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Liu Wei, director-general of the General Affairs Department of the State Administration of Foreign Exchange, in an interview with Century Weekly, recently responded to questions concerning hot money? The interview, published in Century Weekly (no. 2, 2011) and on www.caing.com, is presented as follows. The Cure for Hot Money? Hot money has become a hot topic in the emerging economies. At the upcoming meeting to be convened by central banks from Southeast Asia to talk about regulation of cross-border capital flows, the prevention of hot money is bound to come up as a key issue. This is the first time after the outbreak of the 1997 Asian financial crisis that East Asian nations have once again put priority on this topic. The background for this latest development involves loose monetary policies and a series of economic stimulus measures taken by the major developed economies, such as the U.S., Japan, and Europe, in an effort to combat the 2008 international financial crisis, resulting in tremendous liquidity in the market. As for the emerging markets, due to their steady economic growth, interest rate spreads between the home currency and foreign currencies, and expectations for an RMB appreciation, China has become a magnet for international capital. According to the State Administration of Foreign Exchange (hereafter referred to as the SAFE), the banks foreign exchange settlements and sales have recovered to their highest level, with USD2.12 trillion for the first eleven months of 2010, 4% higher than that at the 2008 peak level during the same period; the surplus of the banks foreign exchange settlements and sales for that same period stood at USD351.5 billion, registering year-on-year growth of 48%. This shows that people prefer to have their capital held in RMB instead of foreign currencies, and this directly results in a further surge in China's foreign exchange reserves. As of the end of September 2010, the balance of China's foreign exchange reserves amounted to USD2.65 trillion, an increase of USD249.1 billion from year-end 2009. This amount is more than twice that of the runner-up, Japan, which had USD1 trillion in its foreign exchange pool. However, to the unprofessional eye, the inflow of Hot money to China is as complicated in nature as it is difficult to understand. As Liu Wei, director-general of the SAFE General Affairs Department, answered questions concerning hot money in an interview with our journalist, she offered insights into the categorization, inflow channels, regulation targets, and policy measures for hot money, as well as provided an up-close introduction to its high-voltage crackdown. Results of Quantitative Easing Caing-Century Weekly: What can China expect this year in terms of cross-border capital flows? Why? Liu Wei: Since 2010, the combination of the slow recovery of the global economy and the strong momentum on the domestic front has exerted more pressure on the net inflows of foreign exchange into China. This is mainly because: first, a new round of quantitative easing policies adopted by the major developed countries added to the rise of global liquidity, resulting in the emerging economies facing the impacts of currency revaluations and capital flows. Second, China's good economic fundamentals continued to attract inflows of foreign capital. Third, affected by changes in the domestic and international macroeconomic environments, Chinese market entities, including businesses and individuals, were more willing to settle accounts in foreign currencies but less inclined to buy foreign exchange. Domestic market entities actively adjusted their asset-liability structures in domestic and foreign currencies, for example by taking large USD loans to replace foreign exchange purchases. Banks also avoided overseas capital maneuvers as much as possible, and instead be brought the capital back to the home market, which also indirectly led to more net inflows of foreign exchange. Moreover, there is the possibility that arbitrage capital infiltrated through legal channels or instruments. Caing-Century Weekly: How do you interpret the impacts of the quantitative easing policies adopted by the Federal Reserve? Liu Wei: In the short term, America's QE policies might weaken the dollar, keep its interest rate down, and to a certain extent stimulate the U.S. economy. But in the medium and long term, this policy might fuel inflation and asset bubbles around the world, and making a global economic recovery more uncertain. First, it might aggravate the deteriorating economies of some European economies. Second, emerging markets will have to deal with more inflows of speculative funds, leading to appreciation pressures and aggravation by the already high inflation level. Third, global expectations of a USD depreciation will grow, forcing some countries to adopt measures to slow their currency appreciation, or even to devalue their currency, which will likely result in another round of global protectionism. Fourth, the large supplies of US dollars will trigger asset bubbles in sectors such as commodities, stocks, and the real estate markets. Fifth, as an international reserve currency, an increased supply of dollars might contribute to the export of America's inflation to other parts