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HSBC's purchasing quota of foreign exchange for overseas investment services on behalf of its clients increased 2007-10-27/en/2007/1027/859.html
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Editors Note: As an important part of foreign-related economic and financial activities, foreign exchange management has always been in the spotlight. The State Administration of Foreign Exchange (SAFE), in an attempt to communicate with the public, increase the transparency of policies and management, and facilitate and enhance public understanding of foreign exchange management, has extensively surveyed and collected issues of common concern in the media and among the public and has compiled a list of frequently-asked questions on foreign exchange management policies. These questions will be answered in succession in future issues for public discussion and reference. Q1: How did Chinas foreign exchange reserve assets come into existence? Can these assets be allocated for free? A: Foreign exchange is bought and sold by businesses and individuals through the commercial banks. If such foreign exchange is sold by commercial banks on the interbank market and bought by the Peoples Bank of China (PBOC), it becomes part of the foreign exchange reserves. When the PBOC buys foreign exchange, it pays the equivalent amount in RMB to the holder of the foreign exchange. There are three main channels from which foreign exchange flows: The first is businesses. When companies provide goods or services to foreign customers or accept foreign investment, they are paid in foreign exchange, which can then be converted into RMB in commercial banks before it is used in China. During the exchange settlement, the companies sell the foreign exchange to the commercial banks in exchange for an equivalent amount of RMB, thereby converting their foreign currency assets into RMB assets at the current exchange rate. The second channel is individuals, who sell their foreign exchange to the commercial banks in exchange for an equivalent amount of RMB. The third is commercial banks. After buying foreign exchange from businesses and individuals, the commercial banks, as required according to the foreign exchange asset liability allocation, will resell the foreign exchange to businesses and individuals in various business outlets and will sell the remaining foreign exchange to the PBOC in exchange for an equivalent amount of RMB. Taken as a whole, during the formation of the foreign exchange reserves, businesses, individuals, and banks are not handing over their foreign exchange to the state without compensation; instead, they are selling their foreign exchange to the state in exchange for an equivalent amount of RMB. This is completely different from taxation and fiscal revenue. It should be emphasized that all these transactions are conducted in an equivalent and voluntary manner. The economic interests of the banks, businesses, and individuals are realized when their foreign exchange is converted into RMB and the PBOC acquires this foreign exchange by paying the corresponding amount in RMB. The formation of foreign exchange assets comes with a cost; therefore, they cannot be allocated for free. Q2: How can foreign exchange reserves support the development of the domestic economy? A: Foreign exchange reserves play an important role in the development of Chinas domestic economy because, first of all, an abundant amount of foreign exchange reserves is conducive to safeguarding Chinas economic and financial security. In recent years, we have witnessed the benefits of keeping a large amount of foreign exchange reserves, in terms of maintaining the capacity for international payments, guarding against financial risks, upholding national economic and financial security, and robustly supporting the healthy and stable development of our national economy. After the outbreak of the recent international financial crisis, foreign exchange reserves played a prominent role in cushioning the blow of the external disturbances. Second, sufficient foreign exchange reserves can facilitate foreign-related economic activities of businesses. Only when there are sufficient foreign exchange reserves can enterprise demands for the use and purchase foreign exchange be fulfilled. If a company wants to invest in a foreign country, as long as the company is economically viable it can make the investment after purchasing foreign exchange with RMB. In this sense, the foreign exchange reserves can guarantee abundant funding for the going global initiatives of Chinese enterprises. Similarly, companies are given guarantees and support when they have to pay for foreign goods or debts. Third, the operating profits from foreign exchange reserves can increase expenditures for the peoples livelihood. The responsibility of the foreign exchange management departments is to ensure, in addition to risk management, maintenance of the value of the assets and an increment in the foreign exchange reserves. The operating profits of foreign exchange reserves are incorporated into the overall account of the PBOC, as part of the net profits of the central bank that will be fully turned over to the state treasury. This will increase the availability of funds used to improve the peoples livelihood, which in effect will constitute a boost to national welfare. In discussions of how foreign exchange reserves can support the development of the domestic economy, two issues need to be clarified. First, foreign exchange reserves cannot be used without compensation. Unlike fiscal funds, foreign exchange reserves are created when the PBOC purchases foreign exchange with RMB on the domestic or international foreign exchange markets and the reserves are closely related to the currency issuances and RMB liabilities of the PBOC. If foreign exchange reserves were to be allocated for free use, the balance sheet of the PBOC would be affected, generating inflationary pressures and threatening economic and financial stability. The second issue is that foreign exchange reserves consist of foreign exchange, which is mainly used for foreign payments. For the foreign exchange reserves to be used domestically, they have to be reconverted into RMB, which will require that more currency is issued, thus aggravating the surplus of domestic liquidity. Q3: What is the appropriate scale for Chinas foreign exchange reserves? A: Too much foreign exchange reserves can be bad. We are not seeking to build up large volume of foreign exchange reserves nor a long-term surplus in our international balance of payments. Chinas current account and capital account have maintained a multi-year surplus, and the growth of our foreign exchange reserves is the objective result of the twin surplusin the international balance of payments, reflecting the long-term stable growth of the Chinese economy. In fact, this is determined by the current stage and characteristics of Chinas economic development. Our abundant foreign exchange reserves can ensure a stable financial environment. As a large developing country, we need to maintain a certain scale of foreign exchange reserves, even for what has traditionally been considered moderate. In addition, maintaining sufficient foreign exchange reserves can also boost our confidence. As