the 2 QFIIs whose quotas were cancelled), and a total of USD 75.247 billion in investment quotas to 96 QDIIs. The foreign exchange authorities actively promoted work related to the pilot program of domestic securities investments by RMB Qualified Foreign Institutional Investors (RQFII). In December 2011, on the basis of the formulation of the pilot measures related to the RQFII together with the relevant departments, the foreign exchange authorities timely issued supporting provisions on foreign exchange administration and allocated the RQFII investment quota in accordance with such principles as appropriately considering the level of operations and the type of product risks. As of January 2, 2012, the foreign exchange authorities had allocated the first batch of the RQFII investment quota, a total of RMB 20 billion. The steady implementation of the above system has preliminarily established a bidirectional flow mechanism for capital under securities investments, promoted the opening up and development of the domestic capital market, expanded the overseas investment channels for domestic institutions and individuals, and better met the objective requirements of domestic and overseas market players to make cross-border securities investments. Bidirectionally developing the cross-border claim and debt business, steadily promoting the convertibility of other investments In order to increase policy support for subsequent financing of enterprises established overseas, and to support those enterprises that have “gone global” to develop better and faster, in 2009 the foreign exchange authorities began to allow qualified enterprises of various types, upon approval, to use, within a certain limit, their self-owned foreign exchange, foreign exchange purchased with RMB and other permitted foreign exchange to grant overseas loans, and such matters as the opening of special foreign exchange accounts for overseas loans, the domestic transfer of funds, and foreign exchange purchases began to be directly handled by designated foreign exchange banks. In 2009, in order to support post-disaster reconstruction in Sichuan and to support Guangdong to continue to give play a forefront role in the reform, the foreign exchange authorities allowed Chinese-funded enterprises in Sichuan and Guangdong to borrow short-term external debt within a certain limit, and in 2010 promoted this policy nationwide on the basis of a summary of the pilot experience. In 2010, the foreign exchange authorities further simplified the management procedures for external guarantees, cancelled the approval procedures for the banks’ external guarantee performance, relaxed the qualification requirements for the debtor and the restrictions on financial indicators, and expanded the business scope of external guarantees. Implementation of the above policies relieved the problems of overseas investment enterprises, such as financing difficulties and insufficient working capital, and also steadily promoted improvement in the convertibility level of other investments. Streamlining administration and instituting decentralization, and further improving the level of convertibility under the capital account The foreign exchange authorities actively simplified the procedures for administrative examination and approval, and each year introduced multiple measures to simplify the business examination procedures. First, they adjusted the management methods of some businesses from examination on a case-by-case basis to aggregate control. For instance, in 2010 the policy for management of external guarantees was reformed, the previous management method of case-by-case approval was adjusted to annual balance control, and the enterprises may handle the business themselves without the approval of the foreign exchange authorities. Second, they granted more authority to the branches and sub-branches of the SAFE, and integrating the overlapping administrative functions. In recent years, the foreign exchange authorities simplified dozens of business examination procedures, such as those for opening capital accounts in other localities, transferring the property of individuals overseas, and partial market withdrawal under the securities investments, and simplified the materials required for business examinations. Third, some businesses which were originally examined by the foreign exchange authorities were authorized to be handled by the banks. For example, with respect to such businesses as those related to foreign exchange purchases or payments for the profits of foreign investors in some financial institutions with foreign capital participation, the foreign exchange to be used for payment of overseas listing expenses from China by the overseas listed domestic companies, and the record of the transfer of the foreign exchange capital gained through the reduction in state-owned shares in overseas listed companies to the National Social Security Fund are currently directly handled by the banks. These measures help reduce the costs to the enterprises and the burden on society, improve operating efficiency, and also further improve the level of convertibility under the capital account. The foreign exchange authorities will steadily and orderly promote capital account convertibility for the Renminbi in accordance with the relevant requirements of the Twelfth Five-Year Plan and the National Financial Working Conference. On the basis of the specifications, the foreign exchange authorities will expand the use of RMB in cross-border trade and investment. The foreign exchange authorities will gradually expand capital outflow channels, encourage qualified institutions in China to “go global,” and relax the restrictions on overseas investments by domestic residents. The foreign exchange authorities will gradually expand the opening up of the domestic financial market and establish a system and mechanism for guarding against the impact of bidirectional flows of cross-border capital. As an important content of the reform of China ’s foreign exchange administration system, capital account convertibility for the Renminbi is not the ultimate goal. The realization of capital account convertibility for the Renminbi is a gradual process and a systematic project involving many departments, and relevant reforms are required to promote coordination and an improved capability to cope with external impacts. During the process of promoting convertibility under the capital account, the foreign exchange authorities will keep a close eye on economic development at home and abroad and will take measures for promoting convertibility that are consistent with China’s stage of economic development, the level of market development, the tolerance of enterprises, the level of financial supervision, and the international financial environment. While relaxing some controls, the foreign exchange authorities will continuously improve and strengthen macro and prudential supervision, further improve statistics, monitoring, and early warnings of cross-border capital flows, effectively guard against the impact of capital flows, and safeguard the economic and financial security of China . 2012-06-07/en/2012/0607/1055.html