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Foreign exchange reserves exceed the optimal level “In all circumstances (no matter how serious the impact will be), foreign exchange reserves of USD 3.7 trillion are enough” Caixin: China saw its foreign exchange reserves reach approximately USD 3.7 trillion at the end of the third quarter. Is this beyond the optimal level? Yi Gang: Yes, I think so. There are those who are preparing for events that will be even more disastrous than the 1997 Asian financial crisis and the collapse of Lehman Brothers. But in my opinion, the USD 3.7 trillion in foreign exchange reserves is enough for any scenario. Massive foreign exchange reserves can reflect China’s strong national power, improve confidence, and deter speculators from assaulting China. With these benefits, massive foreign exchange reserves offer guarantees for financial and economic security. But the reserves need to be capped. Too much reserves will lead to fewer benefits and higher costs. It will not be cost-effective if the foreign exchange reserves exceed an equilibrium that lies between the marginal cost and the marginal benefits curves. The marginal costs include the heavy pressures on resources and the environment imposed by the vast exports and the interest paid by the central bank to hedge against the excess liquidity that results as it acquires US dollars and increases the monetary base. Further, it is not an optimal choice if the central bank intervenes in the market; instead it is the market that should play a decisive role. Caixin: Where does China sit on the curve now? YG: For sure, China has exceeded the intersection of the two curves. But it is still uncertain how far it is from that equilibrium point. What is the optimal level for foreign exchange reserves? Some say the reserves should be large enough to address several months’ needs for payments for imports, or to account for a certain part of the external debt, or they should be measured by the trade volume, investment volume, or even by stress tests that are designed to measure the volume of foreign exchange reserves required in cases of the most serious assaults. Passing all these measurements indicates that our foreign exchange reserves are already high enough. Caixin: What are your ideas about diversifying foreign exchange reserves investments? Hasn’t there been talk about launching several funds for this purpose? YG: Everyone is welcome to make suggestions regarding foreign exchange reserves investments but the suggestions must be conducive to sustainable development and beneficial for the nation and its people. The adoption of suggestions will depend on their performance. Foreign exchange reserves that the central bank bought through market interventions correspond to the bank's liabilities on the balance sheet. These assets must be managed well or there will be grave macroeconomic consequences. So suggestions are encouraged and appreciated. The establishment of the China Investment Corp. (CIC), for example, proved to be a good solution. Thereafter, the China Reform Holdings Corp., dubbed CIC II, was also set up. Both firms have their own unique characteristics. Investments by the SAFE using foreign exchange reserves have also proved fruitful. These investments can be compared across the board. In general, assets should match liabilities, which should be the case also for rights and obligations. We cannot have the kind of power that comes with no obligations. This means that if we are to manage an asset, we must take responsibility. If performance is poor, many would challenge any further adoption of such an approach. Given the fact that a relatively long period is needed to prove the results and the asset quality of an investment, assets should not be quickly transferred, otherwise it will be difficult to know which investments are fruitful. Therefore, efforts should be made at the institutional level to make sure assets are matched with liabilities and rights are matched with obligations, encouraging full incentives and proper competition. Any further advice will be deeply appreciated provided it clearly states the responsibilities. But please make sure the mechanism and the tactics have the ability to yield good results. The only solution is to pursue balanced international payments "The market plays a decisive role in balancing international payments. In addition, the RMB exchange rate also matters—international payments will automatically be balanced when the RMB exchange rate reaches an equilibrium" Caixin: How can we curb the further growth of the foreign exchange reserves? It seems that the reserves are still growing, which is partially due to the decision of the Fed to delay the QE tapering. YG: The only solution is to achieve an equilibrium for international payments, with more spending on imports, travel, and services, as well as more outbound investments. As international payments become more balanced, the foreign exchange reserves will stop growing. This is the simplest solution. Caixin: What did you mean when you said at a SAFE meeting, in conveying the spirit of the Third Plenary Session of the 18th CPC Central Committee, that China should "accelerate development of a market-based mechanism and institutions that promote an equilibrium in the balance of international payments?" YG: Policy-wise, we can put more emphasis on the importance of imports to promote a balance of international payments. In fact, imports can create a lot of jobs and imports of key raw materials and energy resources are critically important to China. Many imported commodities in the past that were in high demand by the middle classes were mistaken as luxuries and these imports were discouraged. Currently, as income is increasing rapidly, a large middle-income group has emerged. What they need, for instance, is imported commodities like apparel, notebooks, and cosmetics. It is necessary that we attach priority to these imports in terms of taxes and distribution channels, with the aim of bridging the wide pricing gaps. The pricing gaps between the domestic market and foreign markets can only be narrowed after the distribution channels are liberalized and tariffs are properly adjusted. Some people blame the pricing gaps with foreign brands that intentionally jack up prices in China. This is a bit absurd. But I believe that slightly higher prices are acceptable provided there is enough competition. Caixin: The year 2012 witnessed a substitution of the capital and financial account deficit and the current account surplus for the double surpluses in China's balance of payments that began in 1999, indicating that the balance of payments has finally started to move in a self-regulating and self-balancing direction. But why did the double surpluses reappear this year? YG: On the one hand, they are associated with cross-border capital flows. Most developed countries have been pursuing loose monetary policies, putting tremendous pressures on China. The United States, for example, has introduced a quantitative easing (QE) policy. Japanhas loosened its monetary policies both quantitatively and qualitatively. The European Central Bank has prudently protected its fragile economic recovery. For example, earlier this year, it showed deep concern about strengthening the euro. After the interest rate was cut on October 7, the euro fell by 1 percent. On the other hand, China's surplus in trade in goods is higher than it was last year, and it has exceeded USD 200 billion over the past 10 months. In addition, expectations of yuan trends among individuals and firms on the Mainland and in Hong Kong are important factors. Taking these factors into consideration, this year we are facing relatively stronger pressures from capital inflows. Caixin: Abnormal cross-border capital flows have risen recently, resulting in increased volatility, especially in terms of the capital and financial account. How can we strengthen our ability to monitor and analyze cross-border capital flows and improve the early-warning system? YG: The State Administration of Foreign Exchange (SAFE) has in place a comprehensive response plan that will be triggered when capital inflows reach a certain threshold. Rather than being tabled, this plan has been initiated three times and since its introduction in 2010 it has proven to be efficient. In my opinion, administrative controls over capital flows usually have limited and temporary effects. A new measure to regulate capital flows usually proves to be very effective within the first three months but it becomes less effective later on as people discover countermeasures, in the same way that a virus becomes resistant to drugs. The ultimate solution, as highlighted at the Third Plenary Session of the 18th CPC Central Committee, is to have the market play a decisive role in allocating resources, that is, leaving the market to play a decisive role in balancing international payments. In addition, the RMB exchange rate also matters—international payments