has been amply proved during the recent international financial crisis, a sufficient amount of foreign exchange reserves can put us in a better position to effectively fend off future crises. In terms of aggregate foreign exchange assets, in a broad sense, at year-end 2009, China held USD 3.46 trillion in foreign financial assets, far lower than the developed countries in North America and Europe. The main problem at present is that most of Chinas foreign exchange assets are controlled by the government, leaving only a small proportion in private hands. Specifically, foreign exchange reserves held by the Chinese government account for two-thirds of all foreign assets in China, compared with only one-sixth in Japan. Therefore, we encourage businesses and individuals to hold and invest in foreign exchange so as to diversify the mix and to distribute foreign exchange within the private sector. This, of course, takes time. With the development of our national economy and the increase in income, enterprises and individuals will have greater demands for diversification of asset allocations. If more foreign exchange investment channels and products are provided for the public to reap concrete benefits from the foreign exchange, then the foreign exchange pressures on the government will be greatly relieved. Q4: What currencies are included in Chinas foreign exchange reserves? How are they structured? A: Chinas foreign exchange reserves include the major currencies, for instance the US dollar, the euro, and the Japanese yen, as well as the currencies of some emerging economies. This is a generally loose composition of currency. The currency composition of the foreign exchange reserves is designed to facilitate Chinas foreign-related economic activities. It takes into consideration Chinas foreign payment structure that encompasses foreign trade, foreign debt, and direct investment, as well as the currency structure of global foreign exchange reserves, so that the risks can be diversified against dynamic developments of various currencies and so that demands for foreign payments and asset allocations can be better fulfilled. The currency composition does not remain static. It is dynamically adjusted and optimized to respond to market volume, liquidity, the risk-return characteristics and development trends of the currencies, and changes in the economies and markets, as well as in response to investment demands. Q5: In the operation and management of the foreign exchange reserves, how can we ensure the openness and transparency of market information and compliance with investment and operations rules?? A: At present, the foreign exchange reserves of China follow the information disclosure requirements of the IMFs General Data Dissemination System (GDDS), which is the common practice in most countries. In recent years, efforts have been made to enhance the transparency of information on the foreign exchange reserves. For example, the Overview of Chinas Foreign Exchange Administration was issued in 2009, in which one entire chapter is devoted to presenting a relatively comprehensive introduction to the operations and management of the foreign exchange reserves. In addition, when the 2009 Balance of Payments Statement was formulated and published, the statistical method for the foreign exchange reserve assets was further improved to increase transparency. This being said, the increase in information transparency on the foreign exchange reserves should be carried out in a prudent and measured manner. As the large scale of Chinas foreign exchange reserves lends significant weight to Chinas position in international financial markets, any information disclosed about investments might give rise to market turbulence and cripple our investment activities. Most countries choose to be very careful when disclosing information related to foreign exchange reserves. Specific transactions are generally not disclosed to the public and are not required to be disclosed by the data dissemination standards of the relevant international organizations. To ensure the safety, liquidity, value maintenance, and increment in our foreign exchange reserves, we have established a comprehensive set of investment decision-making processes and various risk management and internal control systems, which have been developed to guarantee appropriate and effective progress in reserve operations and management. Reserve operations are regularly subject to audits by the relevant departments. Furthermore, any comments and suggestions from different sectors are highly valued, investigated in a timely and in-depth manner, and kept as reference for the operation and management of the foreign exchange reserves. (To be continued) 2010-07-02/en/2010/0702/936.html
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Yi Gang, deputy governor of the People's Bank of China (PBOC) and administrator of the State Administration of Foreign Exchange (SAFE), recently accepted an interview with Hu Shuli, executive editor-in-chief of China Reform. The interview, published in issue no. 8 (2010) of China Reform and appearing on www.caing.com, is presented here as follows. The Best Choice for the RMB Exchange Rate Regime Ultimate Goal and Timetable Hu Shuli (hereinafter referred to as Hu): On June 19, 2010, the Peoples Bank of China announced the decision to further the reform of the RMB exchange rate formation mechanism on the basis of the 2005 reform. Why now? What do you think of the achievements that the exchange rate reform has made so far? Yi Gang (hereinafter referred to as Yi): Chinas exchange rate regime is a floating one, which is based on market supply and demand and subject to adjustment and management against a basket of currencies. In fact, this is the best choice at present for the Chinese socialist market economy. How have we arrived at this conclusion? The reform of the exchange rate regime began in 1994, when exchange rates were unified on January 1 and the foreign exchange market was established soon thereafter. From 1994 to 1996, the RMB fluctuated in both directions and appreciated by about 5 percent, from 1: 8.71 to 1: 8.28 against the USD. Then, after the outbreak of the Asian financial crisis, as the Thai Baht and the Korean Won experienced huge depreciations, China refused to devalue the RMB, resulting in a stable 1: 8.28 from 1997 to 2005. We still believed in the benefits of the exchange rate reform and that a managed floating currency is the right exchange rate mechanism for China, but the existence of inertia or path dependencemade reform very difficult. Then, on July 21, 2005, the reform started again and we had three years of fluctuations up until 2008. During this period, the RMB was in fact subject to two-way fluctuations and followed the direction of the currency basket. But in 2008, a series of events occurred, including the outbreak of the sub-prime mortgage crisis.Soon thereafter Bear Stearns went under, and Lehman Brothers declared bankruptcy on September 15, 2008, pushing the financial crisis to a climax. From then on, the RMB remained near the level of RMB 6.83 against the USD, with minor fluctuations, until June 19 of this year, when we again launched the RMB exchange rate reform. Looking back on history, it is clear that we have never lost sight of this