-
A National Foreign Exchange Administration Conference has been held in Beijing . The participants earnestly studied the spirit of the Seventeenth National Congress of the CPC and China 's Central Economic Work Conference. A scientific concept of development was deeply implemented, foreign exchange administration work of prior periods reviewed and summarized, the current situation and tasks analyzed, and the main work for 2008 researched and arranged. Ms. Hu Xiaolian, deputy governor of the PBOC and administrator of the SAFE, attended the meeting and delivered a speech on foreign exchange administration. In 2007, according to the uniform plans set forth by the Party Central Committee and the State Council, the foreign exchange administrations continued to facilitate the holding and use of foreign exchange by domestic institutions and individuals, tightened supervision over capital inflows and sales of foreign exchange, and improved foreign exchange administration, thereby, making progress in various fields. First, a package of policies and measures on foreign exchange administration to promote a balance of payments equilibrium was promulgated. The SAFE abolished the quota limit on the foreign exchange account under the current account, integrated the foreign exchange administration policies for the customs special supervisory zone, and actively supported implementation of the Qualified Domestic Institutional Investors (QDII) system. Second, the SAFE further facilitated foreign exchange receipts and payments incurred to domestic institutions and individuals, and raised the total amount for individuals annual purchases of foreign exchange. Annual individual purchases of foreign exchange increased by almost 3 times, qualified finance companies were approved to deal with the trial operations of internal sales and purchases of foreign exchange, approvals of value-maintenance businesses under the debt accounts through overseas institutions, etc. were abolished, and enterprises were helped to enhance the efficiency of capital utilization. Third, the SAFE continued to broaden capital outflow channels. The annual outward remittances of FX capital under the overseas direct investment account totaled USD 10.82 billion, an increase of 32%. The outward remittances of foreign exchange investment with foreign exchange purchased by the QDII totaled USD 35.3 billion. Fourth, the SAFE continued to strengthen construction of the foreign exchange market. The SAFE introduced new institutions to the inter-bank foreign exchange market, enriched the trading categories and business scope, launched the swap business for the RMB and foreign currencies in the inter-bank market, and improved market access management for spot foreign exchange sales and purchases. Fifth, the SAFE tightened management of foreign exchange capital inflows and sales. It strictly monitored foreign exchange collection and payments under the goods trade of enterprises with much foreign exchange collection, reduced in phases the short-term external debt quota of financial institutions, strengthened management of foreign exchange registration and borrowing of external debt by foreign real estate enterprises, carried out a series of special inspections and investigations of key foreign exchange capital inflow links and areas, and intensified efforts to crack down on underground money houses and illegal foreign exchange trading, and other illegal and criminal activities, and constantly improved foreign exchange reserve management, while, at the same time, realizing the maintenance and appreciation of the national foreign exchange reserves, strengthening statistics and monitoring of the balance of payments, and boosting construction of IT applications for foreign exchange administration. Hu Xiaolian pointed out that, since the reform and opening up, China has been deepening its reform of the foreign exchange administration system and has made a series of breakthroughs. For example, the convertibility of RMB current accounts has proceeded gradually; the convertibility of capital accounts is increasing step by step; the formation of the RMB exchange rate is increasingly market-oriented; a foreign exchange market is gradually being established and has made considerable progress; the statistical and monitoring system for foreign exchange business is constantly improving and the management system for foreign exchange reserves is being perfected. Ms. Hu emphasized that the SAFE should continue to use the reform and development methods to solve future problems, devote more energy to institutional and mechanism innovations, and give better play to the basic role of the market in the allocation