of the world. In a word, the QE policies of the U.S. are accompanied by complicated and profound implications that we should closely follow, carefully evaluate, and cope with promptly. Caing-Century Weekly: You mentioned America's QE policies have aggravated inflation and capital inflow pressures in the emerging markets. Do you think the surge in Chinese banks? foreign exchange settlements and sales is a sign of the influx of Hot money? Liu Wei: I feel the need to clarify two matters: first, a massive foreign exchange net inflow does not mean there is a large inflow of foreign exchange. Generally, the differences of banks foreign exchange settlements and sales can be used to gauge the cross-border flows of foreign currencies. A foreign exchange net inflow means there is a surplus in the banks foreign exchange settlements and sales, created either by an increase in the sale of foreign exchange or by a decrease in the purchase of foreign exchange, or by a combination of both. China's increased surplus in foreign exchange this year can mainly be attributed to the weakened inclination of market entities to purchase foreign exchange. Market entities prefer to raise capital in foreign currencies or settle payments in RMB, thereby substantially lowering the amount of the banks foreign exchange settlements and sales. Second, not all incoming capital falls into the category of hot money. While continuously trying to facilitate trade and investment, China still keeps an eye on capital controls and has put in place a series of policy measures to curb the inflow of short-term speculative arbitrage funds. Therefore, there is no room for legal inflows of hot money in China. Addressing the Root Cause Caing-Century Weekly: What on earth is hot money Given the many current arguments, what do you think is a more reasonable way to assess the scale of hot money inflows? Liu Wei: Indeed, no consensus has yet been reached on a definition of hot money.? In reality, long-term capital and short-term capital are interchangeable, and it is difficult to draw a line between investment and speculation. In economies with free flows of capital, Hot money generally refers to capital moving rapidly in and out of the country for the purpose of short-term speculative profits. Due to China's capital account management, short-term capital is not allowed free entry or exit; therefore, the key to determining whether some capital is Hot money is to find out whether the capital flows are for real and legitimate trade or investment purposes. A popular way in China to assess the amount of Hot money is newly added funds outstanding for foreign exchange trade surplus actually utilized foreign capital = hot money. Personally, I do not think that this is a recommended method because it fails to reflect the reality of the cross-border capital flows. First, this formula omits important trading items. Aside from trade and actually utilized foreign capital, there are other trading items that generate cross-border capital flows, such as services, profits, current transfers, securities investments, and other investments. According to this method, all other international payments are labeled hot money, and this obviously is unreasonable. In addition, some hot money flows in the guise of trade and investment, so this method runs the risk of either overestimating or underestimating the amount of hot money. Second, this method of evaluation brings together the two different concepts of funds outstanding for foreign exchange and international trade without explaining the mechanism for the formation of funds outstanding for foreign exchange or identifying its components. This involves a gross overgeneralization and fails to consider the time lag between goods flows and capital flows. We need to fully reflect the reality when evaluating the true volume of hot money. Since hot money is usually disguised as legal capital inflows, a simple formulaic calculation can hardly reveal the full extent of hot money. In contrast, daily supervision and investigation of hot money can offer some evidence of the scale of the hot money inflows. For example, starting from February 2010, the SAFE has been carrying out a hot money crackdown campaign, and by the end of October 2010, it had exposed 197 cases of foreign-exchange violations involving a total of USD7.34 billion. Caing-Century Weekly: Has the SAFE observed more inflows of hot money? Liu Wei: In this year's hot money crackdown campaign, we have not seen a massive organized cross-border inflow of hot money into China. Violators of hot money regulations mainly include Chinese-foreign equity joint financial institutions, Chinese-funded enterprises, foreign-funded enterprises, and entities that receive foreign exchange from overseas ties and commercial transactions. As for large multinational financial agencies, given the legal risks they face under the capital controls, they are seldom found to be involved in illegal hot money operations. In addition, as the market awareness of businesses and individuals is strengthened, they become more sensitive to the changes in price signals, such as interest rates and foreign exchange rates. In order to avoid risks and maximize profits, some market entities have adjusted their domestic and overseas asset arrangements and financial