will automatically be balanced when the RMB exchange rate reaches an equilibrium. The market-based mechanism for setting the yuan exchange rate should be improved. “In my opinion, the exchange rate is very close to an equilibrium level. But I hope that the mechanism will be more flexible and resilient" Caixin: The Decision on Major Issues Concerning Comprehensively Deepening the Reforms (hereafter “the Decision”), deliberated and approved at the Third Plenary Session of the 18th CPC Central Committee, highlights that China will improve its market-based exchange-rate formation mechanisms for the yuan. What is your interpretation of this? YG: Above all, a market-based exchange-rate formation mechanism for the yuan means that the RMB exchange rate will be decided by market supply and demand, which is the fundamental feature of the mechanism. From this, there are three key takeaways. First, develop markets, making market access and market transactions more convenient by requiring fewer administrative approvals, and developing hedging products according to market demand. As there is still a long way to go in terms of deepening the foreign exchange market with more diversified products in China, it is necessary to develop the market. Second, increase the flexibility of the RMB exchange rate and allow it to fluctuate in both directions. The volatility range for the RMB exchange rate against the USD can be expanded as at present it is the narrowest of all major currencies, whereas interest rates in China are high, leading to almost no costs for conducting interest arbitrage. An expanded range of volatility can push up the costs of interest arbitrage but will not have a serious impact on companies. Third, it is hoped that the RMB exchange rate will remain stable at an equilibrium level and will not, as was the case in the past, be fixed based only on the USD. These three key takeaways indicate our future work priorities. Put simply, China will continue to follow the marketization path while remaining stable. Caixin: You said common people will benefit from a stronger yuan. But many exporters suffer when the yuan appreciates. How do you account for the yuan's highs and lows over the past years? YG: The impact of the RMB exchange rate over the past few years needs to be viewed holistically. We know RMB appreciations hurt exporters. Now there has been talk about the yuan "being forced to appreciate" and that will have a very negative impact. But we also need to see the other side, that is, the benefits of a more market-based RMB exchange rate. First, China's economic strength has improved significantly, with last year’s GDP exceeding USD 8 trillion. Second, there are material benefits for the general public. Last year, for example, China imported more than 58 million tons of soybeans, more than 270 million tons of oil, and more than 700 million tons of iron ore. Had the yuan not appreciated, the soybean oil and bean pulp used for animal fodder would have been much more expensive. The more than 80 million people traveling abroad and those studying overseas could do so at lower costs. Why do so many people criticize an RMB appreciation? Because export companies speak with loud voices, while common people and those who benefit indirectly are the silent majority. But an RMB appreciation needs to be capped. I do not wish to see the yuan appreciate more than it should; an appropriate, balanced, and largely stable level is preferable. An important criterion for assessing whether an exchange rate is appropriate is the balance of international payments. As the balance of international payments reaches an equilibrium, the exchange rate will also be balanced. Overall, the RMB exchange rate has been stable. According to the Bank for International Settlements, from 2000 to 2013 the RMB exchange rate against a basket of 52 currencies rose 17.3 percent and 21.9 percent in terms of the nominal effective exchange rate and the real effective exchange rate respectively. This was an average appreciation of more than 1 percent every year. This is absolutely in line with improvements inChina's productivity and its economic development. So the yuan was not forced to appreciate and the appreciation did not hurt the economy. The fact that China has been posting "double surpluses" in most years for more than a decade also shows that the yuan is not over-appreciated. Caixin: What do you think of the trends in the RMB exchange rate? Will the yuan continue to appreciate? YG: In my opinion, the exchange rate is now very close to an equilibrium level. But I hope the mechanism can be more flexible and resilient. Caixin: Does the reform aim to allow the yuan to freely float? Is a sound exchange-rate formation system the same as a free-floating exchange rate? YG: It would be free-floating in most cases. The Third Plenary Session of the 14th CPC Central Committee set the goal of gradually making the yuan convertible. Basically, that means making it a free-floating currency as determined by the market. But this is not mutually exclusive with demands for the central bank to take actions that comply with and respect market rules in cases when a crisis or a special event might occur. In other words, free-floating does not mean the central bank cannot intervene under any circumstances. Getting this straight may dispel the concerns of most people. Caixin: How far are we from free-floating? YG: We are now very close to a free-floating level. In 2012, for example, most of the time the central bank did not intervene in the market. Caixin: Even when we have a free-floating exchange rate in the future, will it be easy for the central bank to intervene in the market? YG: Any intervention will have to be rule-based. That means the personal judgment of any official cannot be used to justify an intervention. There needs to be a certain set of rules that clearly states the preconditions, means, and extent of any intervention, with clear terms and conditions in place so that power remains in a transparent cage. Rule-based intervention stresses the role of the market in orientation and decision making, with the aim of improving market transparency and boosting market confidence. It is hoped that the market can be simple, ruled by law and fully competitive, with clear regulations and transparent information. Caixin: Is the timing of the reform also a concern? YG: There is indeed an argument for this. But if public opinion and ideas do not change, all that work will have been for nothing. Even if we pick the best time, things will change. In 2008, for example, when we hosted the Olympics, an appreciation [of the RMB] was put on hold for a year and a half because of public pressures—many people considered the Olympics a top priority and did not want anything to go wrong. In the future, however, will an RMB appreciation be put on hold again if there is to be another Lehman Brothers crisis or if exports weaken? In fact, weak exports are more of a reason not to stop a RMB appreciation because the yuan will depreciate when exports are weak. Exports will soon see a turnaround due to a depreciation of the yuan. Whenever something unexpected occurs, people's first reaction has always been to call for suspending the RMB exchange-rate reform. This is not a problem regarding determination to reform but a problem of philosophy. It is very difficult to guide public opinion as by habit everyone always thinks exchange-rate flotation needs to be suspended whenever something uncalled for occurs. Caixin: Making the yuan float freely is a step-by-step process. Is it possible to first allow that to occur in the Shanghai Free Trade Zone (FTZ)? YG: Many people think in this same way. I think that in theory this assumption is flawed as China is but one market. If the Shanghai FTZ's policy has the front line open but the second line is under control, the assumption may work. But if it has the front line open and the second line is under control throughout the country, it would make the FTZ an offshore market with no direct connection to the mainland market. This makes no sense for the Shanghai FTZ, since we already have Hong Kong as an offshore market. If we cannot have the second line under control, we cannot make such an assumption work in the Shanghai FTZ, as capital moves freely between the FTZ and the rest of the mainland. This means the market in the entire country is free. This is where it becomes difficult. Orderly capital account convertibility "Capital account convertibility is designed to further protect and expand people's property rights" Caixin: The Third Plenary Session of the 18thCPC Central Committee highlighted that capital account convertibility should be accelerated. What is the next step? YG: Capital account convertibility was elaborated upon in the Decision. There was one sentence on interest rates and RMB exchange rates, but an entire paragraph on capital account convertibility. It reads: "Push ahead a two-way opening of the capital market, increase the