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The Way Forward for Reform and Opening up of Foreign Exchange Administration Yi Gang, PBC Deputy Governor and SAFE Administrator China’s economic development over the past 36 years has been miraculous. The key to this miracle is reform and opening up. Through reforms, China has built a financial system that is fit for the socialist market economy and improved the financial industry's capabilities to allocate resources and serve the real economy. Through opening up, China has further liberalized its financial industry, both to the inside and the outside, and optimized the industry's capability to allocate resources both horizontally and vertically. Reform and opening up are the two wheels that drive China's economic development. With the deepening of the reform of foreign exchange administration in recent years, we have focused on boosting the "five shifts" in foreign exchange administration, the implementation of administration streamlining and power delegation, and profoundly changing the functions of foreign exchange administration, with administrative interference in micro-level events on the decline. At the same time, we have optimized public services through enhancing ongoing and ex-post management. As a result, foreign exchange administration has played significant roles in maintaining economic and financial stability and ensuring fair competition, with a stronger ability to promote sustainable economic development. Reform and opening up of foreign exchange administration has achieved significant progress Following the uniform plans of the CPC Central Committee and the State Council, we have focused on promoting the "five shifts" in foreign exchange administration over the past few years, i.e., shifting from approval to monitoring analysis, from ex-ante regulation to ex-post management, from behavioral management to player management, from assuming people are guilty until proven innocent to assuming people are innocent until proven guilty, and from “positive list” to “negative list”. In so doing, we have improved our capabilities of coping with complex situations, and coordinated facilitation and risk prevention, thus making better use of the roles of foreign exchange administration while giving a decisive role to the market. New breakthroughs have been made in the reform of foreign exchange administration for trade in goods. Foreign trade development is an important part of China’s reform and opening up, of which trade in goods is of critical significance, accounting for nearly 80% of the total value of current account. In the past, foreign exchange receipts and payments under trade in goods needed to be verified transaction by transaction, involving tedious procedures. To improve trade facilitation and regulatory efficiency of foreign exchange, the State Administration of Foreign Exchange (SAFE) rolled out nationwide the import and export verification reform in August 2012, upon the approval of the State Council. The reform canceled transaction-by-transaction verification of foreign exchange receipts and payments under trade in goods, simplified certificates required and processes, and promoted aggregate review, dynamic monitoring and classified management, facilitating foreign exchange receipts and payments under trade in goods by 95% of enterprises doing business in compliance with laws and regulations and focusing regulation on a minority of enterprises with abnormal receipts and payments, thus ensuring trade facilitation and effective regulation. After the reform, enterprises can, on average, reduce labor costs by more than RMB 70,000 per year and banks can shorten time spent on handling business transactions from more than 20 minutes to just 9 minutes per transaction. New progress has been achieved in the reform of foreign exchange administration for trade in services. In the past, ex-ante approval was required for the receipts and payments of foreign exchange under trade in services, requiring enterprises to prepare a large quantity of materials and go to many authorities, which inhibited efficiency. In September 2013, the SAFE universally canceled ex-ante approval for trade in services and delegated the management of all foreign exchange receipts and payments transactions under trade in services to banks, requiring no approval of documents for transactions below the equivalent of USD 50,000 and simplifying instruments for approval for transactions above the equivalent of USD 50,000, with a dozen kinds of instruments simplified and consolidated. The strengthening of offsite monitoring and analysis enabled us to stick to our bottom line of guarding against systematic risks. After the reform, documents approval for nearly 15 million transactions of foreign exchange receipts and payments under trade in services has been canceled every year, which has significantly reduced processing costs and the total number of instruments to be approved by banks. Enterprise operating efficiency has been enhanced remarkably, with the time spent on processing shortened from 20 minutes to 5 minutes per transaction. Direct investment convertibility has reached a new high. Direct investment is a key channel for introducing foreign capital and supporting Chinese companies to go global. Previously, opening of foreign exchange accounts and entering an item in an account under direct investment had to be verified by a foreign exchange authority, and law firms were required to go through review and registration procedures of capital verification confirmation with a foreign exchange authority for foreign direct investment, thus having a negative impact on a company's investment efficiency. In recent years, foreign exchange administration for direct investment has been significantly simplified, with 35 administrative approval items canceled and 14 items simplified or merged, whereby facilitating capital operation in cross-border investments by enterprises, and achieving basic convertibility. For overseas direct investment, for example, the ex-ante approval for capital source and outward remittance verification has been replaced with ex-post registration, and the time spent on business processing has been shortened from 20 working days to 5 working days. In some provinces, such business services can even be processed on the day of application. New breakthroughs have been made in the two-way opening up of portfolio investment, an important area for global resource allocation. In the past, due to limited channels for cross-border portfolio investment, the level of facilitation was low. To promote orderly liberalization of the securities market, the SAFE captured the opportunity of a balanced foreign exchange situation, followed the logic of balanced regulation and two-way flows and improved the QFII and QDII schemes, on which basis, the SAFE launched the RQFII scheme. As of August 28, 2015, the SAFE had approved an investment quota of USD 76.703 billion to 276 QFIIs, USD 89.993 billion to 132 QDIIs and RMB 404.9 billion to 138 RQFIIs. At the same time, the SAFE has expanded channels for the two-way opening of capital and made institutional arrangements for facilitating the buying of public funds in Hong Kong by domestic investors and sales of public funds in mainland China to Hong Kong. In the future, "sales or issue of securities for collective investment overseas by residents" or "sales or issue of securities for collective investment domestically by non-residents" will no longer be restricted, suggesting the level of capital account convertibility will be further enhanced. A new chapter has been opened up for external debt administration to serve the real economy. External debt is an important channel for expanding financing sources for domestic entities. Previously, balance indicator management was adopted for a financial institution's external debt, with foreign-funded enterprises managed based on the difference between investment and registered investment and Chinese enterprises subject to strict regulations and having to go through tedious approval procedures. To further facilitate enterprise financing, the SAFE has vigorously pressed ahead with the external debt and cross-border guarantee management reform. The ex-ante approval for external debt and cross-border guarantee has been canceled, and banks are empowered to handle such business services directly, with the time span from opening of an external debt account and settlement of foreign exchange shortened by 3 working days, and thus essentially building an external credit and debt management framework focused on ex-post registration. A macro-prudential proportioned self-discipline management approach to external debt has been explored and a pilot program has been carried out in Zhongguancun of Beijing, Qianhai of Shenzhen, and Zhangjiagang of Jiangsu, allowing enterprises to borrow external debt that is within a certain multiple of net asset, and equalizing the external debt management policies for Chinese companies and foreign-funded companies. Estimates show pilot enterprises can save on capital cost by 2-3 percentage points. In terms of management concepts, efforts have been made to promote the shift from super-national treatment to national treatment, allowing eligible Chinese enterprises to use short-term external debt to support foreign trade. The foreign exchange market has reached a new high. The foreign exchange market is a key carrier for international economic communication and capital flows. Previously, the players and products in China's foreign exchange market were simplistic, and the infrastructure was not sound. In recent years, the SAFE has been consolidating the fundamentals of the foreign exchange market and optimizing the foreign exchange market services. Firstly, it has been enriching transaction products to satisfy diversified demand for management of foreign exchange rate risks. The type of transaction products has been expanded from spot transactions and forward transactions of some pilot banks to foreign exchange swaps, current swaps and futures products, thus establishing a basic product system that is popular in the international market. The transaction currencies also increased from the original USD, EUR, JPY and HKD to 14 other currencies regularly involved in cross-border receipts and payments in China. Secondly, the SAFE has been increasing market players to build a diversified market player hierarchy. As of the end of 2014, there were 465 institutions in the inter-bank foreign exchange market，of which 53 were non-banking financial institutions, 1 was non-financial company and 8 were overseas financial institutions. Thirdly, the SAFE has been involved in improving infrastructure to promote market operation, improve efficiency and prevent risks. The interbank foreign exchange market began centralized netting of over-the-counter trading in 2009 and officially launched central counterparties in 2014, which have actively helped reduce clearing risks and improve trading efficiency. Combining regulation and deregulation is a banner of the reform and opening up of foreign exchange administration In recent years, the SAFE has focused on the provision of services, and equal importance has been attached to pressing ahead with reforms and preventing risks, with the reform approach stressing ‘balance’ and the reform direction being guided by experience gained during trials and pilot programs that can then be widely adopted. After several years of