of foreign exchange resources, constantly improving the market mechanism and management system for the balance of payments and continuing to promote the convertibility of RMB capital accounts in a safe and orderly manner so as to guard against international economic risks. At present, the contradictions in the imbalance in Chinas balance of payments are still prominent; we still face many challenges to improve the situation in this regard. Generally, a twin surplus in the balance of payments will be maintained and various uncertainties will obviously emerge. This will increase the risk of volatility in Chinas balance of payments. Foreign exchange administration departments must always remain clear-headed, further enhance their sense of urgency, keep close track of the domestic and international situations, remain vigilant in peace time, take precautions in advance, and make good preparations to cope with all kinds of complex and difficult situations and emergencies. The conference also made arrangements for the major foreign exchange administration work for 2008. Hu Xiaolian stressed that the foreign exchange administration work in 2008 should fully implement the spirit of the Seventeenth National Congress of the Communist Party of China, hold high the great banner of socialism with Chinese characteristics, remain under the guidance of Deng Xiaoping Theory and the important thoughts of the Three Represents, and earnestly implement the scientific concept of development. Ms. Hu also emphasized deepening the reform of the foreign exchange administration system in accordance with the requirements of the Central Economic Work Conference and the specific arrangements of the work meetings of the Peoples Bank of China, to better meet the needs of domestic institutions and individuals to legitimately hold and use foreign exchange, and to strictly oversee and manage cross-border capital flows and strengthen foreign exchange reserve operations in a bid to improve the equilibrium in the balance of payments. Ms. Hu urged the SAFE to continue to follow and to do a better job in pushing forward the reform, promoting outflows, stressing supervision, and improving methods. First, innovative methods of foreign exchange administration under trade must be developed, vigorously promoting reform of the cancel-after-verification system for imports and exports, carrying out the reform of the foreign exchange administration of the services trade step by step, and formulating a unified set of regulations concerning foreign exchange administration of the services trade. Second, the foreign exchange market must be actively nurtured and developed, strengthening the infrastructure of the foreign exchange market and further improving currency exchange services. Third, the convertibility of the capital account should be promoted in an orderly way, actively supporting overseas direct investment conducted by domestic enterprises and individuals (namely, foreign industrial investment), and steadily pushing forward implementation of the qualified domestic institutional investor system to better satisfy the demands from individual residents for foreign exchange resulting from the growth of personal property income and diversified investment. Fourth, supervision over the foreign exchange business of financial institutions should be consolidated, intensifying supervision over banks implementing foreign currency policies and establishing and improving the bankssupervision and management system of their own foreign exchange revenue and expenditure. Fifth, management of foreign exchange capital collection and sales should be tightened, strengthening dynamic supervision and ex post verification of foreign exchange revenue and expenditures under the goods trade and services trade, further standardizing the administration of individual foreign exchange revenue and expenditures, continuing to strengthen the quota management of banksshort-term external debt, and conducting research on methods to improve external debt management in foreign-invested enterprises. Sixth, efforts should be made to intensify foreign exchange inspections of cross-border capital flows, carrying out a series of special inspections focusing on foreign exchange capital inflows and the flow direction of RMB capital after sales of foreign exchange, conducting special inspections on the compliance of banks in implementing foreign exchange policies and cracking down on underground money shops and illegal trading of foreign exchange, and other illegal and criminal activities together with the relevant departments, and, at the same time, further improving foreign exchange reserves management and promoting foreign exchange administration regulations and administrative capacity-building. 2008-01-29/en/2008/0129/864.html