convertibility of cross-border capital and financial transactions in an orderly way, build and fine-tune a system to manage foreign debts and capital flows under the framework of macro-prudential management, and accelerate capital account convertibility for the Renminbi." This shows how much significance the CPC Central Committee has attached to capital account convertibility. China achieved current account convertibility in 1996 and joined the WTO (the World Trade Organization) in 2001. These two events made China a major trade power—the world's largest exporter and the world’s second-largest importer. These are the changes that current account convertibility has brought to China. In fact, capital account convertibility is designed to further protect and expand people's property rights. For instance, under the planned economy urban residents were not allowed to buy housing. Later it became their right to choose whether or not to buy a home. This change protects their property rights and expands their rights to choose. In addition, in the past it was difficult for people to travel abroad for personal affairs, but now overseas tourism has become very convenient and part of their rights. The allocation of assets both at home and abroad has become an economic agent's right, while making the capital account convertible recognizes and expands such a right. Efforts shall be made to drive capital account convertibility. The two-way opening of the capital market will make China an overseas investment power as well as a major destination for overseas investments. This definitely will be good for China. Caixin: But many worry about outflows of capital and external shocks. How do you respond to this? YG: Some worry that if we open up, capital will flee and China's stock market will crash. In fact, once we liberalize the market, a lot of capital will vie to come in. Another worry is that an open capital account will leaveChinavulnerable to external shocks. It is said that it was due to the capital controls that China was not affected too much by the Asian financial crisis. This actually should not be attributed to the capital controls, but it is difficult to convey this idea to people and to convince them. The biggest worry is that many people interpret convertibility as an open door for hot money to freely flow in and out of China. That's unnecessary. This worry has been addressed in the Decision, which states that "efforts need to be made to create and fine-tune a system to manage foreign debts and capital flows under the framework of macro-prudential management.” In fact, we have already achieved a lot of progress toward this goal. China's system for balance-of- payments statistics is the most advanced in the world. While other countries base their statistics on sample payments, China counts each and every payment. Caixin: Does capital account convertibility mean no control? YG: A macro-prudential management framework must conform to the laws and market rules. Within these boundaries, capital can flow freely. What is macro-prudential management? It means you have a clear idea about capital inflows and outflows, understanding previous cases such as George Soros' attack on the British pound or on the Thai currency. Analyzing these cases, you should understand what has happened in the market and what kind of rules can be created to protect most investors and prevent cut-throat competition. This is the core philosophy of macro-prudential management. In addition, mechanisms for anti-money laundering, anti-terrorism financing, and anti-tax havens will be maintained. An IMF working paper once reported that imposing temporary controls on some capital accounts is possible under some special circumstances. Caixin: Can the pilot program for capital account convertibility come into force immediately in the Shanghai FTZ? Is the scheme almost completed? YG: Yes, the scheme is almost finished. The Shanghai FTZ will see a lot of progress in this regard, and some substantial and experimental steps will be taken. As it has been said, there are still major questions about the connections between the Shanghai FTZ and the rest of the Chinese market. Caixin: The Decision highlights that efforts should be made to push ahead with a two-way opening of the capital market. Has any progress been achieved in the Qualified Domestic Individual Investors (QDII2) program? YG: The scheme is being developed. Being prudential at the macro level to prevent risks "In this way, economic and financial security can be ensured and firms and individuals can enjoy maximum freedoms and conveniences. Those are the desirable outcomes of regulation" Caixin: The State Administration of Foreign Exchange (SAFE) has launched measures to manage the banks’ synthetic position in foreign exchange settlements and sales, linking the limits of the consolidated position floors for foreign exchange settlements and sales to the foreign exchange loan-deposit ratio as a tool for macro-prudential management. Can you elaborate on the content and policy tools for macro-prudential management? YG: In macro-prudential management, one should be prudent and watch out for risks. Take a maturity mismatch for example. If many firms focus on short-term growth, they will be warned. If they focus too heavily on short-term growth and market liquidity is reversed, they will be at risk. A currency mismatch is also something to watch out for. If the exchange rate changes drastically, there will be damage to a sound balance sheet. Linking the banks' consolidated positions to foreign exchange loans, which was initiated in May, is a typical macro-prudential management approach, as foreign exchange loans involve the source of capital for foreign currency loans and matching the loan terms with currencies. When maturity and currency mismatches reach certain thresholds, limitations should be imposed on banks. The minimum requirement to avoid a currency mismatch is to require banks to sustain consolidated positions, while coupling their consolidated positions with loans to achieve balanced development and to make sure maturities and currencies are well matched. Caixin: The revised Procedures for Reporting the Balance of Payments (hereafter Procedures) will come into force on January 1, 2014. I am wondering how the new procedures will facilitate enhanced monitoring of cross-border capital flows. YG: The release of the Procedures will make monitoring much more sound. Our philosophy is that a strong statistical system for the balance of international payments should be in place while power should be in a transparent cage so as to ensure a sound monitoring of the statistics on the balance of international payments and cross-border capital flows while leaving monitoring transparent to the absolute majority of persons who obey the law. In this way, economic and financial security can be ensured and firms and individuals can enjoy the maximum possible freedoms and conveniences. Those are the desirable outcomes of regulation. Caixin: RMB foreign debts, including trade financing, direct investments, and bonds, have gradually increased over the past two years. I am wondering how to manage these debts, and whether these debts should be incorporated into the foreign debt statistics. YG: According to the rules of the balance-of-payments statistics, foreign debts should be incorporated into the scope of the statistics, regardless of the currency. In the US, for example, foreign debts are denominated in US dollars, which does not have an impact on the country's statistics on foreign debts. In other words, the country's foreign debts have not been offset by the use of the home currency. This is justified both in theory and in practice. So far, the foreign debts published by the Chinese government have not included RMB foreign debts in order to maintain the old statistical methodology. However, this issue has been addressed in theory, that is, foreign debts should include all the liabilities between Chinese and foreign economic agents. Cultivating a new benchmark for a market-based interest rate "The conditions should include: 1. The benchmark interest rate adopted by the central bank has been replaced by the market-based interest rate; 2. Banks carry out their internal accounting based on the market-based interest rate" Caixin: What is the next step in accelerating liberalization of the deposit interest rate? YG: Currently interest rates of bonds and financial products have been liberalized, as have loan interest rates, whereas deposit interest rates still remain a big concern. They will gradually be liberalized as the conditions are met. Instead of being low, China’s deposit interest rates are actually well in excess of those of the HKD, USD, YEN, and EUR. The one-year deposit interest rate is 3.25 percent, and the yuan is stable and appreciating. What other currency has such an interest rate? Caixin: Will the deposit interest rate drop after liberalization? YG: Most people believe that the deposit interest rate will