exploration, the foreign exchange administration has taken on a new look. In order to promote the transformation of foreign exchange administration, focus must be placed on streamlining administration and delegating power. First of all, this means adhering to law-based administration in order to further streamline and integrate regulations on foreign exchange administration. As at the end of 2014, more than 700 invalid regulations were abolished and less than 300 regulations were retained. Secondly, focusing on major enterprises and easing control over small ones and classified management, with aggregate verification and dynamic monitoring adopted to promote the shift from ex-ante regulation to ex-post regulation. For the current account, for example, offsite monitoring allows us to identify violating companies at a lower cost and is a more targeted approach. In 2014, through offsite monitoring and analysis, we homed in on 1,774 abnormal enterprises that engaged in export but did not receive foreign exchange, with the export value accounting for 6% of the country's total. After verification, violating enterprises were either forced to close, be downgraded to class-B or C enterprises, or be transferred to procuratorate authorities for further investigation. Thirdly, shifting from behavioral regulation to player regulation. Full-coverage monitoring of foreign exchange receipts and payments by market players has been strengthened to better identify abnormal or violating behaviors; classified management has been adopted to facilitate enterprises that do business in compliance with laws and regulations and restrict violating players to improve the level of compliance among market players. Strengthening the capability of foreign exchange administration to support the development of the real economy, with focus on trade and investment facilitation. Improving the level of services is the basis for foreign exchange administration. We have always interwoven administration in services when launching a reform measure, and actively adjusted foreign exchange administration measures that are not in line with the market operation laws in recent years. For foreign-invested enterprises, we have introduced the discretional foreign exchange settlement policy, giving them the power to discretionally settle foreign exchange funds to lower their financial cost. This policy has been rolled out nationwide. For MNCs, we have introduced the administration policy for the centralized operation of foreign exchange funds by MNCs, with the number of pilot companies increasing from 250 to 570 in the first half of 2015, and facilitated the optimization of foreign exchange funds by more excellent companies, especially private companies. In cross-border e-commerce, efforts have been made to ease regional restrictions, delegate approval power, elevate the limit on a single transaction and expand the scope of payment. In January 2015, the pilot program was rolled out nationwide and as of the end of June, had generated funds totaling USD 4.181 billion. Strengthening the capability of preventing cross-border capital flow riskswith focus on safeguarding the risk bottom line. One of the key functions of foreign exchange administration is to prevent the internalization of external risks. In recent years, preventing risks has been our top priority. To this end, we have improved the regulatory system, administrative methods, technical means, and intensified team building, with a focus on building the capability of monitoring cross-border capital flows, and thus successfully guarding against systematic and regional financial risks, which we consider to be the bottom line of our efforts. To this end, we first intensified monitoring analysis to lay a solid foundation for preventing risks. Situational changes were closely tracked and the focus of monitoring analysis was shifted from monitoring of inflows to monitoring of both inflows and outflows, making prejudgment of situations more scientific and timely. We have built a monthly reporting system for cross-border capital monitoring analysis, and intensified analysis and judgment of macro trends, with dynamic fine-tuning and modification made on a monthly basis, whereby making monitoring analysis more comprehensive and precise. The second measure was accelerating data and system integration to provide technical support for risk prevention. We built a basic database for full-coverage cross-border capital flows, integrating data from different business systems for centralized sharing. We also built a cross-border capital flow monitoring and analysis platform, with focus on improving the system's functions of comprehensive analysis and data mining. We improved the warning system for balance of payments, monitoring the risks arising from imbalance of payments in a two-way manner, to provide data guarantee and system support for comprehensively monitoring the foreign exchange operation by market players and immediately identifying abnormal cross-border capital volatility. Thirdly, we improved foreign exchange inspection to provide effective means of risk prevention. We built and promoted the offsite foreign exchange inspection system, replacing the previous large-scale dragnet investigation with big data analytics, to identify clues to irregularities, thereby enhancing the relevance and effectiveness of regulation. We have focused our efforts on investigating cases involving serious violations and conducting special inspections of banks' foreign exchange transactions, to crack down on flows of hot money by key players and through key channels. From 2009 to 2014, we investigated and solved 17,000 cases that violated foreign exchange laws and regulations, confiscating illegal gains and imposing fines of about RMB 2.2 billion in total. Continuing to deepen the reform and opening up of foreign exchange administration Foreign exchange administration has entered a new normal, with continued net inflows of foreign exchange changed to balanced flows, ex-ante approval changed to ongoing and ex-post regulation, and current account convertibility changed to capital account convertibility. Developing a comprehensive understanding of and accurately grasping the foreign exchange new normal is a starting point for conducting the subsequent foreign exchange administration reform. Next, foreign exchange authorities will closely follow the new normal and accelerate the "five shifts", with focus on promoting the RMB capital account convertibility, to effectively perform their responsibilities for foreign exchange administration and make foreign exchange administration more scientific. Changing the philosophy and method of foreign exchange administration is the principle and the direction of foreign exchange reform. Efforts will be made to press ahead with the administrative approval system reform to comprehensively improve administrative efficiency, based on the relationship between the government and the market. Firstly, the SAFE will continue to streamline administration and delegate power. We plan to further slash administrative approval items, and sort through and simplify existing regulations on foreign exchange administration, making sure foreign exchange administration regulations are reduced, simplified and easier to operate, to facilitate market players and regulation. Secondly, the SAFE will comprehensively advance law-based administration. Following the requirements for the "five shifts" in the philosophy and method of foreign exchange administration, we will adapt to the needs of capital account convertibility in China, and build a forward-looking legal framework systemfor foreign exchange administration, with focus on changing from behavioral regulation-based legislation to player regulation-based legislation and switching from ‘positive list’ to ‘negative list’. Thirdly, the SAFE will diversify means for ongoing and ex-post regulation. For the current account, for example, we will enhance cross-departmental cooperation and deepen the administration of capital flow risks under the current account. Promoting trade and investment facilitation is both the starting point and the action plan. In terms of administrative mentality, we will raise the sense of service and put ourselves in others' shoes in order to promote the linkage between policy adjustment and the commercial operating models of market players and provide a favorable policy environment for market players that do business in compliance with laws and regulations. We will optimize processes and formalities, deepen reforms through improving services, effectively improve the level of facilitation for trade and investment, and reduce the social cost for foreign exchange administration, with the aim of improving administration through services. For administration objects, we will promote the change from behavioral regulation to regulation of key entities and from ex-ante approval to ex-post monitoring and analysis. For example, we will implement the upgraded version of the administration of centralized operation of foreign exchange funds by MNCs to further enhance MNC's efficiency in capital operation. Pressing ahead with the reform and opening up in key areas is the focus and the priority. Based on the building and improvement of the market mechanism and administration mechanism that adjust the balance of payments, we will further improve the middle and long-term working plan for the foreign exchange administration reform, determining the implementation steps, time frame and division of labor, as well as the roadmap and the timetable. In the capital market, we will promote the orderly two-way opening of the capital market, further improve the qualified institutional investor scheme, and implement the Mutual Fund Connect scheme to accelerate the RMB capital account convertibility. In the foreign exchange market, we will promote the opening of the foreign exchange market, expand the scope of trading, increase the number of trading entities, enrich the products for risk aversion and value preservation, and improve the building of a diversified and competitive trading platform that is subject to effective regulation, so as to build a sophisticated, advanced and multi-layered foreign exchange market system. Guarding against abnormal cross-border capital flow risks is the foundation and the guarantee of an effective foreign exchange system. In the long run, foreign exchange authorities should make risk prevention their top priority. To enhance warning, we will accelerate the building of a warning platform for cross-border capital flows, complete cross-border capital flow data integration and data warehouse construction to cover cross-border capital flows that involve different trading currencies, projects and entities such as domestic and foreign currencies, trade and investment, institutions and individuals, in order to provide regulatory authorities with reliable tools. Meanwhile, we will continue to improve the warning indicator system and offsite inspection indicator system for cross-border capital flows to immediately assess and prejudge the pressures from capital outflows and inflows. In addition, we will flesh out policy plans focused on counter-cyclical adjustment, study and introduce price adjustment means such as Tobin tax, URR and foreign exchange trading fees to contain the inflows and outflows of short-term speculative and arbitrage funds. To optimize the operation of foreign exchange reserves, we will encourage diversified and scattered investments and efficient management and use of foreign exchange reserves, enhance allocation of quality assets, and improve the abilities to manage and operate foreign exchange reserves, with the aim of ensuring the security and flows of foreign exchange reserves and the value maintenance and growth. (The original text is available in the 19th issue 2015 of China Finance) 2015-10-29/en/2015/1029/1172.html