-
October 31, 2007 -- The SAFE recently released China's Balance of Payments Statement for the first half of 2007. Statistics reveal that the current account and the capital and financial account posted a "twin surplus",and international reserves increased rapidly. In the first half of 2007, China's surplus under the current account totaled USD 162.9 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods, income, and current transfers reached USD 135.7 billion, USD 12.9 billion, and USD 17.4 billion, respectively, while the deficit in services amounted to USD 3.1 billion. Meanwhile, China's surplus under the capital and financial account totaled USD 90.2 billion. In particular, net inflows of the capital account, direct investments, and other investments reached USD 1.5 billion, USD 50.9 billion, and USD 42.6 billion respectively, while the outflows of portfolio investment totaled USD 4.8 billion. Furthermore, China's international reserves continued to grow. At the end of June, China registered a total of USD 1,332.6 billion in foreign exchange reserves, an increase of USD 266.3 billion over the end of 2006. In addition, the BOP Analysis Team of the SAFE released China's Balance of Payments Report for the First Half of 2007 in order to facilitate understanding of the data and analysis of China's balance of payments among all social groups. Chinas Balance of Payments * (First Half of 2007) (Unit: 1,000 US dollars) Item Line Balance Credit Debit I. Current Account 1 162,857,962 656,184,959 493,326,998 A. Goods and Services 2 132,549,018 603,062,616 470,513,597 a. Goods 3 135,690,881 547,174,215 411,483,334 b. Services 4 -3,141,862 55,888,401 59,030,263 1.Transportation 5 -4,843,018 13,554,628 18,397,646 2.Travel 6 3,341,977 17,935,000 14,593,023 3.Communication Services 7 125,237 592,293 467,057 4.Construction Services 8 619,002 1,878,559 1,259,557 5.Insurance Services 9 -4,336,191 482,745 4,818,936 6.Financial Services 10 -218,799 76,406 295,205 7.Computer and Information Services 11 971,409 1,948,049 976,640 8.Royalties and Licensing Fees 12 -3,833,739 114,902 3,948,641 9.Consulting Services 13 -196,482 4,941,825 5,138,307 10.Advertising and Public Opinion Polling 14 295,104 875,640 580,536 11.Audio-visual and Related Services 15 31,048 92,700 61,652 12.Other Business Services 16 4,903,403 13,035,673 8,132,270 13. Government Services, n.i.e. 17 -814 359,980 360,794 B. Income 18 12,904,373 34,083,181 21,178,808 1.Compensation of Employees 19 1,716,895 2,972,999 1,256,105 2.Investment Income 20 11,187,478 31,110,182 19,922,704 C. Current Transfers 21 17,404,571 19,039,163 1,634,592 1.General Government 22 -83,230 21,191 104,421 2.Other Sectors 23 17,487,801 19,017,972 1,530,171 II. Capital and Financial Account 24 90,164,499 446,812,821 356,648,322 A. Capital Account 25 1,464,582 1,563,893 99,311 B. Financial Account 26 88,699,916 445,248,928 356,549,011 1. Direct Investment 27 50,919,043 63,314,553 12,395,510 1.1 Abroad 28 -7,414,240 585,653 7,999,892 1.2 Domestic 29 58,333,282 62,728,900 4,395,618 2. Portfolio Investment 30 -4,825,693 17,686,641 22,512,334 2.1 Assets 31 -15,077,372 7,434,962 22,512,334 2.1.1 Equity Securities 32 -5,034,000 927,000 5,961,000 2.1.2 Debt Securities 33 -10,043,372 6,507,962 16,551,334 2.1.2.1 Bonds and Notes 34 -8,175,372 6,507,962 14,683,334 2.1.2.2 Money Market Instruments 35 -1,868,000 0 1,868,000 2.2 Liabilities 36 10,251,678 10,251,678 0 2.2.1 Equity Securities 37 10,251,678 10,251,678 0 2.2.2 Debt Securities 38 0 0 0 2.2.2.1 Bonds and Notes 39 0 0 0 2.2.2.2 Money Market Instruments 40 0 0 0 3. Other Investment 41 42,606,567 364,247,734 321,641,167 3.1 Assets 42 17,149,666 31,767,204 14,617,538 3.1.1 Trade Credits 43 -5,915,000 0 5,915,000 Long-term 44 -414,050 0 414,050 Short-term 45 -5,500,950 0 5,500,950 3.1.2 Loans 46 12,235,115 14,539,086 2,303,972 Long-term 47 -1,041,000 0 1,041,000 Short-term 48 13,276,115 14,539,086 1,262,972 3.1.3 Currency and Deposits 49 9,227,109 13,212,830 3,985,722 3.1.4 Other Assets 50 1,602,443 4,015,287 2,412,844 Long-term 51 0 0 0 Short-term 52 1,602,443 4,015,287 2,412,844 3.2 Liabilities 53 25,456,901 332,480,530 307,023,629 3.2.1 Trade Credits 54 7,132,000 7,132,000 0 Long-term 55 499,240 499,240 0 Short-term 56 6,632,760 6,632,760 0 3.2.2 Loans 57 10,192,989 279,836,819 269,643,829 Long-term 58 2,381,266 10,091,536 7,710,271 Short-term 59 7,811,724 269,745,283 261,933,559 3.2.3 Currency and Deposits 60 8,247,446 44,741,749 36,494,304 3.2.4 Other Liabilities 61 -115,534 769,962 885,496 Long-term 62 278,404 309,958 31,554 Short-term 63 -393,938 460,004 853,942 III. Reserves Assets 64 -266,097,901 219,340 266,317,242 3.1 Monetary Gold 65 0 0 0 3.2 Special Drawing Rights 66 -36,242 0 36,242 3.3 Reserves Position in the Fund 67 219,340 219,340 0 3.4 Foreign Exchange 68 -266,281,000 0 266,281,000 3.5 Other Claims 69 0 0 0 IV. Net Errors and Omissions 70 13,075,441 13,075,441 0 * This BOP statement employs rounded-off numbers. 2007-10-31/en/2007/1031/860.html