rise after liberalization, but they need to consider the related problems if the deposit interest rate is to rise again. Caixin: What do you mean by saying “when conditions are met”? YG: There are two conditions: 1. The benchmark interest rate launched by the central bank has been replaced by the market-based interest rate; 2. Banks carry out their internal accounting based on the market-based interest rate. The Shanghai interbank offered rate (Shibor), for example, might replace the current benchmark interest rate. If banks price their products and verify deposits and loans, and capital transactions between parent banks and branches are based on the Shibor rather than the deposit interest rate, then that will be a signal for liberalization. The Shibor is just an example—the repo rate might be more important in the future. If a mature market-based benchmark rate can be identified to largely replace the benchmark rate launched by the central bank, it will be time to liberalize the deposit interest rate. But we worry that the market will become chaotic if the deposit interest rate is liberalized and no new benchmark interest rate has been found to replace the current benchmark. Caixin: Is it possible that the deposit interest rate will be liberalized first in selected regions, such as the Shanghai FTZ, Wenzhou, or Qianhai? YG: We encourage regions to implement the pilot program for deposit interest rate liberalization within the possible scope and we believe considerable innovations can be made. But any region that wants to liberalize the deposit interest rate must first satisfy two requirements: one, it must prove logically that it is ready in theory; and two, it must make sure that the market will remain stable and orderly when the pilot program is implemented and that the liberalization of the deposit interest rate is in the public interest. Caixin: What are your ideas about the recent financial strains in the bond market? YG: Certain volatilities in the market are normal since we want to allow the market to play a decisive role in allocating resources. We should be more tolerant of such volatility, but the central bank will not allow such volatility to reach a point whereby economic activities are impacted. But just as the interest rate is decided by market demand and supply, the bond price is decided by the demand and supply of bonds and we need to be poised to tackle the consequences of ups and downs in the interest rate. In principle, we should respect the market's role in allocating resources. (Originally published in issue no. 26 of Century Weekly by caixin.com, 2013.) 2013-12-02/en/2013/1202/1091.html
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On May 16, 2012, the 37th annual meeting of the International Organization of Securities Commissions (IOSCO) convened in Beijing . The China Securities Journal conducted an interview with M SunLujun, head of the Capital Account Administration Department of the SAFE, on issues related to the QFII system. Q1: This year marks the 10th year since China launched the QFII system. How do you regard implementation of the system during the past ten years? A: Ten years have past since the QFII system was launched in China at the end of 2002. It is an institutional arrangement under such circumstances that foreign investors are granted limited access to China ’s capital market, and the RMB capital account remains nonconvertible. This arrangement allows qualified foreign institutional investors living up to certain standards to make portfolio investments in China 's capital market within verified investment quotas. Implementation during the past ten years shows that the QFII system is an important move by the government to promote the opening-up of the capital market and the convertibility of the RMB capital account. The involvement of QFIIs in the domestic stock market has played an important role in improving the framework of the system, investment philosophy, corporate government, risk control, and technical level of the capital market, as well as enhancing the services of domestic custodians and investment banks. It also stimulates cooperation between domestic and foreign financial institutions, facilitates the standardization and internationalization of the capital market, and provides practical experience for further reform and development of the capital market. Q2: From the perspective of the assignment of responsibilities, the CSRC is currently responsible for examining and approving the qualification and market admittance of QFIIs, while the SAFE is responsible for examining and approving the QFII quota to invest in the domestic stock market. Could you briefly describe the procedures for QFII quota examination and approval? A: According to the relevant laws and regulations of the QFII system, QFII institutions shall, upon receipt of portfolio investment business licenses from the CSRC, submit through trustees, within one year, investment quota applications to the SAFE. The SAFE implements a collective examination mechanism to examine the investment quotas. A quota examination committee is established consisting of the heads of the SAFE departments to examine QFIIs that have submitted complete and regulatory compliant applications. A meeting is held once a month to examine the applications. This mechanism has played an active role in enhancing the transparency, fairness, standardization, and timeliness of the QFII quota examination. The SAFE has maintained close communications and coordination with the relevant CSRC departments. An effective information-sharing mechanism has been established to facilitate communications. Q3: Could you say something about examination and approval of the QFII quota in recent years? A: Since implementation of the QFII system, the SAFE has worked closely with the CSRC in controlling the pace of the quota examination and in increasing the scale of investments by QFIIs. This has been achieved in accordance with the government target to support and promote the reform and development of the capital market, and based on the circumstances of the BOP conditions and the development of the stock market. As of May 16, 2012, the SAFE had approved an investment quota of USD26.013 billion for 138 QFIIs (excluding three institutions with nullified quotas due to changes in the investment entities and the approved relevant quotas). In general, the pace of the quota examination is consistent with the demand of the QFIIs. For instance, during the initial period of QFII implementation and the expansion of the global financial crisis in 2008, the amount of the approved quota was relatively small due to fewer applications submitted by the QFIIs; during periods when the QFII system was steadily carried out, the SAFE approved average quotas of USD3-3.5 billion each year. It should be noted that in 2011 the country faced great pressures from cross-border fund inflows. In response, the SAFE properly slowed the pace of QFII quota examination, with a total amount of USD1.92 billion approved for the whole year. Since the beginning of 2012, China ’s balance of payments has moved toward equilibrium. In order to further promote the reform and development of the capital market, the SAFE timely adjusted and accelerated the pace of the QFII quota examinations. As of May 16, 2012, USD4.373 billion had been granted to 38 QFIIs, nearly equal to the total investment quota approved in 2010 and 2011. Q4: We noticed that the CSRC recently released data showing that by the end of April 2012, 163 overseas institutions had been granted QFII qualifications. According to data newly released by the SAFE, as of May 8, 2012, only 141 QFIIs had been granted investment quotas. What is the source of this discrepancy? A: The CSRC gathered and released data on QFII qualifications, and the SAFE gathered and released data on QFII investment quotas. The discrepancy is due to three factors: (1) some QFIIs did not submit the applications to the SAFE on time; (2) some QFIIs had to alter their submitted applications due to fundraising reasons or adjustments to the investment schedule; (3) some QFIIs asked to defer the approval of the quotas due to fundraising difficulties. Excluding the above reasons, the SAFE has maintained a pace consistent with that of the CSRC in QFII examination and approval. Q5: Recently, the CRSC said that it will take measures to further promote the development of the QFII system, such as the lowering of the threshold for QFII admittance, further introducing overseas long-term funds, and so forth. Does the SAFE have similar plans? A: During formation and implementation of the QFII system, the SAFE has established close communications and coordination with the CSRC. The two authorities have also established a mechanism for smooth data-sharing. The SAFE has taken steps to promote the facilitation, standardization, and transparency of foreign exchange administration relating to the QFII system by revising the policies and regulations, establishing a quota