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In recent years, the State Administration of Foreign Exchange (SAFE) has accelerated promoting the "five shifts" in foreign exchange administration by streamlining administration and delegating power, deepening the foreign exchange administration reform and stressing promoting reforms while guarding against risks, thus allowing market participants doing business in compliance with laws and regulations to fully enjoy trade and investment facilitation while continuing crackdown on foreign exchange irregularities to maintain foreign-related economic and financial security in China. Due to complex and changing economic conditions both at home and abroad, the short-term cross-border capital flows have been more fluctuating since the beginning of 2015, despite equilibrium between foreign exchange supply and demand. To guard against risks arising from abnormal cross-border capital flows, the SAFE has enhanced monitoring and checking using the big data system for the real-time cross-region, cross-market player and cross-business monitoring of all cross-border receipts and payments, and stepped up efforts to inspect the key channels of abnormal cross-border capital flows and relevant key market participants, so as to promptly identify irregularities and have relevant persons punished without interrupting normal operations of market participants that do business in compliance with laws and regulations. As we have inspected, most financial institutions, companies and individuals are in strict compliance with the regulations on foreign exchange administration, suggesting further improvement in the overall level of compliance. However, some enterprises and individuals use deceptive means such as false instruments, invalid instruments, repeatedly-used instruments and structuring of trade, or conduct outward remittance through split-off for outflows and purchases of foreign exchange in violation of regulations; some banks conduct foreign exchange sales and settlement, as well as cross-border receipts and payments of foreign exchange without performing the obligation of authenticity review, affecting the healthy and stable economic and financial development and the equilibrium of balance of payments. For the purpose of warning and education, we hereby make public the selected institutions and individuals violating foreign exchange regulations and the resulting punishments on them. From April 2012 to January 2014, Bank of Shanghai Co., Ltd. Shenzhen Branch handled 9 payments of foreign exchange under entrepot trade for 3 companies in Shenzhen, which involved a total amount of USD 30.78 million, despite the inconsistency between the destination in the contract and that on the receipt as well as between the date of transportation, trading object in the contract and those on the imports filing list. Since this violated the regulation that banks should conduct reasonable review of the authenticity of transactions under trade and of the consistency of the transactions with foreign exchange receipts and payments, the SAFE decided to impose a fine upon the said bank as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In February 2013, Shanghai Pudong Development Bank Co., Ltd. Yiwu Sub-branch refunded foreign exchange under general trade to a Zhejiang-based company, which involved an amount of USD 1.02 million, but violated the regulations on to-be-inspected accounts by making payments directly from the to-be-inspected account for revenue from exports. In March 2013, the bank handled outward remittance of USD 7.09 million under entrepot trade, despite doubts and flaws in the relevant documents submitted by a Yiwu-based company. Since this violated the regulation that banks should conduct reasonable review of the authenticity of transactions under trade and of the consistency of transactions with foreign exchange receipts and payments, the SAFE decided to impose a fine upon the said bank as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. Between June and July 2013, Ping An Bank Co., Ltd. Chongqing Branch handled payments of foreign exchange under entrepot trade for 2 companies in Chongqing, which involved USD 7.06 million and USD 2.22 million respectively, despite inconsistency between the agreed parties and the signatories in the warehousing agreement retained for the transactions. From June 2013 to February 2014, the bank handled 29 payments of foreign exchange totaling USD 85.95 million under entrepot trade for 3 companies in Chongqing, without endorsing the relevant original instruments as required and retaining any original or duplicated copies for reference. Since this violated the regulation that banks should conduct reasonable review of the authenticity of transactions under trade and of the consistency of transactions with foreign exchange receipts and payments, the SAFE decided to impose a fine upon the said bank as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. Between December 2007 and April 2014, Shanxi Shouyang Zhongsheng Weiye Dongwan Coal Mine Dedicated Railway Line Management Co., Ltd. purchased and paid overseas foreign exchange through individual split-off of corporate profits by employee, which involved a total amount of USD 4.8 million. Since this violated the regulations for foreign exchange administration on purchases and payments of foreign exchange, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In June 2013, Hubei Wuhan Rongduan Trading Co., Ltd. made 4 payments of foreign exchange under entrepot trade with 2 invalid bills of lading, which involved USD 21.27 million in total. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. From May 2013 to March 2014, Sichuan Hongda (Group) Co., Ltd. made payments of foreign exchange of USD 7.34 million for import through entrepot trade and collected foreign exchange of USD 7.37 million from export through entrepot trade repeatedly using 12 bills of lading. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In January 2014, Hunan Honors Resources Trading Limited made one payment of foreign exchange of USD 15.24 million with instruments without true and legal transaction bases. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In February 2014, Jiangsu Kunshan Jinaer Sports Instruments Co., Ltd. purchased foreign exchange of USD 3.40 million for making payments overseas, but actually for performing the contract of forward foreign exchange settlement, thus violating the regulations for foreign exchange administration on purchases and payments of foreign exchange. The SAFE therefore decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In May 2014, Shandong Chuanjun Chemical Co., Ltd. made one payment of foreign exchange of USD 2.43 million under import letter of credit through a bank using invalid instruments including a false import contract, bill of lading and commercial invoices. Since this violated the regulation that receipts and payments of foreign exchange under the current account should be conducted with true and legal transaction bases, the SAFE decided to impose a fine upon the said company as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. In September 2014, a Mr. Zhao in Chengde, Hebei organized 23 persons including a Mr. Du to buy foreign exchange of AUD 1.23 million (or USD 1.15 million) using RMB for the purpose of individual "overseas travel", and remitted the money to Australia for Zhao to buy an overseas property. Since this violated the regulations on administration of individuals' foreign exchange, the SAFE decided to impose a fine upon Zhao as an administrative punishment, in accordance with the Regulations of the People’s Republic of China on Foreign Exchange Administration. Market participants should learn from these cases, developing a sense of social responsibility in economic activities, enhancing self-management, pursuing robust operations and scientific development and strictly abiding by the policies and regulations on foreign exchange administration. The institutions and individuals that have violated relevant regulations and been investigated and punished should rectify their activities and raise their awareness of doing business in compliance with laws. 2015-09-18/en/2015/0918/1171.html
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Q: How do you view the changes in the data on foreign exchange settlement and sales by banks in August? A: Despite fragile recovery of the world economy, China's economy has been growing slowly but stably and confidently since the beginning of this year, with positive factors on the rise. Due to the impact of multiple domestic and overseas factors, the short-term cross-border capital flows have been fluctuating more sharply as the supply of and demand for foreign exchange in China have been basically balanced. In August, banks recorded a deficit of RMB 274.5 billion (equivalent to USD 43.5 billion) between foreign exchange settled and sold. The factors that impacted this deficit include: first, market players were more willing to hold foreign exchange, with the USD deposits held by domestic residents and enterprises with domestic banks on the rise. Second, market players optimized the arrangements for assets and liabilities in domestic and foreign currencies. Companies adjusted the structure of foreign currency liabilities and RMB assets that was popular in the past few years, making the US dollars and the renminbi more matched in the assets and liabilities, thereby reducing the foreign exchange rate risk. Third, trading and investment activities resulted in the increase in external payment, including foreign trading companies accelerating foreign exchange payments and actively repaying debt incurred by trade finance as well as seasonal factors like purchase of foreign exchange for travel and for return on investment. August is the peak season for overseas travel and studying abroad by Chinese residents as well as for distributing dividends and purchasing foreign exchange by enterprises. Generally speaking, the recent changes in foreign exchange receipts and payments have been driven primarily by economic and market factors and show the bidirectional volatility of cross-border capital flows, which is normal and affordable. While continuing to vigorously facilitate trading and investment activities by market players that do business in compliance with laws and regulations, the SAFE will further enhance monitoring and warning of cross-border capital flows, accelerate building and improving the external debt and capital flow management system under the macro-prudential management framework, and increase counter-cyclical policy tools, so as to stick to its bottom line of guarding against systematic and regional financial risks. 2015-11-10/en/2015/1110/1174.html