-
November 26, 2007 -- Ms. Hu Xiaolian, deputy governor of the People's Bank of China and administrator of the State Administration of Foreign Exchange (SAFE), recently conducted research and investigation in Guangdong province on the implementation of the guiding principles of the Seventeenth National Congress of the CPC, the enhancement and improvement of foreign exchange management, and the promotion of an equilibrium in the balance of payments. During her research and investigation, Hu and her colleagues held symposia with the Guangdong branch and some central sub-branches of the SAFE, and paid visits to locally designated foreign exchange banks and enterprises. Guangdong province, with its developed export-oriented economy, ranks top in China in terms of its foreign trade and utilization of foreign capital; in particular, its foreign exchange business accounts for one-third of the state's total. Hu listened carefully to analyses on the current situation of foreign trade, foreign capital, and foreign exchange receipts and payments, with a focus on the administration of foreign exchange in trade, foreign capital and external debts, and overseas investment, the attack on underground money shops, and so on. In order to facilitate the production and operation of foreign trade enterprises and to effectively monitor the foreign trade activities and the authenticity of foreign exchange receipts and payments, foreign exchange administrative departments have carried out systematized administration over the import and export enterprises. Guangdong branch has employed a "Dynamic Monitoring and Managing System for Foreign Exchange Inflows" in regions under its governance, and has greatly enhanced the efficiency of systematized administration. While inspecting the results of the application of this system, Hu expressed great affirmation and appreciation for the innovative work of the Guangdong and Shenzhen branches. She pointed out that the introduction of this system can enable real-time tracking of the match between foreign exchange receipts and payments of enterprises and their foreign trade activities, as well as enhance monitoring efficiency. On this basis, follow-up monitoring work should be strengthened to urge enterprises to handle foreign exchange receipts and payments in accordance with the laws and regulations and to correct problems in a timely manner. Furthermore, those enterprises experiencing a serious conflict between capital flows and the actual situation of import and export activities should be listed as "highlighted enterprises" for intensified pre-supervision. In recent years, the foreign exchange administrative departments of Guangdong province, in close cooperation with the public security agencies, have reinforced efforts to crack down on underground money shops and illegal foreign exchange transactions, and have destroyed many such shops and dens. Hu specified that cases of underground money shops should be treated with different measures according to the specific situations, and both guidance and punishment should be adopted. Cooperation with the public security agencies should be continuously promoted to strongly fight against those conducting illegal activities such as gambling, smuggling, tax evasion, and money laundering through underground money shops. The quality and level of financial services should be earnestly improved to enhance the competitiveness of business procedure fees, timeliness, and so on. Further reforms should be advanced in order to keep pace with the times, to meet demands for the holding and utilization of foreign exchange by domestic institutions and residents, and to loosen controls on individual foreign investments in an orderly, controllable, and moderate manner. Publicity and education should be strengthened so as to enhance the law-abiding consciousness of domestic institutions and residents to handle foreign exchange business through formal financial institutions. When visiting the designated foreign exchange banks and enterprises, Hu expressed appreciation for their cooperation with the foreign exchange administration. Meanwhile, she pointed out that supervision of China's current foreign exchange administration is mainly carried out through subrogation by designated foreign