mechanism; we were just interrupted by the outbreak of the crisis and other factors. Nevertheless, this is the best choice for China, a choice that we should uphold. Hu: What is the ultimate goal? Yi: Our ultimate goal is to make the RMB a convertible currency. This is the goal that was made in the fall of 1993, at the Third Plenary Session of the 14th CPC Central Committee. Hu: What is the relationship between a convertible RMB and its exchange rate? Is its free convertibility based on free floating? Or is the RMB freely convertible under a managed floating exchange rate mechanism? Yi: This question can be very theoretical. Usually a convertible currency has a freely floating exchange rate. At the Bretton Woods Conference, it was agreed that the major currencies would be pegged to the U.S. dollar, which in turn was pegged to gold at US$35 per ounce. This in fact was a fixed exchange rate system. But when the Bretton Woods system collapsed in the 1970s, the peg to gold was abandoned along with the fixed exchange rate system. In theory, convertible currencies should have a floating exchange rate because the mechanism for a floating exchange rate can act as a stabilizer for the convertible currency. In other words, the float ensures its convertibility. If the USD is always pegged to gold, it is impossible to achieve convertibility between the two. In contrast, if the USD is floating, sustainable convertibility can be achieved. Another extreme example lies in the Currency Board system practiced in Hong Kong and other regions. It is a special arrangement that gives the Currency Board no power to effect monetary policy. It can only be implemented in a small and fully open economy, and should be considered an exception that proves the rule. Generally, a convertible currency should have a very flexible exchange rate mechanism. A relatively developed country, or a mature emerging economy, should eventually choose to exercise monetary policies independently and to ensure the free flow of capital. To do so, it has to eliminate the fixed exchange rate. That is the case in the U.S. and in the Euro Zone, where the USD and the Euro are allowed to fluctuate widely according to the market situation. Hu: When can the RMB become convertible? Is there a timetable? Yi: We dont have an official timetable for RMB convertibility in China. But according to an IMF study, for an average country, it takes about 7 to 10 years to transition to capital account convertibility from current account convertibility, which China achieved in 1996. Now, 15 years later, China still hasnt achieved capital account convertibility, and we do not have a timetable. People can make their own judgments based on international practices. The main reason is China is too big and our development is too uneven, which makes the problem very complicated and it is difficult to achieve a consensus. Hu: In terms of currency appreciation, we all know that there are both external pressures and domestic needs. Comprehensively, what are the reasons that the RMB still cannot have a floating exchange rate? Yi: What really makes a currencys exchange rate float is the real effective exchange rate, which can be altered in two ways. The first is to adjust the nominal exchange rate, and the other is to increase domestic prices. In face of appreciation pressures, we do not have to adjust the nominal exchange rate because inflation can change the real effective exchange rate. Both methods have been used by China in the past decade, with adjustments in both the nominal exchange rates and prices. The surge in the housing prices is a good example. Hu: Now after several rounds of exchange rate reform, peoples expectations of a RMB appreciation should be pretty low now. Do we still need to continue the adjustment via inflation? Yi: It is safe to say that the pressure has weakened. In the recent decade, housing prices have gone through the roof in Beijing and Shanghai. In fact, commodity prices as a whole have greatly increased. These price hikes are actually adjustments against imbalances. Ten years ago, if you converted USD into RMB and bought property in China, you could make a lot of money, but now it is no longer a very lucrative deal. The same is true for other assets. All these indicate that, compared with ten years ago, the RMB exchange rate is now much closer to an equilibrium level. Now, the exchange rate is not likely to fluctuate sharply and we are in a position to maintain a flexible exchange rate regime and to keep the exchange rate stable at a reasonable level of equilibrium. Every coin has two sides. The constant increase in labor productivity in China has determined the overall trend in currency value. Under such a trend, appreciation can curb inflation; a bit more appreciation would mean a bit less inflation. So if the nominal exchange rate remains the same, the result will be more inflation. Some might argue that the Chinese people do not need imported goods, so a RMB appreciation will result in no benefits. This is wrong. Take soya beans as an example. Over half of the soya beans consumed in China are imported, and bean products are in high demand. Even soya bean pulp is needed to breed pigs, which means soya beans are somehow related to pork prices. If the RMB does not appreciate, then the prices of soya beans, bean oil, and bean pulp will be at least 20 percent higher than they are now. At present, these soya products are becoming very expensive on the international market, but the price increase is not that apparent in China. Why? Because the RMB has gone up and soya prices are mostly calculated in USD. It is the same for crude oil and iron ore, which, believe it or not, are also closely related to every household. So a currency appreciation can control imported inflation. In addition, many Chinese people travel abroad or send their children to study overseas. They are also the beneficiaries, but they are the silent majority.The small number of people who do not gain from the RMB appreciation mainly work in the export industry. They are the ones who complain loudly that they will lose their jobs and their lives will become miserable. Before the exchange rate reform in 2005, the relevant department made an that the cost was RMB 8.11 for state-owned enterprises and RMB 8.07 for private enterprises. If the cost is higher than the exchange rate, then the enterprises will suffer losses. If that were the case, when the RMB exchange rate jumped to RMB 8.11 on the first day of the launch of the foreign exchange reform in 2005, export enterprises would have had massive losses. But during the period from 2005 to 2008 since the reform, Chinas exports have been growing at an annual rate of over 20 percent. In other words, the adjustment of the foreign exchange rate did not hurt exports; on the contrary, during these years, exports witnessed substantial growth, along with industrial upgrading, technological progress, product upgrading, and the increase of added value of Chinese products. So we should view this question dynamically. The government is trying all methods to formulate sound policies and to create an enabling environment. For example, instruments for hedging and forward settlement and sales of foreign exchange are offered to help import and export enterprises to hedge against risks. Another