management. In international trade settlements, if companies advance or delay their payments to take advantage of foreign exchange fluctuations, they will intensify the volatility of cross-border capital flows and will need to be regulated, though the capital involved cannot be categorized as hot money. Taken together, the cross-border capital inflows this year are mostly the result of real trade and investment. We cannot rule out the possibility of arbitrage purposes, but those are not the mainstream. We should not overestimate or exaggerate the scope of hot money. Caing-Century Weekly: Since China maintains an appropriate level of capital controls, in principle there should be no way for hot money to flow in. Then, from the perspective of the SAFE, what channels are responsible for the inflows of Hot money? Liu Wei: The hot money that manages to enter China for speculative purposes and without a real trade or investment background usually takes advantage of the highly open and channels with minimal procedures, such as cargo trade, service trade, and direct investment. The violators cover up their illegal purposes with seemingly legal transactions, breaking or sidestepping the regulations in their chameleon ways. Typical practices include: trade processing companies directing into China more funds than they need or earlier than is necessary in order to make profits from the sale of foreign exchange; some foreign exchange funds being disguised as foreign direct investment, but after falsifying the capital settlement, they flow into the property or stock markets or are used for other investment purposes; some speculative funds are split into smaller amounts and remitted into China by individuals who want to avoid the annual quota management for the settlement and sale of foreign exchange. It is especially important to note that when dealing with the settlement and sale of foreign exchange, some designated banks fail to strictly check whether some foreign exchange settlement applications are for real trade purposes, thus allowing the inflow of hot money. Some banks even dodge foreign exchange management regulations by promoting arbitrage-oriented trade financing products. On the surface, they might achieve a win-win? solution for both the bank and the business, but in fact they increase the pressures on foreign exchange net inflows and affect the balance of international payments by avoiding or delaying purchases of foreign exchange. Therefore, the hot money in China shares the following common features: First, it comes in under disguise. Because hot money is not allowed to flow freely, its entry and exit is usually achieved by violating or bypassing the laws and regulations under the pretense of legal trade or investment or other available means of disguise. Second, it is very complicated. Some aim to gain the differences between domestic and foreign interest rates or exchange rates in the short term, whereas others are more interested in the short-to-medium term profits from asset price increases. Third, it comes in diverse forms, making it difficult to determine the true nature of the underlying transactions. But the movements of hot money leave behind traces that can be used as clues to track down its whereabouts and to reveal its disguise. High-Voltage Crackdown Caing-Century Weekly: Since there are traces left by the hot money, has the Chinese government discovered any clues about the inflows of hot money? Have any countermeasures been adopted? Liu Wei: The massive inflows of cross-border capital have many detrimental effects in China, such as inflation pressures, asset bubbles, as well as increased pressures on monetary policy operations and foreign exchange reserve management. As a result, since 2010, the Chinese government has employed various policy instruments to control the inflows of hot money. First of all, we have strengthened the management of cross-border capital flows. Since February 2010, we have launched hot money crackdown campaigns in provinces and municipalities with large volumes of foreign exchange. In a series of five announcements, the names of the banks, businesses, and individuals violating the foreign exchange regulations have been released to the public. Our continuous high-voltage crackdown has effectively deterred further increases in the inflows of hot money. Recently, the SAFE developed and strengthened foreign exchange management measures and guided cross-border capital flows by introducing temporary policy adjustments with respect to the banks positions in foreign exchange settlements and sales, collection of payments and settlement of exchange for exports, short-term external debts, foreign direct investments, overseas listings, return investments, and penalties for violations of foreign exchange regulations. Since the launch of these policies, initial progress has been made, producing positive regulatory effects on the cross-border capital inflows during certain periods and in certain areas. Second, we have reinforced interdepartmental coordination and stepped up joint regulation. In 2010, for example, the SAFE joined the Ministry of Housing and Urban-Rural Development in issuing a document to reiterate that individuals overseas can only purchase one house in China for their own residence, and overseas agencies