examination committee, providing window guidance, and so forth, and by responding actively to the rational policy demands of the QFIIs. With respect to the quota examination and exchange policies, the SAFE has played a role similar to that of the CSRC in providing preferential policies on quota approval to a single QFII institution, a lock-up period for the principal, and so forth, in compliance with the policy orientation that mid- and long-term investors (overseas pension funds, insurance funds, donation funds, and so forth) should be further encouraged. Q6: Recently, the total quota for QFIIs was increased to USD80 billion upon approval of the State Council. What plan does the SAFE have for examining the increased quota? A: The State Council recently approved an increase in the QFII investment quota to USD80 billion. To facilitate the reform and development of the domestic stock market, the SAFE has made active adjustments to the investment quota and exchange administration, such as actively facilitating quota examination and approval, providing rapid access to the quota examination for mid- and long-term funds, including overseas pension funds and insurance funds, providing preferential policies for the amount of the initial investment quotas, increasing the initial approval amount for the aforesaid QFIIs, and properly streamlining the processes for managing the exchange accounts and RMB accounts of the QFIIs. Looking toward the future, the SAFE will continue to bolster the reform and development of the domestic capital market, maintain close communications and coordination with the CSRC, carry out policies for encouraging mid- and long-term overseas investment funds, further improve the quota examination mechanism for QFIIs, and increase the efficiency of the quota examination, thus further satisfying the quota needs of the QFIIs to invest in the domestic stock market and promoting the reform and development of the QFII system and the capital market. 2012-07-13/en/2012/0713/1057.html
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Premier Li Keqiang recently signed Decree No. 642 of the State Council on promulgation of the Resolution of the State Council on the Amendments to the Measures for the Declaration of Balance-of-Payments Statistics (hereafter, the Resolution), which will come into effect on January 1, 2014. Experts at some relevant research institutes and government departments were interviewed in order to grasp a deeper understanding of the amendments. In 1995, the People’s Bank of China (PBOC) promulgated the Measures for the Declaration of Balance-of-Payments Statistics (hereafter, the Measures) upon approval of the State Council. The Measures were formulated to obtain a comprehensive understanding of China’s foreign economic situation, which could provide an important basis for macro-economic decision-making. The Measures have played an active role in China’s Balance of Payments (BOP) statistics during the past 20 years. What was the reason for this important amendment at this time? Ding Zhijie (dean of the School of Finance of the University of International Business and Economics): The past 20 years witnessed the burgeoning development of China’s foreign economy. The amendments were implemented to adapt to the new circumstances, tackle new challenges, and meet the new requirements. With respect to the new circumstances, in recent years there has been a constant expansion of China’s BOP transactions, a growing diversity of transactions in terms of content, type, and mode, development of new products, such as cross-border portfolio investments and financial derivatives, and the emergence of new businesses, such as e-banking and international bank cards, thus calling for new methods to monitor, analyze, and provide early warnings for the BOP statistics. As for the new challenges, in recent years there have been increasing uncertainties regarding BOP operations, a growing severity of abnormal inflows of cross-border capital, and greater difficulties in supervising them. This has made it necessary that monitoring and analysis of cross-border capital flows be strengthened and that early-warning capability be enhanced by improving the current BOP statistical and declaration systems. As for the new requirements, in 2009 the IMF published the Balance of Payments and International Investment Position Manual (hereafter, the Manual, sixth edition), specifying the universal international standards for the compilation of BOP statistical statements. The revised Manual refined the existing system in terms of its principles, scope, and classification and framework of the statistics and enhanced the statistics on the stock of the BOP positions. These changes subjected China’s BOP statistical data and methods to higher standards and created good opportunities for China to improve its BOP statistical system so that it is consistent with the latest international standards. The amendments reflect the most recent requirements as a result of the rapid changes in the BOP situation and macro-economic monitoring and analysis. What are the highlights of the amended measures as compared with the previous measures? Zhao Qingming (expert on international finance): Five areas are highlighted in the amendments. First, the current statistical declaration system (scope, object, and so forth) has been comprehensively revised based on the latest international standards for BOP statistics. Second, some key areas were revised, such as BOP stock statistics and the declaration obligations of non-Chinese residents. Third, the Measures have been supplemented by some content that was missing from the previous version and by those vulnerable aspects of the BOP statistics, including stock statistics and the obligations of the declaration entities, such as Chinese and non-Chinese residents. Fourth, the amendments optimize the channels and specify the obligations of registration, settlement, and trusteeship agencies in terms of submitting portfolio investment data in a more convenient and accurate manner, thus easing the burdens on the declaration entities and increasing the efficiency and accuracy of the submitted data. Fifth, the statistical obligations of declaration entities and the statisticians, as well as the penalties for violation of the regulations, are specified. Guan Tao (director of the BOP Department of the SAFE): The amended Measures cover six areas. First, external financial assets and liabilities of Chinese residents are incorporated into the statistics. Second, non-Chinese entities are treated as declaration entities so as to acquire more comprehensive and accurate data on BOP transactions, especially transactions with non-Chinese residents that take place within China. Third, a series of new declaration requirements for agencies that provide services, such as registration, settlement, and trusteeship, have been added due to the development and administration of e-banking, international bank cards, and the securities market. Fourth, the declaration obligations of Chinese residents who have external financial assets and liabilities have been added. Fifth, the confidentiality obligations of the above entities have been added based on the revision of the declaration entities. Sixth, it is explicitly specified that penalties shall be imposed on the relevant entities in accordance with the Regulations on Foreign Exchange Administration of the People’s Republic of China, and the penalties set forth in the previous Measures are hereby abolished. All in all, for the present and for the foreseeable future, the revised version will meet the requirements for BOP statistics and monitoring. The amendments also introduce some new requirements for China’s current BOP statistical system. Suggestions and opinions from experts were solicited regarding implementation of the new version. The BOP Department of the SAFE, as the entity responsible for implementing the Measures, has also been making preparations for their implementation. Zhang Bin, director of the Global Macro-economy Research Office of the Research Institute on the World Economy and Politics at the Chinese Academy of Social Sciences, has suggested that the relevant systems be improved and that the statistics on China’s external financial assets, liabilities, and transactions be strengthened so as to provide an important basis for macro-economic control. Current statistical methods should be further improved to meet the new requirements in the Measures and to fulfill the obligations in the amendments. Efforts should be intensified to disseminate information about the relevant policies in order to enhance awareness among the declaration entities as well as the general public regarding their declaration obligations. Guan Tao described three new initiatives for implementing the Measures. The first is to revise and publish national standards for the Statistical System for External Financial Assets and Liabilities and Transactions and the Classification and Coding of BOP Transactions as required by the Balance of Payments and International Investment Position Manual (sixth edition). The second is to improve the direct declaration and statistical systems for external financial assets, liabilities, and so forth, to refine the statistical content of the BOP sampling survey, and to explore the estimation and statistical methods so as to reduce the social costs and to streamline the procedures for the declaration entities while maintaining the quality of the statistical data. The third is to intensify training efforts on the BOP statistics by increasing the frequency of training classes, enhancing face-to-face communications with the data submission agencies such as the banks, carrying out training and dissemination campaigns at various levels, and compiling brochures that interpret the BOP statistics so as to impart the relevant knowledge to both the general public and the declaration entities. 2013-11-22/en/2013/1122/1089.html