misconception is that a RMB appreciation means losses in our foreign exchange reserves. In 2007, when the RMB was appreciating very rapidly, some observers said that the loss of foreign exchange reserves in one quarter would be worth one aircraft carrier. Now, we have 2.45 trillion USD in foreign exchange reserves (equivalent to more than RMB 16 trillion). With the RMB going up, the foreign exchange reserves, in RMB terms, would appear to be less in number, but that does not mean the money is gone. We would suffer some losses if we were to convert the foreign exchange reserves from USD to RMB, but we havent converted yet, so there is no such loss. Such a calculation is conversion on book value only. If such a calculation has to be done, we might as well do the math by calculating how much we will have earned if all RMB assets are put into USD. Take the financial and housing assets in China as an example; the total value of those assets would be RMB 200 trillion (over ten times that of the foreign exchange reserves). If the RMB appreciates and these assets are marked in USD, we can gain at least ten aircraft carriers. But of course, the truth is we neither gain nor lose. Hu: Thats right. They did not take into account the RMB assets. In addition, Chinese peoples savings can increase in value as well. Yi: Right, so we have to look at the issue comprehensively. Right now, we have neither gained nor lost anything. It is the different reporting currencies that are creating the different impressions. Of course, inflation in the U.S. can lead to weakened purchasing power of Chinas foreign exchange reserves. That can be considered a loss, but over the years, the rate of return of foreign exchange reserves has always been higher than the rate of inflation in the U.S. Hu: The abnormality of the foreign exchange rate would exert pressures on resources and the environment. Can you elaborate on that? Yi: If the nominal exchange rate is distorted, there would be a series of consequences. The foreign exchange rate is a price, and its distortion would definitely lead to the distortion of resource allocations. We have always emphasized the importance of expanding domestic demand. If the foreign exchange rate is distorted, foreign demand would be more lucrative, and enterprises would not try to expand domestic demand. Therefore, the distortion of the foreign exchange rate hinders the expansion of consumption and growth of the services industry. Hu: In face of the inflationary pressures, it is suggested that we should increase the interest rate, but can it replace the leverage of the foreign exchange rate? Yi: The interest rate represents the price of capital, whereas the foreign exchange rate is the ratio of the price of one currency against other currencies. These two are interchangeable in very limited ways, and there is always the question of how far away they are from the point of equilibrium. This can trigger endless arguments, because no one knows exactly where the point of equilibrium is. In theory, it is determined by supply and demand. In the best-case scenario, both the interest rate and the foreign exchange rate are close to the point of equilibrium. If the interest rate is increased, the currency will be stronger. Recently, many currencies have increased interest rates, but the USD, the Euro, the Japanese Yen, and the Pound have not. Foreign exchange rates and interest rates have different roles to play, so it is better that they fulfill their respective functions. Hu: The long-term fixed exchange rate has caused a certain degree of distortion. Now the exchange rate is being changed to a floating rate. At present, aside from the mind-set problem, the greatest threat perhaps comes from speculative attacks? Yi: Yes. So, we should continue to decrease these risks. As the market plays a greater role, it will be less lucrative to speculate on the foreign exchange rate. By then, people will give up speculation. Hu: The foreign exchange reform has been interrupted repeatedly. Is the progress a bit too slow? Yi: China is a big developing country. In the past three decades, China has created an economic miracle in the history of mankind. In this sense, Chinas macroeconomic policies have changed track. There might be some criticism concerning the degree of marketization or the delay of reform, but from 1994 to the present, China has maintained a high growth rate. In addition, since the 1994 inflation, so far we have not experienced another big inflation. On the whole, Chinas macro-economic policies are almost optimal. Indeed, we have been interrupted many times, and some might even think that the foreign exchange reform is not occurring fast enough. This question is open to discussion and reflection, but it is fair to say that our macro policies are generally successful. Hu: Why did the government choose the present time to recover the elasticity of the foreign exchange rate? Is it because it is less risky now, or because there are greater external pressures? Yi: China has made this decision mainly based on domestic considerations. It is an independent decision. Like I said, during the global financial crisis, the exchange rate was stable for a while. In fact, the crisis is not yet completely over, as is evidenced by the European sovereign debt crisis this year, but the overall picture is much better than before. As the crisis is receding, our growth rate increased last year from 8.7 percent to 9.1 percent. For the U.S., Europe, and Japan, 2010 is also widely predicted to be a year of recovery. Given the domestic and international background, I think now is the ripe time to recover the elasticity. Hu: But how do we evaluate the role of the foreign exchange rate reform in the external imbalance? Yi: Foreign scholars use their own framework to analyze the issue, and they believe that the foreign exchange rate is an important factor for rebalancing. In fact, as history has shown, the foreign exchange rate is indeed important, but it is not a decisive variable, which is very clear if you look back at the history of Japan and Germany. The appreciation of the Japanese Yen and the German Mark in the 1970s and 1980s did not lead to the immediate disappearance of the trade surplus in Japan or Germany. This might be true in China as well. But this question is very tricky because of a reverse question: If Chinas trade surplus cannot be adjusted even when the RMB appreciates, then is appreciation all good and no bad? Think about it, if the RMB appreciates, I can buy foreign goods very cheap; and if even then, my trade surplus cannot be cut, I have all the benefits, right? This is a tricky question. How to become a rule-maker? Hu: Can China become a rule maker? Yi: This is a huge question. We have always stressed the importance of taking part in the making of international rules. Who makes the rules for the so-called international monetary system? Apparently, major developed countries, especially the U.S. Then how did the U.S. become a rule maker? It was because the US dollar market is open, and it is the main theater for the global financial market. Naturally, whether for stocks or bonds, the rules shall be made by the authorities in charge of those markets, i.e., the U.S. and Europe. We are not yet a rule-maker, but as long as we open up the market and allow