can only purchase non-residential housing in the city of registration to be used as offices. These principles help curb the influx of foreign capital into China's property market. Third, we have made full use of monetary policy measures and intensified macro prudential regulations. We do this mainly by allowing price mechanisms such as foreign exchange rates and interest rates to act as guidance, comprehensively using quantity-based hedging instruments such as the reserve requirement ratio and central bank bills, and stepping up prudential regulation over financial institutions. We have also provided banks with more guidance in terms of foreign exchange risks and have strengthened the banks awareness of legal operations. Caing-Century Weekly: The SAFE has repeatedly mentioned a high-voltage crackdown on hot money. How should we interpret the word high-voltage? Liu Wei: As China's foreign exchange resources shift from a shortage to a relative surplus, the major functions of foreign exchange management should go beyond merely ensuring the acquisition and administration of foreign exchange resources to also covering the balanced management of capital entry and exit, the prevention of abnormal risks in cross-border capital flows, and the security of the national economy and finance. Recent developments at home and abroad have resulted in potential increases in cross-border capital net inflows; therefore, combating hot money and preventing risks have become important measures to ensure steady and healthy economic development, thus they are part of our current priorities. As for the term high-voltage, I will offer the following interpretations: First, we should intensify the investigation and punishment of entities with illegal capital by identifying the key channels, links, targets for hot money inflows, dealing pinpointed blows, and increasing inspection efficiency, thereby effectively preventing and curbing the inflows of hot money. Second, we should further improve the relevant systems and standardize management by reinforcing system building, adopting effective control measures, and preventing market entities from taking advantage of legal loopholes. Third, we should strengthen cooperation with other regulatory authorities to achieve a synergy. Inbound movements of hot money involve many links and multiple entities, such as banks and enterprises, so the SAFE should cooperate with the relevant departments to carry out joint administration. Taking cross-border transactions as the starting point, the related authorities should assume responsibility for the corresponding businesses, identify suspicious conduct, and eliminate arbitrage behavior under the guise of legal facades. It is especially worth mentioning that the persistent high-voltage crackdown on hot money does not mean that we will control or restrain the legal foreign exchange transactions of banks, enterprises, and individuals. This campaign will be conducted without adding extra costs for market entities and we will take active measures to facilitate trade and investment. Caing-Century Weekly: From the end of October 2010 up until the present, the SAFE has issued a series of penalty announcements, making public the foreign exchange violations committed by commercial banks, enterprises, individuals, illegal private banks, and online entities. But given the RMB appreciation expectations and the increases in domestic asset prices, are these measures intended to deter future offenders really effective? Liu Wei: First, these public announcements are made in order to warn and educate the offenders, to urge the entities involved to strengthen internal management and carry out careful rectification. Second, in this way, we can reveal the typical channels and operational models o the hot money inflows, so that market entities can learn from these lessons and refrain from breaking the laws and regulations. Third, we can strengthen compliance awareness by market entities, urge them to assume their social responsibilities, and to strictly comply with the various policies for foreign exchange management. On the whole, these announcements have produced positive social effects, and have been conducive to pooling the strength of society in the fight against hot money, and to enhancing the effectiveness of the hot money crackdown campaign. The speculative nature of hot money determines that it is always in hot pursuit of profits, wherever they are, and to follow the extent of profits, the violation of the laws is only a small price to pay. The SAFE must strengthen investigation and regulation according to the law. For bank offenders, we should impose punishments such as fines, suspension of operations, public criticisms, and hold executives with direct responsibilities accountable. For enterprises and other market entities that have violated the relevant regulations, punishments will be followed by public announcements to deter future offenders. Caing-Century Weekly: You just mentioned the SAFE has adopted a series of measures to curb the inflows of hot money and these have has achieved initial results. Can you elaborate on that point? Liu Wei: On November 9, 2010, the Circular of the State Administration of Foreign Exchange on Issues Relevant to Strengthening the Administration of Foreign Exchange Businesses