exchange banks, so the banks should, while offering high- quality services to customers, adhere to the relevant regulations on foreign exchange administration, balance appropriately among management, competition, and profits, and thus contribute to the economic and financial security of the state. Hu emphasized that the foreign exchange administrative departments at all levels should study and carry out the guiding principles of the Seventeenth National Congress of the CPC, earnestly unify their thoughts with the spirit of the CPC Central Committee, consider the actual situation of foreign exchange administration, fully implement the scientific development concept, and promote an equilibrium in the balance of payments. 2007-11-26/en/2007/1126/861.html
-
December 9, 2007 -- Remarkable progress has been made since China launched its pilot projects for the Qualified Foreign Institutional Investors (QFII) and Qualified Domestic Institutional Investors (QDII) systems in 2002. The QFII system has promoted the transformation of investment concepts in China's capital market and the application of advanced investment risk management technologies, raised the global influence of China's capital market, and played an active role in the improvement of the governance structure of domestic listed companies, the sound development of the market, as well as the institutional reform and innovation of the capital market. The market capitalization of securities held by 49 QFIIs has reached nearly RMB 200 billion, making them the main institutional investors in China 's capital market. The QDII system has expanded the investment channels for domestic capital, enabling domestic investors to reasonably allocate their assets throughout the world and to reduce investment risks. Moreover, the system has directed the orderly outflow of capital and promoted an equilibrium in the balance of payments. Currently, all qualified commercial banks, insurance companies, fund companies, and securities companies can conduct QDII business, gradually diversifying the members of the QDII system. In particular, with the release of QDII products by fund companies in September, the QDII business has entered a phase of rapid development. To deepen the opening up of China 's capital market, the investment quota for QFII has been increased to USD 30 billion. Based on the status of China 's balance of payments and the situation of the securities market, together with the relevant departments the SAFE will control the speed of the examination and approval process of new QFII quotas and will encourage investment of qualified foreign medium- and long-term capital into China 's capital market. In addition, the SAFE will expand overseas securities investment by domestic residents, increase foreign securities investment by QDIIs, encourage qualified domestic financial institutions to raise their competitiveness, provide more diversified products that satisfy the needs of domestic investors, and enhance the level of risk management, thus gaining new dominance from participation in global competition under the conditions of economic globalization. 2007-12-09/en/2007/1209/862.html
-
September 29, 2007 -- At the end of June 2007, China 's outstanding external debt (excluding that of Hong Kong SAR, Macao SAR, and Taiwan Province , the same as below) reached USD327.802 billion, an increase of USD 4.814 billion or 1.49% compared with that at the end of 2006. Specifically, the outstanding long- and medium-term external debt (with the remaining term) reached USD 142.933 billion, an increase of USD 3.573 billion or 2.56% compared with that at the end of 2006, accounting for 43.60% of the total outstanding external debt; the outstanding short-term external debt (with the remaining term) totaled USD 184.869 billion, an increase of USD 1.241 billion or 0.7% compared with that at the end of 2006, accounting for 56.40% of the total outstanding external debt. Among China 's total outstanding external debt, the outstanding registered external debt reached USD 216.702 billion and the balance of trade credit was USD 111.1 billion. Among the outstanding registered external debt, the outstanding sovereign debt borrowed by ministries under the State Council was USD 34.608 billion, accounting for 15.97%; the outstanding debt of Chinese-funded financial institutions was USD 70.648 billion, accounting for 32.60%; the outstanding debt of foreign-funded enterprises was USD 64.036 billion, accounting for 29.55%; the outstanding debt of foreign-funded financial institutions in China was USD 43.843 billion, accounting for 20.23%; the outstanding debt of Chinese-funded enterprises was USD 3.282 billion, accounting