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Q: How do you view the changes in China’s full-scale external debt data as of the end of September? A: As at the end of September 2015, China's full-scale outstanding external debt was the equivalent of USD 1.5298 trillion, down by USD 150.3 billion from the end of June. Our analysis shows that the changes in the size of China's external debt are primarily caused by the following: first, domestic players have been actively repaying debt under trade finance to avoid exchange rate risks. As of the end of September, banks' balance of trade finance (i.e., refinancing and forward L/C) was USD 31.4 billion lower than that of the end of June. Second, domestic players have optimized the structure of liabilities and assets in domestic and foreign currencies through financial operation. By the end of September, the outstanding RMB-denominated external debt fell by USD 98.1 billion from the end of June. Third, along with heightened expectations of the Fed's rate rise in the third quarter, some foreign financial institutions and non-residents have adjusted their deposit allocation. The deposits passively absorbed by Chinese financial institutions from their foreign counterparts and non-residents dropped by USD 70.3 billion as of the end of September, as compared with that of the end of June. Overall, with the decline in external debt, the external solvency risk facing China has been reduced. Going forward, as the RMB exchange rate elasticity is enhanced, the capital account convertibility is further boosted and the interest rate and exchange rate change in international markets, short-term fluctuations in China's full-scale external debt may become a new normal. The State Administration of Foreign Exchange (SAFE) will continue to enhance ongoing and ex-post monitoring and analysis, actively build an external debt and capital flow management system under the macro-prudential management framework, increase the response policy reserves and improve emergency plans to guard against the risks associated with abnormal cross-border capital flows. 2016-01-06/en/2016/0106/1180.html
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To enhance internal control and external supervision of banks, the State Administration of Foreign Exchange (SAFE) has recently printed and distributed a circular that it would carry out a special inspection of 7 banks for foreign exchange compliance. This special inspection is designed to identify the typical problems and hidden risks in banks' foreign exchange business, understand banks' deficiency in implementing foreign exchange administration policies and regulations, promote banks to enhance their foreign exchange compliance and curb foreign exchange incompliance and illegalities. The focus of this inspection will be on the rectification of problems identified in previous inspections, internal controls of banks, their implementation of service principles, and their foreign exchange compliance. This inspection will be carried out in three phases. The first phase, starting from January 2015 and ending on February 9, is about self-check by banks and offsite inspection by foreign exchange authorities. Banks are required to conduct a full-scale self-check and foreign exchange authorities will carry out offsite inspection at the same time. The second phase, lasting from February 10 to mid-March 2015, will be focused on onsite inspection of some bank branches and sub-branches which are selected by the foreign exchange authorities. The third phase will be a bank rectification phase. Banks will be required to complete rectification of violations identified in their self-check and the inspection by foreign exchange authorities by the end of May 2015. According to the Circular, banks are required to conduct self-check in their systems by building a level-based accountability system and introducing comprehensive measures without any ignorance, making sure their self-checks are fruitful; they also should report their violations and illegalities, identify causes, conduct rectification and build and improve a long-term mechanism on foreign exchange compliance. To strengthen organization and leadership, the SAFE has established a special inspection leadership team to make decisions and offer guidance on key issues, and coordinate progress and problems to be solved during this inspection. 2015-02-06/en/2015/0206/1146.html
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To further enhancethe policy transparency regarding foreign exchange administration, the State Administration of Foreign Exchange (SAFE)continued toreinforce legislations in key areas and sort out regulations, and improved regulations on administration of foreign exchange sales and settlement by banks and foreign exchange administration for overseas listingin the second half of 2014. Meanwhile, the SAFE rescinded and announced invalid some foreign exchange administrative regulations as the foreign exchangeadministration reform proceeded. To facilitate public enquiry and application, the SAFE then upgraded the Catalogue of Major Existing Laws and Regulations in Effect on Foreign Exchange Administration (Catalogue) and released it at its official website. The upgraded Catalogue contains 259 policies, laws and regulations on foreign exchange administration released as of December 31, 2014, which fall into 8 categories including general foreign exchange administration, foreign exchange administration under the current account, foreign exchange administration under the capital account, regulation of the foreign exchange business of financial institutions, the RMB exchange rate and the foreign exchange market, balance-of-payments and foreign exchange statistics, foreign exchange inspections and application of the laws and regulations, and the scientific administration of foreign exchange, and several sub-categories by specific business type. The SAFE will make further efforts to build and improve a long-term mechanism for sorting out laws and regulations, and streamline and upgrade the Catalogue regularly to enhance policy transparency, facilitate banks, companies, and individuals to understand and apply foreign exchange administrative regulations and promote law-basedforeign exchange administration. 2015-02-09/en/2015/0209/1147.html
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To meet the development needs of the foreign currency banknotes business in China, and further regulate the management of receipts and payments of foreign currency banknotes by domestic institutions, the State Administration of Foreign Exchange (SAFE) recently released the Circular of the SAFE on Printing and Distributing the Measures for Managing the Receipts and Payments of Foreign Currency Banknotes by Domestic Institutions (Huifa No. 47 [2015], the Circular). The Circular is highlighted as follows: First, specifying the conditions for the receipts and payments of foreign currency banknotes by domestic institutions. When bank channels are inaccessible, such as in the cases of unsmooth transfer channels and transactions with countries/regions that are stricken by war or have poor financial facilities, domestic institutions will be allowed to handle part of receipts and payments under the current account in foreign currency banknotes. Second, specifying the requirements on banks in reviewing the receipts and payments of foreign currency banknotes. Under the principles of "knowing your customer", "understanding your business" and "due diligence", banks are required to review the authenticity, legitimacy and necessity of the receipts and payments of foreign currency banknotes. Third, improving relevant foreign exchange regulations. The SAFE will strengthen data acquisition and analysis and enhance ex-post regulation and investigation of misconduct. The Circular shall come into force as of February 1, 2016. The Interim Measures for the Administration of Collection and Payment of Foreign Cash by Domestic Institutions (Huiguanhanzi No. 211 [1996]) shall be abolished simultaneously. 2016-01-08/en/2016/0108/1181.html
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With the approval from the State Council, Zhou Xiaochuan, governor of the People's Bank of China, wrote a letter on October 6, 2015 to Christine Lagarde, managing director of the International Monetary Fund (IMF), in the capacity of Governor of the IMF for China, officially informing Ms. Lagarde of China's decision to adopt the Special Data Dissemination Standards (SDDS) of the IMF. This marks that China has completed all the processes for subscribing to the SDDS and will observe the SDDS to disseminate its statistical data. On October 7, Yi Gang, deputy governor of the People's Bank of China and administrator of the State Administration of Foreign Exchange (SAFE), and David Lipton, first deputy managing director of the IMF, attended a ceremony to celebrate China's adoption of the SDDS during the annual meeting of the IMF in Lima. Subscribing to the SDDS, a necessary step in reform and opening up, will further improve the transparency, credibility and International comparability of China’s macroeconomic statistics, further unveil China's macroeconomic conditions to provide timely and accurate basis for decision-making on the macro-economy, and deepen the international community's and the public's understanding of China's economy to expand China's participation in global economic cooperation. The adoption of the SDDS is another bold step forward in improving China's statistical system and transparency. To help data users to fully understand the statistical methodologies of China's foreign-related departments, scientifically assess the coverage, timeliness, availability and authenticity of the data, and reasonably judge the conditions of China's foreign-related economy, the SAFE hereby releases SDDS metadata for the Balance of Payments, the International Investment Position and the External Debt Statistics Interpretation Documents for reference. 2015-11-30/en/2015/1130/1177.html
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The State Administration of Foreign Exchange (SAFE) held a press conference on the foreign exchange receipts and payments for the first half of 2017 in the State Council Information Office on Thursday, July 20, 2017 at 10 am and answered press questions. Moderator Xi Yanchun: Good morning, ladies and gentlemen. Welcome to the press conference of the State Council Information Office. Today we are very glad to have with us Ms. Wang Chunying, press spokesperson and director of the Department of Balance of Payments of the SAFE. She will brief us on the foreign exchange receipts and payments for the first half of 2017 and take your questions. Now let's invite Ms. Wang for some opening remarks. 2017-07-20 10:00:50 Wang Chunying: Good morning, everyone. Welcome to today's press conference. Now I would like to disseminate China's foreign exchange receipts and payments data for the first half of 2017 and then I will be taking your questions. In the first half of this year, the global economy continued to recover and the global financial markets remained stable. China's economy performed stably with stronger momentum for growth. Its economic development becomes more stable, coordinated and sustainable, and the RMB exchange rate stayed stable. The SAFE was committed to enhancing the cross-border trade and investment facilitation and boosting the two-way opening of the financial market in a proper and orderly manner to serve the development of the real economy on the one hand; and on the other hand, it tightened the monitoring of cross-border capital flows, enhanced the building of regulatory capability, and cracked down on foreign exchange irregularities to safeguard the health and stability of the foreign exchange market and China's economic and financial security. Overall, China's cross-border capital flows remained sound with good momentum for growth, and the supply and demand in the foreign exchange market found a basic equilibrium in the first half, which proved to be the best equilibrium over the past three years. 