was issued to further standardize cross-border capital flows through channels such as trade, foreign direct investment, return investment, and overseas listings, and in particular to strengthen management of the banks positions in foreign exchange settlements and sales, and short-term external debts, and to reinforce the banks obligations to verify the authenticity when dealing with foreign exchange businesses. According to foreign exchange statistics since November 2010, due to the above-mentioned foreign exchange policies, net inflows of foreign exchange have dropped: the surplus of banks spot foreign exchange settlements and sales has been lowered, especially the surplus in the settlement of foreign exchange capital for foreign-funded companies and foreign exchange settlement and sales for individuals; banks are more cautious when providing forward foreign exchange settlement services, resulting in an obvious reduction in the volume of settlements; banks cash basis positions have increased after the launch of the relevant measures, demonstrating the initial effects of the measures to regulate the foreign exchange market. Meanwhile, expectations that the RMB will appreciate have weakened both at home and abroad. On December 29, 2010, the one-year forward exchange rates of RMB/USD in the home market and the overseas market were respectively 6.5807 and 6.4890, with the RMB appreciation expectation standing at 0.7% and 2.1%, down by 1.5 and 1.6 percentage points compared with the end of October. Of course, considering the complicated and uncertain prospects in the foreign exchange markets, we must remain vigilant, and closely watch and actively cope with the latest developments. Caing-Century Weekly: Going forward, what steps will the SAFE take to tackle hot money? Liu Wei: To prevent and combat hot money, we must adopt a two-pronged approach. While robustly promoting the facilitation of trade and investment, we must strengthen our monitoring and early-warning of capital flows, adopt measures to stop cross-border arbitrage activities, prevent the devastating impacts of fluctuations in domestic asset prices and the aggravated financial risks caused by the massive entry or exit of hot money. First, we will maintain our high-voltage stance toward the inflows of hot money and other illegal capital. We will focus on banks and other key channels, continue to carry out special inspections of hot money inflows, step up efforts for foreign exchange examination, and severely crack down on illegal private banks and other foreign exchange crimes. Second, we will improve the methods for foreign exchange regulation and will optimize management of cross-border capital inflows. We will strengthen trade-based foreign exchange administration, improve management of foreign exchange registration and capital settlement of foreign-invested enterprises, and explore follow-up examination and regulation of money after exchange settlement. We will also strengthen management of banks short-term external debts and reinforce the regulation of banks off-balance-sheet financing. Third, we will promote the process of opening up China's capital market and boost capital outflows. We will encourage the relevant companies to set up overseas operations, allow more types of institutions to engage in QDII businesses, and while ensuring risk controllability, accelerate the process of capital account convertibility selectively and in order of priority. Last and most importantly, we must bring into full play the basic functions of the market mechanisms, provide proper guidance by using price mechanisms such as foreign exchange rates and interest rates, eliminate arbitrage opportunities that are likely to be exploited by hot money, and take concrete measures to maintain an enabling foreign exchange policy environment for the sustainable development of foreign-related businesses. 2011-01-10/en/2011/0110/977.html
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In order to increase the efficiency of the use of funds by domestic enterprises, to further promote the facilitation of trade, and to support the going globalmove of domestic enterprises, the State Administration of Foreign Exchange recently promulgated the Circular on the Implementation of Administration of Overseas Deposits of Export Proceeds (Hui Fa [2010] No.67, hereinafter referred to as the Circular) in accordance with the relevant provisions in the Regulations of the Peoples Republic of China on Foreign Exchange Administration, in which it is decided that as of January 1, 2011 the SAFE will implement on a nationwide scale the Interim Measures for the Administration of Overseas Deposits of Export Proceeds from Trade in Goods and the instructions for operations based on the results of a pilot operation. The Circular covers four principal areas: (1) implementing an account-opening registration system for overseas deposits of export proceeds by domestic enterprises. Domestic enterprises that meet the requirements regarding the sources of export proceeds, have a need for overseas payments, and have operated in compliance with the foreign exchange administration regulations over the past two years may apply to the local foreign exchange authorities to make overseas deposits of their export proceeds; (2) implementing scaled