foreign players access to our turf, the Chinese monetary and regulatory authorities will then have every right to make our own rules. That is for sure. Hu: I recently interviewed Russia's first Deputy Prime Minister Igor Shuvalov. He said that sooner or later the RMB will become a reserve currency, whereas the Russian ruble will at most be a regional currency. What do you think? Yi: We cannot be too complacent. It will do us harm. China is still a developing country. We should bear in mind our limits. Hu: Then is it possible for the RMB to become a reserve currency? Does the world need it? Yi: This compliment is half flattery, half prediction. We should be modest and prudent, and keep a low profile. If the RMB is chosen by other countries to be a reserve currency, we will let it happen, because it is market demand. But we are not going to push it. I think the best way is to let things run their own course. We must not take the flattery too seriously; in fact, the RMB is still far from being a reserve currency. Hu: Are reserve currencies chosen naturally by the market? Or do we need governments to decide which should become a reserve currency? Or is it a bit of both? Yi: For a currency to become a reserve currency, the first most important factor is the economic strength of that country or confederation; the second is its cultural cohesion and influence; and the third is political and military power. Economic strength is the deciding factor. As to culture, it is important to have an influential culture, whose core values will be widely accepted by other countries and regions. A reserve currency must be backed by a powerful culture and influential value system. Do not underestimate the resilience of the US and Europe Hu: Two years ago, in the midst of the financial crisis, many people, including some Chinese, underestimated the USD and overestimated Euro. Now, the outbreak of the recent European debt crisis seems to prove that Europe cannot be overestimated either. In the past, investors ignored the problems of the U.S.; now, they have gone from one extreme to another. Yi: Let me just talk about Chinas foreign exchange reserve investments. We have always insisted upon the diversification of our foreign exchange reserves, on the two levels of currencies and assets. In terms of currencies, we diversify our investments across all major currencies, such as the USD, the Euro, the Japanese Yen, the Pound, and the currencies of the emerging economies. For each currency, we have to decide whether to buy bonds or other assets in order to achieve asset diversification. Back to your question, in fact, we have not underestimated the USD or the Euro. But the massive size of our reserves makes it impossible for adjustments to be made promptly. Diversification, as we have insisted upon, is in fact an asset allocation principle. Then how is the asset allocation principle determined? It is determined by Chinas real economy, to be specific, the proportion of trade, FDI, and account settlement in Chinas real economy. Hu: China seldom makes comments on specific investments of its foreign exchange reserves, but regarding the recent development of Fannie Mae and Freddie Mac, the authorities seem eager to make their attitudes known to the public. Why are Fannie Mae and Freddie Mac so important? Yi: They are important because of their vital role in Americas housing market and in the stability of the financial market. Shortly after the outbreak of the sub-prime mortgage crisis, the U.S. government still relied upon these two institutions to alleviate the crisis, but as the crisis deepened, these two organizations collapsed and were taken over by the U.S. government. Now the U.S. Treasury as their biggest shareholder owns about 80 percent of their shares. Recently, they were de-listed from the NYSE, but this does not constitute a negative impact on their securities. The recent announcements were made by the State Administration of Foreign Exchange to help the public understand that the foreign exchange reserve assets are safe and our management is effective. Hu: After the financial crisis, both Europe and the U.S. made some adjustments and changes. What do you think of their ability to recover? Yi: I think they have strong resilience and should not be underestimated. The U.S. financial regulatory reform bill, recently signed into law, marks another milestone after the Glass-Steagall Act of 1933, and the Financial Services Modernization Act of 1999 signed by former President Clinton represents a reflection of the past several decades, especially the recent round of the financial crisis. Aside from the U.S. bill, there is also a new roadmap for a financial regulatory framework drawn up by Britain, and a series of financial regulatory standards formulated by the Financial Stability Board under the G20, the IMF, the Basel Committee, and the Bank for International Settlements. All these have formed global financial regulatory standards and a framework for the coming decade or even longer. Under such a regulatory framework, their capacity to recover is relatively strong and the speed is relatively fast. Europe has made many contributions to the establishment of an international financial regulatory framework, but, of course, the U.S. is leading the way as it passed the regulatory reform bill. Hu: Recently, I interviewed Michael Evans, vice chairman of Goldman Sachs. He said that Goldman Sachs is prepared to adjust its strategy. In fact, Wall Street is still resistant to the U.S. financial regulatory reform bill, but Goldman Sachs will adjust its position and embrace the reform. It has set up the Business Standards Committee, which, after investigation and research, has come up with concrete measures to change its business behavior. When talking about the lawsuit against the U.S. Securities and Exchange Commission, he said that although the case has a political bias, we must admit that we made mistakes too. Judging from his attitude, there is a possibility of mediation, but he emphasized that mediation does not mean the end, and Goldman Sachs still needs to adjust its business behavior. But from another perspective, since the financial reform bill has been spoken so highly of, why is it so difficult to implement? Why is the Republican Party so vigorously opposed to the bill? Yi: The difficulties stem from conflicts of interests. The bill used to contain clauses that harm the interests of investment banks and commercial banks, but they have been watered down now and compromises have been made. On the whole, I think this bill is positive, and the prompt adoption of this bill is so much better than no action at all. Uncertainty would accumulate if no measure were taken. Now the launch of the bill ends the suspense, stabilizes market expectations, and can restore the market to normalcy. Be Realistic about Chinas Economic Growth Hu: I have a question about the macro economy. Do you think there is a big chance of a Double Dipin the world economy? Yi: The short answer to this question, as far as I see it, is no. But a precise explanation depends on the definition of Double Dip. This year, the U.S. economic growth rate hopefully will be 2.5 percent to 3.5 percent. In Japan, the growth rate will be above zero, probably even above 2 percent; as to Europe, possibly 0.5 percent to 