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An outreach meeting on theoretical study by the central division of the leading Party group was recently convened by the State Administration of Foreign Exchange. Yi Gang, administrator and secretary of the leading Party group of the SAFE, presided over the meeting. The meeting was held to convey the spirit of the Central Economic Work Conference and the Central Conference on Urbanization and to make future plans for foreign exchange administration. It was agreed by the participants that the Central Work Economic Conference was held in the context that the Third Plenary Session of the Eighteenth Chinese Communist Party Congress established the overall planning regarding the deepening of the reform. The Conference was of great significance for pursuing sustainable and healthy development of the economy in 2014. The Conference comprehensively summarized the progress in economic development in 2013, conducted in-depth analysis into circumstances both at home and abroad, and proposed the essential requirements to make progress while maintaining stability and to implement the reform while make innovations in economic development in 2014. The Conference was of vital importance for us to consolidate our convictions, gather our strength, deepen reform in an all-round manner, and maintain a positive momentum for economic and social development. The Central Conference on Urbanization was the first of its kind since the launch of the reform and opening-up policy convened by the Party Central Committee, and it was an important move for deepening the reform in an all-round manner. It is of crucial strategic significance for the advancement of urbanization in the right direction. It was stressed at the meeting that 2014 will be the first year for the SAFE to comprehensively implement the spirit of the Third Plenary Session of the Eighteenth Chinese Communist Party Congress and to deepen the reform in an all-round manner. The SAFE should comprehensively carry out the spirit of the Eighteenth Chinese Communist Party Congress and its Second and Third Plenary Sessions, adhere to the keynote of making progress while maintaining stability, carry out reform and innovation in each area of social and economic development, maintain the continuity and stability of macro-economic policies, focus on stimulating the vitality of the market, accelerate transformation of the mode of economic restructuring, effectively improve the quality and benefits of economic development, and promote sustainable and healthy economic development as well as social harmony and stability. The Conferences mandated that all members of the SAFE should study and fully implement the spirit of the Conferences, adhere to the keynote and essential requirements of the Party Central Committee’s planning for economic work in 2014, and with concerted efforts, thoughts, and actions unite with respect to the decisions and arrangement of the Party Central Committee. All members of the SAFE should carry out the reform and make innovations in each area of foreign exchange administration, deepen the reform by giving play to the decisive role of the market in allocating resources, make endeavors to achieve breakthroughs in key areas of foreign exchange administration, and step up improvements in the market-oriented system and the mechanism that facilitates an equilibrium in the balance of payments. It is essential that the role of foreign exchange administration be enhanced to serve the real economy, the policies of foreign exchange administration be aligned with the deepening of the reform, foreign exchange administration improve the reform approaches and methodologies, major efforts be directed to transforming the concepts and approaches of foreign exchange administration, and routine administration and services be carried out. All members of the SAFE should promote the reform in compliance with the spirit of the Party Central Committee and in a correct, accurate, orderly, and harmonious manner, work conscientiously with solidarity, and strive to achieve the sustainable and healthy development of the economy and society. 2013-12-16/en/2013/1216/1095.html
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In 2012, the SAFE received and handled a total of 45 suggestions and proposals for the “Two Sessions,” the content of which involved facilitation of trade and investment, support for enterprises to “go global,” cross-border RMB settlement, operations and management of foreign exchange reserves, and so forth. At present, this work has been smoothly completed. During the period of handling the suggestions and proposals for the “Two Sessions,” the SAFE attached high priority to the work, carefully planned organization, and paid close attention to implementation. First, sound systems were established and handling procedures were regulated. Special measures were developed to guarantee that the work of handling such proposals and suggestions be institutionalized and standardized. Second, leaders attached importance to this task and made careful arrangements. The CPC Leading Group at the SAFE placed high priority on the work of handling the suggestions and proposals, and the leaders of the SAFE convened special conferences to make arrangements and to put forward the requirements for the handling of the suggestions and proposals. Third, training was enhanced and supervision was strictly enforced. Collective training was organized for the staff responsible for handling the suggestions and proposals, and more efforts were made to supervise the handling of the work so as to effectively guarantee that each suggestion or proposal receive a reply. Fourth, the work of coordination and communication was carried out well so as to improve performance. Communication with representatives and members was enhanced through various methods, and the comments and suggestions of the representatives and members were taken into consideration so as to ensure the quality of the work of handling the suggestions and proposals. Fifth, experiences were summarized and excellence was commended. After completing the handling of the suggestions and proposals, the experiences and good practices were summarized and units and individuals with notable contributions were recognized. Because the 2013 “Two Sessions” are about to convene, the SAFE will further improve its work style, engage in solid work, and effectively handle the suggestions and proposals for the 2013 “Two Sessions.” 2013-02-27/en/2013/0227/1079.html
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According to statistics released by the SAFE, in the first quarter of 2012 inflows and outflows of direct investments by overseas investors in domestic financial institutions amounted to USD660 million and USD40 million respectively, resulting in a net inflow of USD620 million. Outflows and inflows of overseas direct investments by domestic financial institutions amounted to USD1.55 billion and zero respectively, resulting in a net outflow of USD1.55 billion (see table 1). As of the end of 2011, the stock of direct investments by overseas investors in domestic financial institutions amounted to USD68.43 billion, while the stock of overseas direct investments by domestic financial institutions amounted to USD52.66 billion (see table 2). To further increase the transparency of exchange statistical data, from the beginning of 2012 the SAFE will release the flow amount of direct investment by financial institutions on a quarterly basis, and the stock amount of direct investments by financial institutions on a yearly basis. Table 1: Direct Investment Flows by Financial Institutions (Quarterly) Unit: USD (100 mn) Item Q1, 2012 Net inflows of direct investments by overseas institutions 6.2 Inflows 6.6 Outflows 0.4 Net outflows of overseas direct investments 15.5 Inflows 0 Outflows 15.5 Table 2: Stock of Direct Investments by Financial Institutions (Annually) Unit: USD (100 mn) Item End 2011 Direct investments by overseas institutions 