management of overseas deposits of export proceeds by domestic enterprises. The scale of export proceeds deposited overseas shall be submitted by the domestic enterprises to the local foreign exchange authorities based on their actual needs, and the latter shall register and put on file the relevant scales; (3) streamlining the procedures for export verification and writing-off, online inspections, and so forth, and implementing an ex post reporting system; (4) carrying out off-site monitoring of the receipts and payments in overseas accounts of domestic enterprises, and implementing on-site inspections of abnormal circumstances. The launch of the policy represents a significant move on the part of the SAFE to further satisfy needs for the development of a market-oriented economy, deepen the reform of the foreign exchange administration system, and promote the facilitation of trade. The policy will play an active role in balancing cross-border fund flows under trade, facilitating cross-border fund operations by domestic enterprises, and bolstering the going globalmove by domestic enterprises. The policy will play a positive role for enterprises with frequent receipts and payments from cross-border trade to reduce the costs of cross-border transfers of foreign exchange funds and the costs of currency conversion. The policy will also play a positive role for enterprises to have greater involvement in international competition and stronger ability for group management, to raise the efficiency of the use of funds, lower the costs of overseas fundraising, and further sharpen the competitive edge of enterprises on the international markets. 2010-12-31/en/2010/1231/975.html
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In order to facilitate individualshandling of foreign exchange settlement and sales and to promote banks business innovation, at the beginning of 2010 the State Administration of Foreign Exchange (hereinafter referred to as the SAFE) gave a green light successively to the Bank of China, China Merchants Bank, and the Industrial and Commercial Bank of China for pilot operations of foreign exchange settlement and sales for individuals through e-bank channels. Domestic individuals are allowed to handle foreign exchange settlement and sales on a self-service basis through the e-channels provided by the pilot banks. In view of the fact that the pilot operation has received widespread praise from the public, the SAFE recently promulgated the Interim Measures for the Administration of E-bank-based Foreign Exchange Settlement and Sales for Individuals (hereinafter referred to as the Interim Measures), which will come into force as of April 1, 2011. The Interim Measures mainly comprise four areas: (1) After being accepted by the SAFE, banks are allowed to connect their e-banking systems to the information system for the administration of foreign exchange settlement and sales for individuals, to handle e-banking-based foreign exchange settlement and sales for individuals, and to implement the national uniform regulations on the annual aggregate administration of foreign exchange settlement and sales for individuals; (2) Individuals both at home and abroad are allowed to use their own accounts to handle the purchase and settlement of foreign exchange within the annual aggregate and under the current account (exclusive of trade) via multiple e-banking channels such as online banking, self-service terminals, phone banking, and mobile banking; (3) Banks and individuals shall comply with the foreign exchange administration regulations for the handling of e-banking-based foreign exchange settlement and sales for individuals, and shall ensure that the data entered into the information system for the administration of foreign exchange settlement and sales for individuals are authentic, complete, and accurate; (4) The SAFE and the banks will keep a close eye on the e-banking-based foreign exchange settlement and sales for individuals, screen and identify illegal transactions and transactions in violation of the regulations, and place those individuals becoming involved in activities in violation of the regulations, such as splitting large sums of money into smaller parts, on a watch-list for intensified administration. The individuals on the watch-list shall be prohibited from foreign exchange purchases and settlement via e-banking for a certain period of time. By keeping up with the trend of e-banking development, the promulgation of the Interim Measures will further facilitate individuals handling of foreign exchange settlement and sales, lessen the burden on bank counters, and reduce the operational costs for banks. Placing individuals involved in activities in violation of the regulations on the watch-list and intensifying administration of those on the watch-list will be conducive to checking individualssettlement and sales of foreign exchange by splitting large sums of money into smaller parts and to preventing inflows and outflows of abnormal foreign exchange funds through e-banking channels. 2011-03-15/en/2011/0315/987.html