1.5 percent. No one would call this a Double Dip,but there are still many uncertainties, considering the worrying situation in the U.S. housing and job markets. Hu: Chinas economic growth rate was 11.1 percent for the first half of 2010. Will it drop in the future? Yi: For the whole year, the growth rate could reach 9 percent, which is fairly high already. Perhaps we are a bit too obsessed about high growth rates. I hope to see a more moderate approach, which can help extend the long-term growth of the Chinese economy. China has now become the second largest economy in the world. As our economic base expands, growth rates will definitely slow down. In addition, the environmental constraints have reached a bottleneck, with a host of problems concerning underground water, air, and carbon emissions. There are also resource restrictions, including the import of energy. Based on the above reasons and the general rules of economic development, there is no doubt that there will be a slowdown in our economic growth. In the three decades after the launch of the reform and opening up, Chinas average GDP growth rate exceeded 9.5 percent. In the first decade of the new century, the rate was over 10 percent. For the second decade, I would say an average growth rate of 7 percent to 8 percent is good enough. The question is whether we can sustain such a growth rate. If in the third decade, we manage to grow at 5 percent to 6 percent, then we would have had 50 years of rapid growth, an unprecedented feat in human history. In fact, the problem of Chinas economy lies in the quality of its growth. That is why we have been restructuring and transforming patterns of growth; we are trying to improve the quality and effects of economic growth. We should adjust our mind-set; being too impatient doesnt help. 2010-07-30/en/2010/0730/943.html
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The State Administration of Foreign Exchange, the State Administration of Taxation, and the General Administration of Customs recently jointly issued an announcement in which they decided to reform the foreign exchange administration system for trade in goods and to optimize and upgrade the information-sharing mechanism for foreign exchange receipts from exports and export rebates. Entering into effect as of December 1, 2011, a pilot reform will take place in provinces (cities) such as Jiangsu , Shandong , Hubei , Zhejiang (excluding Ningbo ), Fujian (excluding Xiamen ), Dalian , and Qingdao . The reform of foreign exchange administration for trade in goods mainly includes the following: First, improving foreign exchange administration for trade in goods and preventing risks in foreign exchange receipts and payments. The foreign exchange authorities will carry out comprehensive verifications on the flows of imported and exported goods and on the flows of capital from receipts and payments from trade, will conduct classified management of enterprises based on their compliance with the provisions on foreign exchange administration, and will dynamically adjust the results of the classified management. Most enterprises will enjoy facilitation during the handling of foreign exchange receipts and payments from trade; meanwhile the foreign exchange authorities will strengthen supervision of non-compliant enterprises with respect to document examination regarding receipts and payments from trade, business type, mode of settlement, and relevant handling procedures. Second, simplifying the formalities for receipts and payments of foreign exchange from trade and the relevant handling procedures. Enterprises will not be required to handle verifications and writing-off formalities after receipts and payments of foreign exchange from trade; the documents required for enterprise compliance with foreign exchange payments for imports will be simplified significantly, and foreign exchange payments may be handled with the banks upon the strength of the import customs declaration, contract, invoice, or any other documents that can prove the authenticity of transactions. The bank documents and examination procedures for foreign exchange payments by enterprises will be simplified significantly and foreign exchange collections from exports will not be subject to online inspections. Third, simplifying the export-rebate vouchers. During the pilot period, where the export enterprises in the pilot regions apply for export rebates, they will not be required to provide a paper Export Verification Form for Foreign Exchange Collections. The tax authorities will, in accordance with the relevant provisions, examine the enterprises’ export rebates with reference to the information provided by the foreign exchange authorities on the foreign exchange receipts from exports and the classification of the enterprises. Fourth, adjusting customs declaration procedures for exports. During the pilot period, where the export enterprises in the pilot regions make customs declarations on exports, they shall still provide an Export Verification Form for Foreign Exchange Collection in accordance with the provisions in force. Upon nationwide acceptance of the reform of the foreign exchange administration system for trade in goods, the State Administration of Foreign Exchange and the General Administration of Customs will adjust the customs declaration procedures for exports and in general will cancel the Export Verification Form for Foreign Exchange Collections. Fifth, improving regulatory synergy. The State Administration of Foreign Exchange, the State Administration of Taxation, and the General Administration of Customs will further strengthen their cooperation, realize data-sharing, improve coordination mechanisms, and rigorously crack down on irregular cross-border capital flows and activities such as tax fraud and smuggling that are in violation of the relevant laws. Reforming the foreign exchange administration system for trade in goods and establishing a new administration mode combining facilitation and risk management are important measures conforming with the development and changes in the scale, mode, and participants in the country’s foreign trade and responding to the current balance of payments situation. They are an important element in the transformation of the concept and methods of foreign exchange administration. Optimizing and upgrading the information-sharing mechanism for foreign exchange receipts from exports and export rebates is beneficial to reduce social costs, improve the means of foreign exchange administration, and further enhance the level of trade facilitation. 2011-09-15/en/2011/0915/1013.html