2017-07-20 10:01:52 Wang Chunying: Banks settled foreign exchange of RMB 5.31 trillion (USD 772.7 billion) and sold foreign exchange of RMB 5.95 trillion (USD 866.5 billion) in the first half, with a deficit of RMB 644.3 billion (USD 93.8 billion). Meanwhile, banks registered cumulative foreign-related income of RMB 9.55 trillion (USD 1.39 trillion) and made external payment of RMB 10.12 trillion (USD 1.47 trillion) for their customers, with a deficit of RMB 577.9 billion (USD 84.2 billion), according to the data on banks' foreign-related receipts and payments for customers. 2017-07-20 10:03:59 Wang Chunying: China's foreign exchange receipts and payments for the first half present the following characteristics: First, banks' foreign exchange sales and settlements as well as foreign-related receipts and payments registered drastic falls in deficits. In the first half, in dollar terms, foreign exchange settlements by banks were up by 6% year on year, and foreign exchange sales by banks, down by 4% year on year, resulting in a deficit of USD 93.8 billion, down by 46% year on year; the foreign-related receipts by banks for customers were up by 3% year on year, while the payments were down by 3%, leading to a deficit of USD 84.2 billion, representing a decrease of 50% year on year; in particular, the foreign-related foreign exchange receipts and payments recorded a deficit of USD 14.3 billion, down by 45% year on year. Second, the supply and demand of foreign exchange were moving towards a basic equilibrium. According to the foreign-related foreign exchange receipts and payments for customers, a surplus was registered between January and February, and a monthly average deficit of USD 5.9 billion from March to June. As for the foreign exchange settlement and sales for customers, a deficit of USD 15.6 billion was recorded in January, and the monthly average deficit fell to USD 11.2 billion from February to June, compared with the monthly average deficit of USD 26.6 billion in 2016. Considering the spot and forward foreign exchange sales and settlements as well as options, China's foreign exchange supply and demand has found a basic equilibrium since February. 2017-07-20 10:04:27 Wang Chunying: Third, the foreign exchange sales rate dropped drastically while foreign exchange financing of enterprises grew steadily. In the first half, this rate that measures enterprises' motives to buy foreign exchange, or the ratio of customers' purchases of foreign exchange from banks to customers' foreign-related foreign exchange payments was 68%, down by 9 percentage points year on year. In particular, the ratio was 68% and 67% for the first and second quarters respectively, indicating that enterprises are more reasonable in buying foreign exchange, and their willingness for foreign exchange financing is recovering, while they are less willing to buy foreign exchange to service debt. In the same period, China's outstanding foreign exchange loans rose by USD 7.1 billion, down by USD 58.3 billion year on year. The balance of cross-border financing for imports such as refinancing and forward L/C climbed by USD 13.8 billion, and the balance of financing in foreign currencies went up by USD 26.2 billion. Fourth, the foreign exchange settlement rate climbed, indicating domestic resident individuals were less willing to hold foreign exchange. In the first half, the foreign exchange settlement rate that measures taxpayers' willingness to settle foreign exchange, or the ratio of foreign exchange sold to banks by customers to their foreign-related foreign exchange receipts was 62%, up by 1 percentage point year on year. To be specific, the ratio was 62％ and 63％ respectively for the first and second quarters, indicating market participants are more willing to settle foreign exchange. The domestic foreign exchange deposits of individuals went down by USD 1.7 billion in the first half, up by USD 12.9 billion year on year. 2017-07-20 10:09:01 Wang Chunying: Fifth, the differential of forward foreign exchange settlement and sales turned from a deficit into a surplus. In the first half, the value of foreign exchange contracted for forward settlement by banks for customers was up by 94% year on year, while that of foreign exchange contracted for forward sales was down by 18%, leading to a surplus of USD 9.5 billion in forward foreign exchange settlement and sales contracted with banks, compared with a deficit of USD 37 billion for the same period last year. To be specific, a deficit of USD 3.4 billion was registered for the first quarter, and a surplus of USD 13 billion for the second quarter, indicating the recent expectations of RMB depreciation has declined markedly. Sixth, the supply and demand of the foreign exchange market were being increasingly balanced, boosting the continuous recovery of the balance of foreign exchange reserves. As at the end of June 2017, the balance of China's foreign exchange reserves was USD 3.0568 trillion, up by USD 46.3 billion from the level of the end of 2016. The balance of foreign exchange reserves registered recovery for 5 consecutive months from February to June. These are the major statistical data I want to unveil regarding foreign exchange receipts and payments for the first half. Now I will answer your questions. 2017-07-20 10:11:25 Moderator Xi Yanchun: Thank you, Ms. Director. Now let's move on to the Q&A session. As many foreign journalists are present today, we arrange for simultaneous interpreting service here. As usual, please identify yourself before raising your questions. Now let's begin. 2017-07-20 10:13:31 Market News International (MNI): Ms. Director, China's cross-border capital flows for the past few months have changed for the better. Will this momentum continue in the second half? What possible disturbances will be guarded against by the competent authority in the near future? The recent reports say that the overseas investment projects of some major companies have been suspended as they violated relevant investment regulations. My second question is whether these reports are true. Is China tightening reviews of outbound investments? Will cross-border capital flows that have taken a turn for the better as you said just now enable the regulators to relax their regulation? Thank you. 2017-07-20 10:17:56 Wang Chunying: Let me answer you first question first. Since the beginning of this year, China's cross-border capital flows have changed for the better in all respects, which can be obviously seen in the various data indicators. First, a twin surplus was posted under the current and capital and financial accounts in the balance of payments. In the first quarter, the current account registered a surplus of USD 18.4 billion, and the non-reserve financial account recorded a surplus of USD 36.8 billion, compared with a deficit of USD 103.1 billion for the fourth quarter of last year, thus ending the deficits that have continued for 11 consecutive quarters. Second, the domestic supply and demand of foreign exchange are moving towards an equilibrium. According to the data just unveiled, banks' deficit in foreign exchange settlement and sales for the first half had dropped by an astonishing 46% year on year. If other factors that impact the foreign exchange supply and demand such as the surplus in the foreign exchange contracted for forward settlement and sales are taken into account, the supply and demand of foreign exchange has remained in balance since February. Third, non-banking sectors such as enterprises posted remarkably lower outflows of cross-border capital. The data just released also show that the deficit in foreign-related receipts and payments dropped by 50% year on year in the first half. Fourth, the balance of foreign exchange reserves has risen for five months straight. 2017-07-20 10:18:33 Wang Chunying: There are also diverse factors that boost the turnaround of China's cross-border capital flows. Internally, first, the domestic economic fundamentals become more supportive. Recently, China's momentum for steady economic growth has become more evident, thereby strengthening market confidence. China's economic growth hit 6.8% last quarter, higher than the previous three quarters, and reached a higher level of 6.9% in the first half, with many economic indicators continuing changing for the better. For example, China's official manufacturing purchasing manager's index (PMI) has remained in the expansion cycle for 11 consecutive months; the added value of industries above designated size grew by 6.9% year on year, 0.9 percentage point higher than the same period last year. Second, domestic market participants' expectations of the market are being further stabilized. In the first half, the two-way fluctuations of the RMB exchange rate against the USD became more obvious, growing by 2.4% accumulatively. At the same time, the formation mechanism for the central parity of the RMB against the USD was further refined, and the impact of the counter-cyclical adjustments took shape. Under such circumstances, domestic market participants were increasingly reasonable in making outbound investments and China's external debt continued its stable recovery. 2017-07-20 10:32:26 Wang Chunying: Externally, the global financial markets are relatively stable. Despite the Fed's interest rate hikes in March and June, and the proposal of shortening the balance sheet for the first time, the US Dollar Index dropped from 102 at the beginning of the year to around 96 as at the end of June, and the USD exchange rate depreciated by 6.4% accumulatively in the first half. In Europe, the euro zone posted a more stable momentum for economic recovery, no black swan event was witnessed in French presidential election, and the subsequent progress of Brexit did not make a stir, suggesting lower uncertainties in the market. 2017-07-20 10:39:31 Wang Chunying: Going forward, there will be a more solid foundation for China's cross-border capital flows to stay stable. In particular, recently collected statistics and information have further built our confidence. First, the domestic economy will have a more solid and sustainable momentum for stable growth. The Report on the Work of the Government, published early this year, points out that the target for this year's economic growth is around 6.5%, while the real growth for the first half hit 6.9%, making it certain that the economy will achieve the target and continue to stay within the reasonable range. In June, the IMF upped its projection of China's economic growth for 2017 to 6.7%, which is the second time that the expectations of China's economic growth has been upgraded this year, representing an objective judgment of the international community. Moreover, China's economic structure is being optimized and the quality of its economic growth is stably improved. Second, the domestic market will be further liberalized. The recent National Financial Work Conference and the Conference of the Central Leading Group on Finance and Economic Affairs studied the issues of improving investment and market environments and expanding opening up, and more work or policies will be introduced in the future. For direct investments, China has recently adopted a series of measures favorable for foreign investments, such as the newly revised Catalogue for the Guidance of Industries for Foreign Investment, and the early and pilot implementation policy for deepening foreign investments in free trade zones, so as to provide better services and build a better environment for the entry of foreign investments into China. As relevant measures are implemented one after another, foreign direct investments will continue stable growth. As for portfolio investment, the connectivity of HK and mainland bond markets indicates the Bond Connect has been launched. The inclusion of A shares in the MSCI Emerging Markets Index shows that this will play a positive role in actual capital inflows and market confidence, which will help enhance the attractiveness and international impact of RMB assets. For example, the European Central Bank announced in June to hold more RMB assets that are the equivalent of EUR 500 million as the foreign exchange reserves. 