for 1.52%; and the outstanding debt of other institutions was USD 285 million, accounting for 0.13%. From January to June 2007, long- and medium-term external borrowing was USD 15.369 billion, an increase of USD 5.492 billion or 55.60% over the previous year. The principal repayment was USD 11.005 billion, an increase of USD 2.653 billion or 31.76% over the previous year. The interest payment was USD1.740 billion, an increase of USD 622 million or 55.64% over the previous year. In the first half year of 2007, the growth rate of Chinas external debt slowed down, and the outstanding registered external debt witnessed negative growth for the first time in the past five years, with the short-term registered external debt dropping greatly and the share of the short-term external debt declining for the first time. 2007-09-29/en/2007/0929/856.html
-
At the end of September 2007, China 's outstanding external debt (excluding that of Hong Kong SAR, Macao SAR, and Taiwan Province ) reached USD345.705 billion, an increase of USD 22.717 billion or 7.03% compared with that at the end of 2006. Specifically, the outstanding long- and medium-term external debt (with the remaining term) reached USD 148.047 billion, an increase of USD 8.687 billion or 6.23% compared with that at the end of 2006, accounting for 42.82% of the total outstanding external debt; the outstanding short-term external debt (with the remaining term) totaled USD 197.658 billion, an increase of USD 14.03 billion or 7.64% compared with that at the end of 2006, accounting for 57.18% of the total outstanding external debt. Of China 's total outstanding external debt, the outstanding registered external debt reached USD 226.005 billion and the balance of trade credit was USD 119.7 billion. Of the outstanding registered external debt, the outstanding sovereign debt borrowed by ministries and commissions of the State Council was USD 34.612 billion, accounting for 15.31%; the outstanding debt of Chinese-funded financial institutions was USD 73.175 billion, accounting for 32.38%; the outstanding debt of foreign-funded enterprises was USD 67.616 billion, accounting for 29.92%; the outstanding debt of foreign-funded financial institutions in China was USD 45.576 billion, accounting for 20.17%; the outstanding debt of Chinese-funded enterprises was USD 4.737 billion, accounting for 2.09%; and the outstanding debt of other institutions was USD 289 million, accounting for 0.13%. From January to September 2007, the long- and medium-term external debt was USD 25.472 billion, an increase of USD 7.65 billion or 42.92% over that in the previous year. The principal repayment under the long- and medium-term external debt was USD 14.761 billion, an increase of USD 2.287 billion or 18.33% over that in the previous year. The interest payment was USD 2.666 billion, an increase of USD 817 million or 44.19% over that in the previous year. 2007-12-29/en/2007/1229/863.html
-
China International Fund Management Co., Ltd's purchasing quota of foreign exchange for overseas portfolio investment increased 2007-10-18/en/2007/1018/858.html
-
China International Fund Management Co., Ltd's purchasing quota of foreign exchange for overseas portfolio investment approved 2007-10-12/en/2007/1012/857.html
-
HSBC's purchasing quota of foreign exchange for overseas investment services on behalf of its clients increased 2007-10-27/en/2007/1027/859.html
-
Editors Note: As an important part of foreign-related economic and financial activities, foreign exchange management has always been in the spotlight. The State Administration of Foreign Exchange (SAFE), in an attempt to communicate with the public, increase the transparency of policies and management, and facilitate and enhance public understanding of foreign exchange management, has extensively surveyed and collected issues of common concern in the media and among the public and has compiled a list of frequently-asked questions on foreign exchange management policies. These questions will be answered in succession in future issues for public discussion and reference. Q1: How did Chinas foreign exchange reserve assets come into existence? Can these assets be allocated for free? A: Foreign exchange is bought and sold by businesses and individuals through the commercial banks. If such foreign exchange is sold by commercial banks on the interbank market and bought by the Peoples Bank of China (PBOC), it becomes part of the foreign exchange reserves. When the PBOC buys foreign exchange, it pays the equivalent amount in RMB to the holder of the foreign exchange. There are three main channels from which foreign exchange flows: The first is businesses. When companies provide