684.3 Direct investments by domestic institutions 526.6 Appendix: Glossary Financial institutions refer to the headquarters, branches, and sub-branches of institutions engaging in banking, securities, insurance, and other financial businesses which are established within the territory of China according to the law. Direct investments by financial institutions refer to equity investments by overseas investors in China’s domestic financial institutions or equity investments by China’s domestic financial institutions in overseas enterprises, which enable direct investors to have voting rights of 10 percent or more in the invested enterprises. The table of direct investment flows by financial institutions exhibits the amounts of capital flows of overseas direct investments by China’s domestic financial institutions and direct investments in China absorbed from overseas institutions. Specifically, inflows of direct investments by overseas institutions refer to the investment capital or increased investments by overseas investors in China’s domestic financial institutions, outflows refer to the investment capital decreased or withdrawn by overseas investors from China’s domestic financial institutions; capital outflows of foreign direct investments refer to capital investments or increased investments by China’s domestic financial institutions in overseas enterprises, inflows refers to decreased or withdrawn capital investments by China’s domestic financial institutions from overseas enterprises. The table of the stock of direct investments by financial institutions exhibits the stock amount of Chinese owners’ equity arising from foreign direct investments by domestic financial institutions and that of foreign owners’ equity arising from direct investments absorbed in China, including paid-up capital, undistributed profits, and so forth. 2012-07-13/en/2012/0713/1058.html
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The System for External Financial Assets, Liabilities, and Statistics on Transactions (Huifa No.43 [2013], hereinafter referred to as “the System”) was recently promulgated by the State Administration of Foreign Exchange (SAFE). With adoption of the newest international statistical standards the System represents a complete revision of the Operating Procedures of Financial Institutions for the Declaration of Overseas Assets, Liabilities, and Profits and Losses promulgated in 1996, and shall be implemented as of September 1, 2014. The System makes significant improvements to the entities, contents, and frequency of the declarations. According to the System, the entities for the declarations include corporate entities in the banking sector, the securities sector, the insurance sector, and other corporate entities engaging in financial intermediary businesses, the leading reporting branches/sub-branches of overseas financial institutions within the territory of China, and other designated institutions. The content of the declarations is extended from the stock of external financial assets and liabilities to the stock and flow of external financial assets and liabilities and other related balance-of-payments transactions. The frequency of the declarations is adjusted from a quarterly to a monthly basis. With implementation of the System on September 1, 2014, China will be able to meet the newest statistical standards of the IMF’s Balance of Payments and International Investment Position Manual in terms of data acquisition. In addition, it will meet the requirements for monitoring and statistics on cross-border capital flows, thus laying a foundation for supervision and risk-monitoring of foreign-related economic entities and satisfying the growing demand for macro-economic analysis and decision-making both at home and abroad. 2013-12-05/en/2013/1205/1093.html
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In order to promote facilitation of foreign exchange receipts and payments for trade in services, Yi Gang, administrator of the State Administration of Foreign Exchange (SAFE) and his entourage visited the Beijing Foreign Exchange Administrative Department and held a discussion with representatives from some banks, enterprises, and branches of the SAFE to investigate the relevant situation with regard to foreign exchange administration for trade in services. Yi Gang pointed out that during recent years the SAFE has made vigorous efforts to promote trade and investment facilitation in compliance with the general requirements of the CPC Central Committee and the State Council for accelerating the reform and opening-up, and has persisted in pursuing administration according to the law by streamlining administration and power delegation to serve the development of the real economy. In 2012, reform of the foreign exchange administration system for trade in goods was implemented on a nationwide basis; foreign exchange administration for direct investments was substantially streamlined, resulting in a significant improvement in trade and investment facilitation. Yi Gang said that the SAFE will further follow the relevant guidelines of the CPC Central Committee and the State Council to develop the service sector, proactively push forward the reform of foreign exchange administration for trade in services, vigorously promote facilitation of the services trade, strengthen communications and coordination with the relevant authorities, and provide policy support for the development of trade in services so as to enhance the role of foreign exchange administration in boosting the “going-global” process of the service sector. 2013-01-15/en/2013/0115/1077.html
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Since 2012, in order to further promote reform and development of the domestic capital market, the foreign exchange authorities have accelerated the pace of approval of the investment quota for Qualified Foreign Institutional Investors (QFIIs). From January 1 to September 19 of 2012, the foreign exchange authorities approved a total investment quota of USD 9.178 billion (including additional investment quotas) for 72 QFIIs. As of September 19, 2012, the foreign exchange authorities approved a total investment quota of USD 30.818 billion for 157 QFIIs. During the next step, in light of the balance of payments situation, the foreign exchange authorities will continue to promote improvement in the QFII system and to support the reform and development of the domestic capital market. 2012-09-21/en/2012/0921/1071.html
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Editors notes: Our administration has published questions and answers about popular topics regarding foreign exchange management policies in periodicals and has analyzed and interpreted ideas and concepts relating to foreign exchange management in response to questions of public concern about foreign exchange management and foreign exchange reserves. This move has been widely acknowledged and welcomed by the media and the general public. With the deepening of the reform and opening up, the general public is becoming more closely involved in foreign exchange business. Therefore, we will continue to popularize knowledge about foreign exchange management and interpret the relevant policies, so that the general public will understand foreign exchange management in plain language. As for the recent de-listing of Fannie Mae and Freddie Mac (hereinafter referred to as Fannie and Freddie) from the New York Stock Exchange (NYSE), we have clearly stated in early remarks that our foreign exchange reserves did not invest in Fannie and Freddie stocks. The bond prices for Fannie and Freddie are stable and repayments for the investment and interest are being made according to schedule. Some readers hope to know more about Fannie and Freddie as well as to learn about the stocks and bonds of the two companies. Therefore, our administration has compiled some questions and answers about relevant information for your reference. Q1: What kinds of enterprises are Fannie and Freddie? How are they positioned in the American financial system? A: Fannie and Freddie are the two biggest mortgage lenders in the United States, i.e., the Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corporation (Freddie Mac). Fannie and Freddie are government-sponsored enterprises established through legislation by the U.S. Congress. The legislation is aimed at providing stable and constant support to the housing mortgage loan markets and improving the accessibility of home mortgage loans. The businesses operated by the two companies play an important role in American housing policy. U.S. housing policy is public. After the Federal Home Loan Bank System was established in 1932, a secondary market of housing mortgages came into being, with Fannie and Freddie as the primary players and private mortgage finance agencies as supplementary players, to provide financial security for housing construction by combining government intervention and market-oriented operations. Fannie and