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Since the July 2005 reform of the mechanism for setting the Renminbi exchange rate in July 2005, there have been increasing varieties of trading products on the Chinese foreign exchange market. The country has witnessed steady development of Renminbi-against-forex forwards and foreign exchange swaps on the market where banks provide services to their clients and on the inter-bank foreign exchange market. In August 2007, Renminbi-against-forex currency swaps were introduced into the inter-bank foreign exchange market. In order to further satisfy the requirements of market entities for hedging exchange-rate risks and to promote the development of the foreign exchange market, the State Administration of Foreign Exchange recently promulgated the Circular on Issues Concerning Foreign Exchange Administration for Renminbi-Against-Forex Currency Swaps Provided by Designated Foreign Exchange Banks to Their Clients (hereinafter referred to as the Circular), indicating the introduction of Renminbi-against-forex currency swaps into the market where banks provide services to their clients. The Circular will enter into force as of March 1, 2011. The Circular mainly covers three issues: (1) simplifying administration of market admittance. Banks that have acquired one-year qualifications for handling Renminbi-against-forex swaps for clients are allowed to provide currency swaps to their clients without having to receive approval from the SAFE; (2) facilitating market transactions. Transaction elements such as currencies and terms in the currency swaps provided by the banks to their clients will be determined at the discretion of the banks; (3) interest rates in currency swaps will be determined by both parties to the contract through negotiations, and shall comply with the regulations of the Peoples Bank of China on the administration of deposit and lending rates. Promulgation of the Circular will provide more opportunities for enterprises to select instruments to hedge risks caused by exchange rates and interest rates, and will play a positive role in promoting the development of Chinas foreign exchange market and enhancing the risk-hedging awareness and capability of enterprises. 2011-01-30/en/2011/0130/981.html
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In order to regulate foreign exchange receipts and payments associated with cross-border trade of environmental equities such as CO2 emissions reductions, the State Administration of Foreign Exchange recently promulgated the Circular of the General Affairs Department of the State Administration of Foreign Exchange on the Handling of Foreign Exchange Business Associated with the Trade of Environmental Equities Such as Carbon Dioxide Emissions Reductions (Hui Zong Fa [2010] No. 151), hereinafter referred to as the Circular). The Circular will come into force as of the date of promulgation. The Circular mainly covers three areas: (1) When handling the procedures for receipts from cross-border trade of environmental equities, such as carbon dioxide emissions reductions, banks may handle the settlement of foreign exchange for domestic institutions or open a capital account foreign exchange account for the trade of environmental equities to preserve the relevant categories of foreign exchange earnings after examining the materials proving the authenticity of the relevant business according to the regulations and based on the needs of domestic institutions; (2) Domestic institutions such as environmental exchanges, emissions rights exchanges, and forest ownership exchanges may, upon approval of the State Administration of Foreign Exchange, open a foreign exchange account for the collateral of special tradefor deposits of collateral, to-be-paid commissions, and taxes by intended transferees, foreign exchange margins that should be refunded to intended transferees in cases of failure of payment, and collateral transferred to sellers and commissions and taxes deducted by the exchanges after conclusion of the relevant transactions; (3) The relevant requirements for the examination of materials, submission of information, registration of basic information, declaration of BOP statistics, and so forth are specified. Promulgation of the Circular will play an active role in facilitating cross-border trade of environmental interests such as CO2 emissions reductions as well as in promoting the healthy development of a low carbon economy. 2010-12-31/en/2010/1231/976.html
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In order to further direct and standardize the verification of indirect declarations of statistics on the balance of payments which is conducted by the foreign exchange authorities at all levels, the State Administration of Foreign Exchange recently issued the newly-revised System for the Verification of the Indirect Declaration of Statistics on the Balance of Payments (hereinafter referred to as the Verification System), which will come into force as of February 1, 2011. The revision mainly covers the following five issues: (1) improvements to the 2003 version of the Verification System and based on the existing system for indirect declarations of statistics on the balance of payments and the functions of its application system, the previous verification system was nullified; (2) the key tasks for verification of large-amount transactions and major transaction items were incorporated into the Verification System, with the previous provisions on the relevant verification