goods or services to foreign customers or accept foreign investment, they are paid in foreign exchange, which can then be converted into RMB in commercial banks before it is used in China. During the exchange settlement, the companies sell the foreign exchange to the commercial banks in exchange for an equivalent amount of RMB, thereby converting their foreign currency assets into RMB assets at the current exchange rate. The second channel is individuals, who sell their foreign exchange to the commercial banks in exchange for an equivalent amount of RMB. The third is commercial banks. After buying foreign exchange from businesses and individuals, the commercial banks, as required according to the foreign exchange asset liability allocation, will resell the foreign exchange to businesses and individuals in various business outlets and will sell the remaining foreign exchange to the PBOC in exchange for an equivalent amount of RMB. Taken as a whole, during the formation of the foreign exchange reserves, businesses, individuals, and banks are not handing over their foreign exchange to the state without compensation; instead, they are selling their foreign exchange to the state in exchange for an equivalent amount of RMB. This is completely different from taxation and fiscal revenue. It should be emphasized that all these transactions are conducted in an equivalent and voluntary manner. The economic interests of the banks, businesses, and individuals are realized when their foreign exchange is converted into RMB and the PBOC acquires this foreign exchange by paying the corresponding amount in RMB. The formation of foreign exchange assets comes with a cost; therefore, they cannot be allocated for free. Q2: How can foreign exchange reserves support the development of the domestic economy? A: Foreign exchange reserves play an important role in the development of Chinas domestic economy because, first of all, an abundant amount of foreign exchange reserves is conducive to safeguarding Chinas economic and financial security. In recent years, we have witnessed the benefits of keeping a large amount of foreign exchange reserves, in terms of maintaining the capacity for international payments, guarding against financial risks, upholding national economic and financial security, and robustly supporting the healthy and stable development of our national economy. After the outbreak of the recent international financial crisis, foreign exchange reserves played a prominent role in cushioning the blow of the external disturbances. Second, sufficient foreign exchange reserves can facilitate foreign-related economic activities of businesses. Only when there are sufficient foreign exchange reserves can enterprise demands for the use and purchase foreign exchange be fulfilled. If a company wants to invest in a foreign country, as long as the company is economically viable it can make the investment after purchasing foreign exchange with RMB. In this sense, the foreign exchange reserves can guarantee abundant funding for the going global initiatives of Chinese enterprises. Similarly, companies are given guarantees and support when they have to pay for foreign goods or debts. Third, the operating profits from foreign exchange reserves can increase expenditures for the peoples livelihood. The responsibility of the foreign exchange management departments is to ensure, in addition to risk management, maintenance of the value of the assets and an increment in the foreign exchange reserves. The operating profits of foreign exchange reserves are incorporated into the overall account of the PBOC, as part of the net profits of the central bank that will be fully turned over to the state treasury. This will increase the availability of funds used to improve the peoples livelihood, which in effect will constitute a boost to national welfare. In discussions of how foreign exchange reserves can support the development of the domestic economy, two issues need to be clarified. First, foreign exchange reserves cannot be used without compensation. Unlike fiscal funds, foreign exchange reserves are created when the PBOC purchases foreign exchange with RMB on the domestic or international foreign exchange markets and the reserves are closely related to the currency issuances and RMB liabilities of the PBOC. If foreign exchange reserves were to be allocated for free use, the balance sheet of the PBOC would be affected, generating inflationary pressures and threatening economic and financial stability. The second issue is that foreign exchange reserves consist of foreign exchange, which is mainly used for foreign payments. For the foreign exchange reserves to be used