2017-07-20 10:42:49 Wang Chunying: In addition, the impact from external environment will be milder. According to the real economy, the world economy at large will continue to recover. The IMF projection shows that the global economic growth will be 3.5% this year, 0.4 percentage point higher than the previous year. As for the financial markets, the Fed has raised interest rates for four times since the US exited from the QE policy, and its impact on the market, especially on the increase of the USD exchange rate, has been declining. On the one hand, this shows that the market has strengthened its capabilities of understanding, adapting to and digesting policies, and on the other hand, this indicates the hedging effect of other factors, such as the market expectations of the long-term growth of the US economy, the economic performance as well as the orientation of monetary policies in the Euro Zone and Japan. Therefore, China's cross-border capital flows will remain stable in the future, and the risk arising from the significant outflows of capital will become much lower. The SAFE will certainly continue to closely watch the impact of various factors and tighten its monitoring and analysis. 2017-07-20 10:55:25 Wang Chunying: As for your second question, I am sorry I have no such information at hand. As for the ODI policies, we have also noticed that the NDRC and the Ministry of Commerce and other relevant departments have given responses, supporting capable domestic enterprises who meet the conditions to conduct true ODI activities in compliance with regulations, and supporting enterprises to make market-oriented outbound investments in accordance with business principles and international practices, especially to make investments and conduct operating activities under the Belt and Road Initiative and to get involved in international production capacity cooperation. At the same time, departments concerned will continue to watch the tendency of irrational outbound investments in real estate, hotels, cinemas, entertainment, and sports clubs to guard against the risks associated with outbound investments and recommend relevant enterprises to be prudent in making decisions. The SAFE will cooperate closely with departments concerned with regard to ODI, to ensure capable enterprises that meet the conditions to carry out true outbound investing activities in compliance with regulations and encourage domestic enterprises to participate in the construction projects under the Belt and Road Initiative and in international production capacity cooperation. On the other hand, the SAFE will take measures to effectively guard against risks arising from outbound investments and boost the healthy, stable and sustainable development of China's outbound investments. 2017-07-20 11:07:28 Wang Chunying: I would like to stress again that the SAFE's foreign exchange administration policies for outbound investments have been consistent and stable. We will keep to several "unchangeds": the going global strategy, the guideline of utilizing domestic and foreign markets and resources, the direction of supporting ODI that is in compliance with laws and regulations, and the principle of guarding against risks arising from outbound investments in pushing for trade and investment facilitation will remain unchanged. Thank you for your questions. 2017-07-20 11:13:59 Phoenix Satellite Television: We have noticed that the SAFE has introduced relevant documents since the end of last year to raise the requirements on declaration of foreign exchange information, especially on enterprises. Some enterprises say many materials and documents are required to be submitted for cross-border remittances, which leaves them very confused. What would you say about this? How to look at the impact of relevant requirements on the normal operating activities of enterprises? Thank you. 2017-07-20 11:16:44 Wang Chunying: Thank you for your questions. As for the declaration of foreign exchange information, the SAFE released at the end of 2016 the Circular of the State Administration of Foreign Exchange on Optimizing the Information System for Individual Foreign Exchange Business, which came into force on January 1. This Circular imposes the authenticity review requirements on the individual foreign exchange business, improves the declaration form for individuals' buying of foreign exchange from banks, refines what to be declared and emphasizes the quality and authenticity of data. In fact, the policies for individuals' buying of foreign exchange remain unchanged, except for the information declaration newly required to purchase foreign exchange. Since the implementation of the policy, individuals' awareness of using foreign exchange in compliance with regulations has been markedly raised, given the survey results and feedback, while false declaration to purchase a large amount of foreign exchange in violation of regulations, and lending foreign exchange quota for split purchases of foreign exchange have declined drastically. The individual sales and settlements of foreign exchange across the country are normal, suggesting a remarkable outcome of standardizing the order in the individual foreign exchange sales and settlements market. The monitoring data of the SAFE show that in the first half, foreign exchange purchased by individuals went down by 4% year on year from a growth of 14% in the same period last year. Also in the first half, the balance of foreign exchange deposits of residents fell by USD 1.7 billion, versus an increase of USD 12.9 billion in the same period last year, indicating residents' desire to purchase and hold foreign exchange is stable. 2017-07-20 11:18:25 Wang Chunying: For enterprises, we did not impose any requirement on information declaration, and the SAFE's principle of enhancing trade and investment facilitation to better serve the real economy and deepen the opening up remains unchanged. Without making any significant policy adjustment, the SAFE still follows the principle of current account convertibility, duly supports and ensures true payments and transfers under the current account in compliance with regulations, while enhancing trade and investment facilitation. What's more, we will continue to properly and systematically push for the two-way opening of the market, support capable domestic enterprises that meet the conditions to make true outbound investments that conform to the regulations and support them to go global. For the issues you are concerned about, we can keep in contact with each other as the issues are also of help to us. Thank you. 2017-07-20 11:27:12 China National Radio: The Bond Connect has been launched recently. What impact will it have on China's cross-border capital flows? What supportive measures will the SAFE provide for the Connect? 2017-07-20 11:33:37 Wang Chunying: China has been committed to stably pressing ahead with the opening up of the financial market, while the Bond Connect is a key measure to achieve this end. Along with the robust development of China's economy and the development of RMB internationalization, global investors are strengthening their demand for investing in RMB assets. The Bond Connect is the institutional arrangement for the connectivity of infrastructure in the financial markets between mainland and Hong Kong, and Northbound Connect makes it easier for foreign investors to invest in China's bond market. 2017-07-20 11:37:02 Wang Chunying: China's bond market has much room for developments and strong potential for attracting the inflows of foreign capital. First, China's bond market still has great potential for growth. Currently the market ranks No. 3 worldwide, but has plenty of leeway for growth as compared with GDP. The balance of government bonds, for example, is nearly 50% of China's GDP, compared with more than 70% in the US and over 200% in Japan. Second, foreign investors are expected to hold more shares. For the moment, foreign investors take up 1.2% of China's bond market. The share of foreign investors holding government bonds is 4% in China, versus 42% in the US, and 10% in Japan. The share is also lower than those of emerging markets in Asia such as Indonesia, Malaysia and Thailand. Third, the bond yield in China still outperforms other major markets. At the beginning of July, for example, the yield of 10-year treasury bonds was 3.6% in China, compared with 2.3% in the US, 0.5% in Europe and only 0.08% in Japan. 2017-07-20 11:41:30 Wang Chunying: The SAFE has been active in supporting the liberalization measures of the Bond Connect. It works with the People's Bank of China to study relevant capital remittances, inward or outward, exchange and foreign exchange risk management, and adopts facilitation management measures. For example, it imposes no restriction on capital remittances, inward or outward, and exchange; it allows foreign investors to trade foreign exchange derivatives through the clearing house in Hong Kong, who can square off the position in the domestic interbank market based on the true compliance requirements under the Northbound Connect, which is favorable for foreign investors to manage exchange rate risks. Going forward, the SAFE will ensure the combination of investment facilitation and risk control to boost stable cross-border capital flows, based on the progress of the liberalization of China's financial market and the implementation of the Bond Connect. The SAFE will also be dedicated to ensuring foreign currency exchange and foreign exchange risk hedging to deepen and refine the liberalization of China's foreign exchange market and its coordination with the opening up of the domestic financial market. Thank you. 2017-07-20 11:45:24 Bloomberg News: We have noticed that the short-term external debt of Chinese enterprises is rising. Are you concerned about this? What risks will this impose on Chinese enterprises? Will the SAFE take measures to tackle such risks? 2017-07-20 11:49:50 Wang Chunying: China's external debt is growing stably now. As at the end of the first quarter of 2017, China's outstanding full-scale external debt was USD 1.44 trillion, up by USD 17.1 billion or 1.2% against the end of 2016. The total external debt has climbed steadily for four consecutive quarters. 