incorporated into the Verification System, and the previous verification system for large-amount transactions is nullified; (3) the relevant quantitative indices involved in the verification are adjusted based on current circumstances; (4) the process for on-site verifications and the key tasks for the verifications of large-amount transactions are standardized; (5) the measures taken by the Departments of the Balance of Payments of the SAFE to impose penalties on acts in breach of the regulations on the declaration of statistics on the balance of payments and the operational procedures for transferring relevant cases to the authorities for foreign exchange inspections are specified. The revision of the Verification System will better reflect operations of the existing declaration of statistics on the balance of payments and its supporting system. Furthermore, the revision will improve the standards for verification of data declaration and clarify the operational procedures for the verification, which will play an active role in standardizing the law-based administration of statistics on the balance of payments, increasing the efficiency of the verification and improving the quality of the data declaration. 2011-01-20/en/2011/0120/979.html
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On April 1, 2011, RMB-against-foreign exchange trading was officially introduced into Chinas inter-bank foreign exchange market. On the first day of trading, the system operated smoothly in parallel with brisk quotations and enquiries by banks. The quotation covered all 13 standard terms. A total of 10 RMB-against-USD options trading were concluded on the first day, with trading terms ranging from 1 to 6 months. The nominal principal amounted to a total of USD49 million. Since Chinas reform of the mechanism for setting up RMB exchange rates in July 2005, the foreign exchange market has witnessed accelerated development and increased varieties of trading products. A broad array of RMB-against-foreign exchange derivatives, such as forward exchange transactions, foreign exchange swaps, and currency swaps, were successively introduced into the market where banks provide services to their clients and the inter-bank foreign exchange market. The introduction of RMB-against-foreign exchange options trading signals the initial formation of a complete system for the trading of fundamental exchange rate derivatives on the foreign exchange market, which will provide a solid foundation for innovation-oriented development of the foreign exchange market in the future. The SAFE will continue to promote the progressive development of the foreign exchange market by taking into account circumstances in market operations and market conditions and by complying with the principle of maintaining the initiative, controllability, and progression of development. 2011-04-06/en/2011/0406/990.html
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In order to properly direct the flow of cross-border funds, to prevent the inflow of illegal funds, and to maintain the security of the foreign-related economy and finance, the State Administration of Foreign Exchange recently promulgated the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning Further Strengthening the Administration of Foreign Exchange Business (Hui Fa [2011] No.11, hereinafter referred to as the Circular). The Circular mainly covers four areas: (1) further strengthening administration of the bankscomprehensive positions for foreign exchange settlement and sales and reducing the lower limit of the negative positions of the bankssettlement and sales of foreign exchange on a cash basis based on the various circumstances; (2) strengthening administration of foreign exchange for transit trade, and incorporating the proceeds from transit trade into the administration of the to-be-verified accounts; (3) appropriately reducing the basic proportions of enterprise quotas for foreign exchange receipts and payments in terms of advances on sales under trade in goods and deferred payments for a term of over 90 days; (4) further reducing the aggregate quota for short-term external debts of domestic financial institutions, and appropriately reducing the quotas for the outstanding short-term external debts of banks with relatively large amounts of inter-bank deposits and lending. Promulgation of the Circular will play an active role in further regulating cross-border fund flows as well as checking the inflows and exchange settlement of illegal funds. 2011-03-30/en/2011/0330/988.html
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Q: The international credit rating agency Standard & Poors yesterday warned that it will revise downward its outlook on the U.S. sovereign credit rating. Since China is a big holder of U.S. Treasury bonds, is there any concern about the safety of its investments? A: We have noticed that the S&P has revised its outlook on the U.S. sovereign credit rating from stable to negative. As a major target of institutional investors in the U.S and throughout the world, Treasury bonds reflect the credibility of the U.S. government. We hope that the U.S government will take responsible measures to guarantee the interests of its investors. 2011-04-20/en/2011/0420/992.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