Freddie are the pillars of the American real estate market. Real estate loans underwritten or purchased by the two companies account for 50 percent of the American real estate market; this figure reached over 80 percent after the outbreak of the sub-prime lending crisis. Fannie and Freddie are not only important to the American real estate market, but also are crucial to the stability of the financial market. The assets owned or guaranteed by the two companies total about USD 5.5 trillion. Over 70 percent of the bond investors in Fannie and Freddie are American investors, such as pension funds, mutual funds, commercial banks, and insurance companies, which are of overriding importance to the U.S. financial system. At the initial stage after the outbreak of the sub-prime lending crisis, the U.S. Government still relied on these two companies to alleviate the crisis and it adopted such measures as lowering their capital requirements and expanding the maximum single loan limit to enhance their role in resolving the crisis. With the deepening of the crisis, the American real estate market experienced dramatic changes; furthermore, due to poor management, the two companies encountered problems. Therefore, the U.S. Government took over Fannie and Freddie, indicative of its support for the companies. At present, in addition to the injection of USD 145 billion in the preferred stocks of Fannie and Freddie by the Treasury, the U.S. Government has promised limitless injections for the two companies by 2012 to offset net losses. Thereafter, the two firms may still apply to the Treasury for injections within the limit of USD 200 billion respectively. In addition, the Federal Reserve and the Treasury purchased a total of over USD 1.4 trillion of Fannie and Freddie bonds, accounting for 25 percent of the total assets owned and guaranteed by the two companies, thus making them the biggest bond holders of Fannie and Freddie. The U.S. Government has promised on several occasions that the capacity of Fannie and Freddie to repay relevant debts in the face of any future reforms will be guaranteed. During the recent second round of the Sino-U.S. Strategic and Economic Dialogue, the U.S. Government stated it will continue to enhance supervision over government- sponsored enterprises so as to ensure that they have adequate capital and a capacity to carry out their financial liabilities. The U.S. Government will listen to all stakeholders and adopt proper measures to further reform so as to ensure that government- sponsored enterprises have the capacity to fulfill their liabilities. Q2: What about the stocks issued by Fannie and Freddie? Why were they de-listed? A: Fannie and Freddie were listed on the New York Stock Exchange in 1970 and 1989 respectively and Fannie Mae was also listed on the Chicago Stock Exchange. In addition to preferred stock, the amount of Fannie and Freddie common stocks totals about 1.14 billion and 0.65 billion respectively. During the ten years before the 2007 sub-prime lending crisis, the share price of the two companies remained at USD 50-70 per share and the dividends were distributed regularly; therefore, the stocks were popular with investors. After the outbreak of the sub-prime lending crisis, Fannie and Freddie suffered heavy losses due to the continuous slowdown in the American real estate market and their share prices declined dramatically. With the deepening of the crisis, the U.S. Government took over the two companies and their share prices fell to lower than USD 1. Thereafter, their share prices fluctuated around USD 1 for a long time. Since this mid-May, the average closing price of Fannie Mae has been lower than USD 1 for thirty consecutive trading days. According to the regulations of the New York Stock Exchange, under such circumstances the company may choose to de-list or to adopt measures such as a reverse split so as to restore the share price to over USD 1. The U.S. Government, the biggest shareholder of Fannie and Freddie, held 80 percent of the total shares, whereas the market value of the shares held by other shareholders was no more than USD 1 billion. Actually, Fannie and Freddie were no longer operated under a common business model. Under these circumstances, the regulatory authority of Fannie and Freddiethe Federal Housing Finance Agencydeclared that the stocks of the two companies would be de-listed on July 7, 2010. The shares of the two companies would continue to be traded on the OTC market after the de-listing. Q3: What agency bonds are issued by Fannie and Freddie? What about their market performance? A: The common agency bonds issued by Fannie and Freddie refer to the preferred unsecured debentures issued by the two companies. Fannie and Freddie raise funds by issuing this kind of bonds, investing in home mortgage loans and other securitization products. The two firms have always been considered to be U.S. Government agencies. Legal contracts signed with the U.S. Government to inject funds and increase their capital were not affected after Fannie and Freddie were de-listed from the NYSE. Fannie and Freddie bonds still maintain a top credit ratingAAA. Bonds issued by Fannie and Freddie still have a large market capacity and good liquidity, so they are important targets of bond investments on the international market. At the end of 2008, the Federal Reserve announced it would buy USD 200 billion of agency bonds issued by Fannie and Freddie, which further improved the safety and liquidity of the bonds and safeguarded steady market operations. The repayment of capital and interest for old bonds and the issuance of new bonds are both very normal. Take Fannie Mae for example. Fannie Mae issued USD 70.5 billion of agency bonds in 2009, 2.2 times the amount issued in 2007. In terms of the locations of the investors, about 73 percent of the investors were from the U.S.; in terms of the types of investors, institutional investors such as mutual funds, insurance funds, and pension funds accounted for about 63 percent and central banks accounted for about 19 percent. The earnings from Fannie and Freddie agency bonds are quite stable. As revealed by the Market Index, which is mainly comprised of agency bonds issued by Fannie and Freddie, the cumulative rate of return stood at 10.7 percent in 2008 and 2009 when the crisis was at its peak and since 2010 the rate of return has remained at 3.9 percent Q4: What are the mortgage-backed securities guaranteed by Fannie and Freddie? What about their performance in the market? A: Mortgage Backed Securities (MBS) refer to securities collateralized by home mortgage loans issued by financial institutions. Government-sponsored enterprises such as Fannie and Freddie provide guarantees to MBS that meet all their standards and secured MBS are called agency MBS. Compared with Fannie and Freddie agency bonds, the MBS guaranteed by Fannie and Freddie are not only secured by Fannie and Freddie credit, but they are also backed by the mortgage pool for repayment, so they have a double assurance. At the end of 2008, the Federal Reserve announced it would buy USD 1.25 trillion of MBS guaranteed by Fannie and Freddie, which further improved market liquidity. This purchase plan has now been completed. The market responded positively to the move. The repayment of capital and interest of old bonds and the issuance of new bonds are both very normal. The earnings from MBS guaranteed by Fannie and Freddie are stable. The cumulative rate of return of the U.S. Agency MBS Market Index, which is mainly comprised of MBS guaranteed by Fannie and Freddie, was 14.9 percent from 2008 to 2009, and since 2010 the rate of return has remained at 4.6 percent. Q5: What about the performance of Fannie and Freddie bonds after the de-listing of their stocks from the NYSE? A: The stocks of Fannie and Freddie are different from their bonds. Generally, the stock represents the ownership of the company, whereas the bond represents the debt of the company. The two are traded on different markets. The bond price of Fannie and Freddie was not affected by the de-listing of Fannie and Freddie stocks after the de-listing was announced on June 16, 2010 As for market performance, the de-listing does not have a negative influence on their bonds; in fact, the spreads between agency bonds and the MBS in different terms and U.S.Treasuries have been narrowed and the bond price has gone up. Taking the 30-year agency MBS market index, for example, the market quotation was up about 0.8 percent on July 13 from when the de-listing was first announced. In addition, new bond financing activities were not affected after the de-listing of Fannie and Freddie stocks was announced. For example, Fannie issued USD 6 billion of 3-year maturity agency bonds on July 8, and since July Fannie and Freddie have guaranteed USD 36.6 billion of MBS. In general, the new bonds issued by Fannie and Freddie sell well. Trading is active on the secondary market and liquidity is adequate. 2010-07-16/en/2010/0716/941.html