2017-07-20 11:52:07 Wang Chunying: Given the level of external debt and relevant metrics, the risk associated with China's external debt is under control now. First, China's full-scale external debt has continued rebounding recently, but is far lower than the peak in recent years. As at the end of 2014, China's outstanding full-scale external debt amounted to USD 1.78 trillion and has been falling since then. As at the end of the first quarter of 2016, the outstanding full-scale external debt hit USD 1.33 trillion, the lowest level since the statistics on full-scale external debt began to be collected. The current level of USD 1.44 trillion was USD 106.3 billion higher than the historical low, but more than USD 340 billion less than the high level as at the end of 2014. According to the maturity structure of external debt, the medium and long-term external debt has changed stably, with the outstanding medium and long-term external debt as at the end of the first quarter of this year being USD 39.7 billion higher than that of the end of 2014. But short-term external debt is volatile. The outstanding short-term debt as at the end of the first quarter increased by USD 45.5 billion year on year, chiefly due to the increases in currencies and deposits attracted by banks, but was still USD 381.8 billion lower than the outstanding external debt as at the end of 2014. The normal flows of external debt in compliance with regulations will help support the development of the real economy. In our opinion, to observe the changes of an economic datum or financial indicator, one should focus on the long-term performance and assess the level of the datum in terms of absolute value or relative value. China's short-term external debt in terms of absolute value is markedly lower than the historical high. 2017-07-20 11:55:06 Wang Chunying: Second, the major indicators of the risks associated with China's external debt are lower than the internationally accepted alarm levels. As at the end of 2016, China's liability ratio, or outstanding external debt/GDP, was 13%, compared with the internationally accepted safe level of 20%; the debt ratio, or outstanding external debt/income from exports of goods and services, was 65%, versus the internationally accepted safe level of 100%; the solvency ratio, or the payments of principal and interest on external debt/income from exports of goods and services, was 6%, compared with the internationally accepted safe level of 20%; the ratio of short-term external debt to foreign exchange reserves was 29%, much lower than the internationally accepted safe level of 100%. Going forward, the PBC and the SAFE will continue to refine the external debt and capital flows management system under the macro-prudential management framework, and will strengthen ongoing and ex-post monitoring and analysis while further promoting cross-border investment and financing facilitation, so as to guard against external debt risks and safeguard China's economic and financial security. Thank you. 2017-07-20 12:04:00 China News Service: China's foreign exchange reserves have recovered for five months straight. What are the major reasons for this? What would you say about the trend of foreign exchange reserves for the second half? Thank you. 2017-07-20 12:06:03 Wang Chunying: The first half has witnessed the five consecutive months of rebounds in foreign exchange reserves, which has strengthened market confidence. The factors that impact the changes in foreign exchange reserves, as we have communicated with you many times before, include the following: First, the central bank's operation in the foreign exchange markets. Second, price fluctuations of foreign exchange reserve assets for investments. Third, as foreign exchange reserves are denominated in the US dollar, changes in the exchange rates of other currencies against the US dollar will lead to changes in foreign exchange reserves. Fourth, as defined by the IMF, foreign exchange reserves used to support going global will be excluded from the entry of foreign exchange reserves in accounting, and vice versa. 2017-07-20 12:07:12 Wang Chunying: The consecutive recovery of foreign exchange reserves in the first half should be attributed to the following: first, in the dimension of trading, China's economic growth has gained momentum, the cross-border capital flows have continued to be stabilized, and the RMB exchange rate has grown stably, and therefore, residents and enterprises have become increasingly reasonable in buying foreign exchange and the supply and demand of foreign exchange have found an equilibrium. Second, in non-trading terms, the currencies against the US dollar have appreciated this year, and the prices of foreign exchange reserves assets for investments have risen, boosting foreign exchange reserves to recover stably. 2017-07-20 12:10:40 Wang Chunying: Looking ahead, it is likely that China's foreign exchange reserves will stay stable. On the one hand, as China's economic growth becomes increasingly stable and coordinated, China's economic performance will continue to make progress while maintaining stability, in terms of industry support, development motives, development confidence and development environment. On the other hand, the further opening up of the financial market, the healthy development of the foreign exchange market, the more stable market expectations, and the balance of cross-border capital flows and the supply and demand of the financial market will further boost the stability of foreign exchange reserves. Thank you. 2017-07-20 12:13:17 Moderator Xi Yanchun: This is the end of today's press conference. Let me thank Ms. Director again for her wonderful answers and thank you all for coming. 2017-07-20 12:17:15 (The original text is available at china.com.cn) 2017-07-20/en/2017/0720/1289.html
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Taking a Sensible Approach to the Changes in China's Foreign Exchange Reserves By Pan Gongsheng, Deputy Governor of the People's Bank of China and Administrator of the State Administration of Foreign Exchange Foreign exchange reserve is an objective indicator of the achievements in China's reform and opening-up and its development of foreign economy, and also the result of the functioning of the balance of payments. Since the 18th CPC National Congress, China's economic development has stepped into a new normal, with the balance of payments finding an equilibrium amid fluctuations, and foreign exchange reserves registering slower growth rather than high-speed growth as it previously did, and even falling in a certain period, which should be looked at and analyzed objectively and sensibly, rather than fretfully. Foreign exchange authorities are required to refine the foreign exchange administration system, and make use of the positive roles foreign exchange reserves play in serving the real economy and maintaining China's economic and financial security, in a bid to embrace the 19th CPC National Congress with excellent performance. First, foreign exchange reserves change as a result of robust macroeconomic performance In 1992 the reform target of building a socialist market economy was set at the 14th CPC National Congress; in 2001 we joined the WTO, which injected strong impetus for the fast development of China's economy and society. Since the outbreak of the global financial crisis in 2008, China has entered into a new normal of economic development along with the changes in environment and conditions internally and externally, and its foreign exchange reserves have declined from a high level after the long-term growth. But overall, China's foreign exchange reserves remain adequate and within a reasonable range. China has taken the top spot worldwide for years for high foreign exchange reserves. Along with the establishment of the socialist market economic system and the deepening of the opening-up strategy, China has adapted to the holistic development trends of the world economy, and actively participated in the international division of labor and cooperation. In the midst of expanding opening-up, China has borne witness to rapid economic growth for consecutive years, fast expansion in foreign trade, use of foreign capital and outbound investments, and continued surpluses in the balance of payments. As a result, China's foreign exchange reserves hiked from USD 21.7 billion in the beginning of 1992 to a historical high of USD 3.99 trillion in June 2014. Statistics show that the top 10 countries/regions by foreign exchange reserves as at the end of March 2017 include China, Japan, Switzerland, Saudi Arabia, Taiwan, Hong Kong, Brazil, South Korea, India and Russia. To be specific, China's foreign exchange reserves accounted for 28% of the world's total, far higher than those of the rest of the world. China's foreign exchange reserves are characterized by cyclical changes. Since the advent of this century, China has seen two stages in the changes of its foreign exchange reserves. In the first stage, which began in 2000 and ended in 2013, a tremendous amount of global capital flew into emerging economies and sent China's foreign exchange reserves surging, from USD 154.7 billion at the beginning of 2000 to USD 3.82 trillion in 2013, representing an annual increase of more than 26%. In the second stage that began in 2014, along with the outflows of global capital from emerging economies, China's foreign exchange reserves peaked in June 2014 and dropped afterwards. China's foreign exchange reserves are adequate. However, there is no universal metric on how much foreign exchange reserve a country holds should be reasonable. In the 1950s to 1960s, the widest used metric for foreign exchange adequacy ratio was the import for 3-6 months. Later as the demand for foreign exchange reserves expanded to guarding against the inadequate debt servicing capability, the widest used metric for the adequacy ratio became the 100% short-term debt. Since 2011, the International Monetary Fund (IMF) proposed the comprehensive standard for foreign exchange adequacy ratio, based on the capital demand of every country for guarding against crises. Foreign exchange reserve is a continuous variable that dynamically changes under the impact of various factors, and therefore, in measuring whether foreign exchange reserves are at a reasonable level, the macroeconomic conditions, level of economic liberalization, capability of using foreign capital and international financing, and maturity of the economic and financial systems of a country should be taken into full consideration. In China, no matter which metric is adopted, its foreign exchange reserves are adequate and help satisfy the demand for economic and financial development. Second, foreign exchange reserves are crucial to promoting China's economic development Since the 18th CPC National Congress was held, Secretary-general Xi Jinping has proposed the thoughts of building a community of shared future for mankind, achieving mutual benefit and seeking common development in promoting opening up in all respects, based on his understanding of the current international trends of peace, development, cooperation and win win. Based on in-depth study and their understanding of Secretary-general Xi Jinping's new thoughts on opening up, foreign exchange authorities have been active in innovating and improving the foreign exchange reserve management system and utilization mechanism, and played a critical role in adjusting macro policy, serving the national strategy and maintaining financial security. Foreign exchange reserves are key to ensuring the robust performance of China's macro-economy. For the moment, China adopts the well-organized floating foreign exchange