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At the end of September 2011, China’s outstanding external debt (excluding that of Hong Kong SAR, Macao SAR, and Taiwan Province) reached USD697.164 billion. Specifically, the outstanding registered external debt was USD440.564 billion and the balance of trade credit between enterprises was USD256.6 billion. With respect to the term structure, the outstanding long- and medium-term external debt (with the remaining term) was USD189.539 billion, accounting for 27.19 percent of the outstanding external debt. The outstanding short-term external debt (with the remaining term) was USD507.625 billion, accounting for 72.81 percent of the outstanding external debt. Specifically, the outstanding registered short-term external debt (with the remaining term) was USD251.025 billion and the balance of trade credit between enterprises was USD256.6 billion. In terms of the composition of the short-term external debt, at the end of September 2011 the balance of trade-related credit was USD374.996 billion, accounting for 73.87 percent of the outstanding short-term external debt (with the remaining term). Specifically, the trade credit between enterprises and bank trade financing accounted for 50.55 percent and 23.32 percent respectively. As trade-related credit is mainly based on real import and export trade, the growth of such payments is basically consistent with that of import and export trade in China; therefore, the increase in the proportion of this short-term external debt will not affect the security of China’s external debt. In terms of types of debtors, the outstanding debt of Chinese-funded financial institutions was USD209.605 billion, accounting for 47.58 percent of the outstanding registered external debt; the outstanding debt of foreign-funded enterprises was USD132.027 billion, accounting for 29.97 percent; the outstanding debt of foreign-funded financial institutions was USD54.373 billion, accounting for 12.34 percent; the outstanding sovereign debt borrowed by ministries under the State Council was USD38.597 billion, accounting for 8.76 percent; the outstanding debt of Chinese-funded enterprises was USD5.797 billion, accounting for 1.31 percent; and the outstanding debt of other institutions was USD 165 million, accounting for 0.04 percent. In terms of types of debt, the balance of international commercial loans amounted to USD370.998 billion, accounting for 84.21 percent of the outstanding registered external debt, with the proportion rising by 4.23 percentage points compared with the end of 2010. The balance of foreign government loans and of loans granted by international financial organizations amounted to USD69.566 billion, accounting for 15.79 percent. In terms of the currency structure, debt in U.S. dollars accounted for 75.81 percent of the outstanding registered external debt, representing an increase of 5.4 percentage points compared with the end of 2010. Debt in Japanese yen accounted for 8.11 percent, representing a decline of 0.45 percentage point compared with the end of 2010. Debt in euro accounted for 7.21 percent, representing a rise of 2.8 percentage points compared with the end of 2010. Other kinds of debt, including SDRs and HKD, accounted for 8.87 percent, a decline of 7.75 percentage points compared with the end of 2010. In terms of the sectors in which the debt is invested, based on the Industrial Classifications of the National Economy, USD53.482 billion was invested in the manufacturing sector, accounting for 24.24 percent of the medium- and long-term outstanding registered external debt (based on contract terms); USD27.677 billion was invested in the transportation sector, the warehousing sector, and the postal-services sector, accounting for 12.54 percent; USD17.354 billion was invested in the production and supply of electric power, coal, gas, and water, accounting for 7.87 percent; USD8.152 billion was invested in the information technology services sector, accounting for 3.69 percent; and USD10.69 billion was invested in the real estate sector, accounting for 4.85 percent. From January to September 2011, medium- and long-term external borrowing totaled USD33.948 billion, an increase of USD6.101 billion, or 21.91 percent, on a year-on-year basis; Repayment of the principal totaled USD20.961 billion, an increase of USD3.057 billion, or 17.07, percent, on a year-on-year basis; Interest payments totaled USD1.779 billion, a year-on-year decrease of USD252 million, or 12.41 percent. Net inflows under the outstanding long- and medium-term external debt totaled USD11.208 billion, up 41.66 percent on a year-on-year basis. 2012-01-04/en/2012/0104/1020.html
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At the end of June 2011, China’s outstanding external debt (excluding that of the Hong Kong SAR, Macao SAR, and Taiwan Province) reached USD642.528 billion. Specifically, the outstanding registered external debt reached USD402.828 billion and the balance of trade credit was USD239.7 billion. With respect to the term structure, the outstanding long- and medium-term external debt (with the remaining term) was USD180.417 billion, accounting for 28.08 percent of the outstanding external debt. The outstanding short-term external debt (with the remaining term) was USD462.111 billion, accounting for 71.92 percent of the outstanding external debt. Specifically, the outstanding registered short-term external debt (with the remaining term) was USD222.411 billion and the balance of trade credit was USD239.7 billion. In terms of the composition of the short-term external debt, at the end of June 2011 the balance of trade-related credit was USD348.221 billion, accounting for 75 percent of the outstanding short-term external debt (with the remaining term). Specifically, trade credit and trade financing accounted for 52 percent and 23 percent respectively of the outstanding short-term external debt. As trade-related credit is mainly based on real import and export trade, its growth is basically consistent with that of China’s import and export trade. Therefore, the increase in the proportion of the short-term external debt will not affect the security of China’s external debt. In terms of types of debtors, the outstanding debt of Chinese-funded financial institutions was USD182.852 billion, accounting for 45.39 percent of the outstanding registered external debt; the outstanding debt of foreign-funded enterprises was USD122.379 billion, accounting for 30.38 percent; the outstanding debt of foreign-funded financial institutions was USD52.418 billion, accounting for 13.01 percent; the outstanding sovereign debt borrowed by ministries under the State Council was USD39.353 billion, accounting for 9.77 percent; the outstanding debt of Chinese-funded enterprises was USD5.679 billion, accounting for 1.41 percent; and the outstanding debt of other institutions was USD147 million, accounting for 0.04 percent. In terms of the types of debts, the balance of international commercial loans amounted to USD334.641 billion, accounting for 83.07 percent of the outstanding registered external debt, representing a 3.09-percentage-point increase compared with that at the end of 2010. The balance of foreign government loans and loans granted by international financial organizations amounted to USD68.187 billion, accounting for 16.93 percent. In terms of the currency structure, debt in U.S. dollars accounted for 78.27 percent of the outstanding registered external debt, representing an increase of 7.86 percentage points compared with that at the end of 2010. Debt in Japanese yen accounted for 7.99 percent, representing a decline of 0.57 percentage point compared with that at the end of 2010. Debt in euro accounted for 4.09 percent, representing a decline of 0.32 percentage point compared with that at the end of 2010; and other kinds of debt including SDRs and HKD accounted for 9.65 percent of the outstanding registered external debt, a decline of 6.97 percentage points compared with