rate system that is adjusted based on the supply-demand in the market with reference to a basket of currencies. As an important stabilizer of macroeconomic performance, foreign exchange reserves play a key role in maintaining the capability of international payment, guarding against financial risks, and withstanding the impact of crises. When the global liquidity is adequate, market participants will sell the redundant foreign exchange funds to promote the growth of foreign exchange reserves. When the global liquidity tightens, market participants will hold more foreign exchange assets and reduce overseas debt, leading to lower foreign exchange reserves. Foreign exchange reserves actually function like a reservoir that avoids significant inflows and outflows of cross-border capital and resulting deviation from the economic fundamentals, and makes room for economic restructuring and industrial transformation and upgrading. The adequate foreign exchange reserves also help China withstand the significant external impact from the Asian Financial Crisis of 1997 and the global financial crisis of 2008, safeguarding China's economic and financial security. Foreign exchange reserves have effectively served the opening-up strategy. Secretary-general Xi Jinping stressed that opening up is a must at the new stage of development, with focus on cooperation and mutual benefit. Following the opening-up strategy, foreign exchange authorities have coordinated big pictures in China and the rest of the world, and expanded diversified use of foreign exchange reserves in the principle of "ensuring paid use of foreign exchange reserves with higher benefits and effective regulation in compliance with laws and regulations", providing significant amount of funds for the economic development of China and the world. In recent years, foreign exchange authorities have developed and expanded various channels such as entrusted loans and equity investment to provide foreign exchange funds to financial institutions and physical economic sectors such as commercial banks and policy banks, establishing the mechanism for use of foreign exchange reserves featuring clearly defined roles and responsibilities, definite goals, multiple tiers, and diverse products, with focus on supporting the Belt and Road Initiative, international production capacity and outfit manufacturing cooperation, enterprises going global, and imports and exports in key areas, so as to serve the development of the real economy. As the world economy is recovering slowly, and economic and trade globalization are faced with serious challenges, diversified use of foreign exchange reserves will be favorable for Chinese companies to effectively use the domestic and overseas markets and resources, facilitate the organic integration of China into the international community, and promote international cooperation in economic affairs. Reasonable utilization of foreign exchange reserves has helped achieve the goal of "letting the public hold more foreign exchange". In the face of the demand of market participants for purchasing foreign exchange and their willingness to hold foreign exchange, foreign exchange authorities have deepened the foreign exchange administration reform, yielded policy dividends, and made exchange easier, which have boosted the endeavor to let the public hold more foreign exchange. As for the holders, China has diverse forms of outbound investors such as foreign exchange reserves, China Investment Corporation, social insurance funds, financial institutions and enterprises, indicating remarkable progress has been achieved in the diversification of foreign exchange holders. From the second quarter of 2014 to the end of 2016, foreign exchange reserves in China's International Investment Position fell by around USD 1 trillion, matching with residents' net foreign assets that rose by USD 0.9 trillion, which is a direct testimony to "letting the public hold more foreign exchange". For the private sector, the foreign exchange they held in the period was to fund ODI, servicing of foreign debt, travelling and studying abroad by domestic residents. For the government sector, as foreign exchange reserves on the asset side of the central bank drop, those on the liability side will fall accordingly, showing "letting the public hold more foreign exchange" does not displace the balance in the central bank's balance sheet that adopts the double-entry bookkeeping system. Horizontally, by the third quarter of 2016, China's foreign exchange reserves as a percentage of external assets are at a reasonable and medium level among major developing countries. Vertically, as at the end of 2016, the share of the external assets held by the private sector surpassed 50% for the first time, the highest level since China began to disseminate the data on international investment position in 2004; foreign exchange reserve assets accounted for 48%, down by nearly 20 percentage points from the level of the end of 2009. This shows that China's external economic and financial exchanges are shifting from the dominance of government investments to equal investments by the public and the private sectors. It should be emphasized that China is not interested in strengthening competitiveness through currency depreciation, and does not need to do so. The central bank provides the market with foreign exchange liquidity, avoiding exchange rate overshooting and the herd effect, and safeguarding stability in the market. China's endeavor to strike a balance between enhancing exchange rate flexibility and maintaining exchange rate stability will be favorable for the international community, effectively avoiding the negative spillover effect due to the disorderly adjustment of the RMB exchange rate and the competitive depreciation among major currencies. Third, effectively use foreign exchange reserves to serve the reform and opening up, and international cooperation in economic affairs Reform and opening up is the necessary path towards national prosperity. Carrying out opening up in all respects is a key strategic step proposed by Secretary-general Xi Jinping at the new historical starting point. Foreign exchange authorities must develop the concepts of development that stress innovation, coordination, green, opening-up and sharing, with focus on accelerating the building of the new open economic system, and making full use of foreign exchange reserves' role in the construction of an open economy to make new contributions to realize the two centenary goals (namely, to complete the building of a moderately prosperous society in all respects when the Communist Party of China celebrates its centenary in 2021, and to turn China into a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious when the People's Republic of China celebrates its centenary in 2049) and the Chinese dream of the great renewal of the Chinese nation and the prosperity and development of the world economy. Foreign exchange reserves will be stabilized amid volatility. The economic and financial variables often fluctuate and develop in cycles, rather than taking the form of linear transformation. This holds true for the changes in foreign exchange reserves. Despite many uncertainties in external environment, China's economic and financial fundamentals will remain stable with strong momentum for growth in the long term, and cross-border capital flows will evolve towards an equilibrium. First, China's economy remains in the mid and high-speed growth range, and as the supply-side structural reform advances, the quality and efficiency of its economic development will be enhanced in the future. China's economic fundamentals will continue to ensure the stable position of the RMB in the global currency system, and the RMB exchange rate will remain stable at a reasonable and even level. Second, the external debt deleveraging has been basically completed and Chinese enterprises' use of external debt has rebounded since the second quarter of 2016. Third, the surplus under the current account in China has remained at the reasonable level. As anticipated by the IMF, China will continue to post surpluses under the current account in the coming five years, which will ensure the stable supply of foreign exchange in China. Fourth, as the RMB joins the SDR basket and the reform, opening-up and development of China's financial market are deepened, the RMB assets will become an important part of the global allocation of financial assets and attract foreign investors to invest in the Chinese market, and the foreign exchange under the financial account will be stably supplied. Fifth, the complementarity of currencies and asset prices in the international financial market, coupled with the diversified layout of China's foreign exchange reserves, will ensure sound diversification and be favorable for the stability of China's foreign exchange reserves. Overall, China's foreign exchange reserves will be stabilized in the midst of volatility going ahead. Further efforts shall be made to optimize the role of foreign exchange reserves in stabilizing the balance of payments. The general work guideline of making progress while maintaining stability is an important principle of the CPC in state governance and a methodology for ensuring sound economic performance. Following the logic of stable macro policy, foreign exchange authorities shall go all out to ensure stable growth and provide a favorable external environment for the stable and healthy development of the economy, and for the stability and harmony of society. In the complex and changing economic and financial environments, internally or externally, foreign exchange reserves need to recover the basic feature of maintaining the stability of the balance of payments, which is a necessary requirement for settling major contradictions and problems in China's economic development and for ensuring robust macroeconomic performance. The purpose of foreign exchange administration and utilization is to serve the economic development in China and the world, and therefore foreign exchange reserve administration and utilization shall be integrated into the big picture of the CPC and the state to align domestic development with opening up, and the domestic development with the world development, in a bid to promote common development. Following the work plans of the CPC and the State Council and the general work guideline of making progress while maintaining stability, foreign exchange authorities shall take up responsibilities and forceful measures to coordinate the diversified use of foreign exchange reserves, and invest its funds in the strategic areas that ensure the Belt and Road Initiative, international production capacity and outfit manufacturing cooperation, and to promote common development and prosperity between China and the rest of the world. The operation and administration of China's foreign exchange reserves shall be enhanced. In the principle of safety, liquidity, value preservation and growth, efforts shall be made to conduct prudent, standardized and professional investment and operation with regard to foreign exchange reserves, optimize and dynamically adjust investment portfolios and strategies, and show respect for rules and practices in international markets so as to maintain and promote the stability and development of the international financial market. (The original text is available in the 13th issue of Qiushi Journal for 2017.) 2017-07-07/en/2017/0707/1288.html