that at the end of 2010. In terms of industrial sectors in which the debt is invested, with reference to the Industrial Classification of the National Economy, USD50.292 billion was invested in the manufacturing sector, accounting for 23.79 percent of the medium- and long-term outstanding registered external debt (based on contract terms); USD26.496 billion was absorbed by the transportation sector, the warehousing sector, and the postal-service sector, accounting for 12.53 percent; USD17.133 billion went to the production and supply of electric power, and the coal, gas, and water sectors, accounting for 8.1 percent; USD8.13 billion was absorbed by the IT services sector, accounting for 3.85 percent; and USD10.626 billion was channeled to the real estate sector, accounting for 5.03 percent. From January to June 2011, the long- and medium-term external debt totaled USD19.579 billion, a year-on-year decrease of USD197 million, or 1 percent. Repayment of the principal was USD11.412 billion, a year-on-year decrease of USD983 million, or 7.93 percent. Payment of interest was USD1.107 billion, a year-on-year decrease of USD336 million, or 23.28 percent. 2011-09-16/en/2011/0916/1014.html
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The SAFE recently released the revised data on China’s Balance of Payments Statement for the second quarter and the first half of 2011. In Q2 of 2011 the current account and the capital and financial account continued to post a "twin surplus" and international reserves maintained a growing momentum. The surplus under the current account totaled USD59 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods and current transfers reached USD66.9 billion and USD6.5 billion, respectively, whereas the deficit in trade in services and income amounted to USD11 billion and USD3.3 billion respectively. Meanwhile, China’s surplus under the capital and financial account totaled USD97.7 billion. In particular, net inflows of direct investments, portfolio investments, and other investments amounted to USD47.9 billion, USD11.1 billion, and USD37.3 billion respectively. International reserves registered an increase of USD142.5 billion (exclusive of changes in the value of non-transaction factors such as exchange rates and prices). Specifically, foreign exchange reserve assets posted an increase of USD143 billion. In the first half of 2011, China’s surplus under the current account totaled USD87.8 billion. The ratio of the surplus under the current account to GDP during the same period was 2.8 percent. Meanwhile, China’s surplus under the capital and financial account totaled USD183.9 billion. China’s international reserve assets posted an increase of USD283.7 billion. In addition, the BOP Analysis Team of the SAFE released China’s Balance of Payments Report for the first half of 2011 so as to facilitate understanding of the data and analysis of China’s balance of payments among all groups in society. 2011-09-30/en/2011/0930/1016.html
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The SAFE recently released the Preliminary Data on China’s Balance of Payments Statement for the Third Quarter of 2011. The current account and the capital and financial account posted a “twin surplus” in Q3 of 2011, and international reserves maintained their growing momentum. In Q3, the surplus under the current account totaled USD57.8 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods and current transfers reached USD85.3 billion and USD6.9 billion respectively, whereas the deficit in trade in services and income amounted to USD20.2 billion and USD14.1 billion respectively. Meanwhile, China’s surplus under the capital and financial account (including net errors and omissions) totaled USD33.9 billion. In particular, net inflows of direct investments amounted to USD35.9 billion. International reserve assets posted an increase of USD91.7 billion. Specifically, transactions in foreign exchange reserve assets registered an increase of USD92.1 billion (exclusive of the influence of non-transactional changes in value such as changes in the exchange rates and prices), the reserve position in the IMF registered a decline of USD300 million, and special drawing rights registered a decline of USD100 million. In the first three quarters of 2011, China’s surplus under the current account totaled USD145.6 billion and the ratio of the surplus under the current account to GDP was 3.0 percent. Meanwhile, this year China’s surplus under the capital and financial account totaled USD229.8 billion (including net errors and omissions). China’s international reserve assets posted an increase of USD375.4 billion. 2012-01-04/en/2012/0104/1019.html
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The SAFE recently released China ’s International Investment Position as of the end of June 2011. The statistics reveal that at the end of June 2011 China’s external financial assets hit USD4615.2 billion, external financial liabilities reached USD2630.1 billion, and external net financial assets totaled USD1985.1 billion. Among the external financial assets, direct investments abroad amounted to USD329.1 billion, portfolio investments USD260.4 billion, other investments USD755.1 billion, and reserve assets USD3270.6 billion, accounting for 7 percent, 6 percent, 16 percent, and 71 percent respectively. In terms of external financial liabilities, foreign direct investments totaled USD1583.8 billion, portfolio investments USD230.9 billion, and other investments USD815.4 billion, accounting for 60 percent, 9 percent, and 31 percent of external financial liabilities respectively. The International Investment Position (hereinafter referred to as the IIP) is a statistical statement reflecting the stocks of financial assets and liabilities of one country or region to other countries or regions in the world at one specific point; together with the Balance of Payments Statement (BOP Statement) it constitutes the complete international accounts system, indicating the country’s or region’s trade flows. FILE: China's International Investment Position(2011Q2) 2011-10-19/en/2011/1019/1017.html
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According to statistical data released by the State Administration of Foreign Exchange (SAFE), in August 2011 the amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD144.4 billion and USD106.5 billion respectively. The surplus of foreign exchange settlement and sales by banks on behalf of clients amounted to USD37.8 billion. For the first eight months of 2011, the cumulative amount of foreign exchange settlements and foreign exchange sales by banks on behalf of clients amounted to USD1068.6 billion and USD713.9 billion respectively. The foreign exchange settlement and sales surplus was USD354.8 billion. In August 2011, foreign-related receipts and payments by domestic banks on behalf of clients amounted to USD211.9 billion and USD185.8 billion respectively, and the surplus of foreign-related receipts and payments reached USD26 billion. For the first eight months of 2011, the cumulative foreign-related receipts and payments of banks on behalf of clients amounted to USD1500.9 billion and USD1264.9 billion respectively; and the surplus of foreign-related receipts and payments reached USD236 billion. 2011-09-28/en/2011/0928/1015.html