domestically, they have to be reconverted into RMB, which will require that more currency is issued, thus aggravating the surplus of domestic liquidity. Q3: What is the appropriate scale for Chinas foreign exchange reserves? A: Too much foreign exchange reserves can be bad. We are not seeking to build up large volume of foreign exchange reserves nor a long-term surplus in our international balance of payments. Chinas current account and capital account have maintained a multi-year surplus, and the growth of our foreign exchange reserves is the objective result of the twin surplusin the international balance of payments, reflecting the long-term stable growth of the Chinese economy. In fact, this is determined by the current stage and characteristics of Chinas economic development. Our abundant foreign exchange reserves can ensure a stable financial environment. As a large developing country, we need to maintain a certain scale of foreign exchange reserves, even for what has traditionally been considered moderate. In addition, maintaining sufficient foreign exchange reserves can also boost our confidence. As has been amply proved during the recent international financial crisis, a sufficient amount of foreign exchange reserves can put us in a better position to effectively fend off future crises. In terms of aggregate foreign exchange assets, in a broad sense, at year-end 2009, China held USD 3.46 trillion in foreign financial assets, far lower than the developed countries in North America and Europe. The main problem at present is that most of Chinas foreign exchange assets are controlled by the government, leaving only a small proportion in private hands. Specifically, foreign exchange reserves held by the Chinese government account for two-thirds of all foreign assets in China, compared with only one-sixth in Japan. Therefore, we encourage businesses and individuals to hold and invest in foreign exchange so as to diversify the mix and to distribute foreign exchange within the private sector. This, of course, takes time. With the development of our national economy and the increase in income, enterprises and individuals will have greater demands for diversification of asset allocations. If more foreign exchange investment channels and products are provided for the public to reap concrete benefits from the foreign exchange, then the foreign exchange pressures on the government will be greatly relieved. Q4: What currencies are included in Chinas foreign exchange reserves? How are they structured? A: Chinas foreign exchange reserves include the major currencies, for instance the US dollar, the euro, and the Japanese yen, as well as the currencies of some emerging economies. This is a generally loose composition of currency. The currency composition of the foreign exchange reserves is designed to facilitate Chinas foreign-related economic activities. It takes into consideration Chinas foreign payment structure that encompasses foreign trade, foreign debt, and direct investment, as well as the currency structure of global foreign exchange reserves, so that the risks can be diversified against dynamic developments of various currencies and so that demands for foreign payments and asset allocations can be better fulfilled. The currency composition does not remain static. It is dynamically adjusted and optimized to respond to market volume, liquidity, the risk-return characteristics and development trends of the currencies, and changes in the economies and markets, as well as in response to investment demands. Q5: In the operation and management of the foreign exchange reserves, how can we ensure the openness and transparency of market information and compliance with investment and operations rules?? A: At present, the foreign exchange reserves of China follow the information disclosure requirements of the IMFs General Data Dissemination System (GDDS), which is the common practice in most countries. In recent years, efforts have been made to enhance the transparency of information on the foreign exchange reserves. For example, the Overview of Chinas Foreign Exchange Administration was issued in 2009, in which one entire chapter is devoted to presenting a relatively comprehensive introduction to the operations and management of the foreign exchange reserves. In addition, when the 2009 Balance of Payments Statement was formulated and published, the statistical method for the foreign exchange reserve assets was further improved to increase transparency. This being said, the increase in information transparency on the foreign exchange reserves should be carried out in a prudent and measured manner. As the large scale of Chinas foreign exchange reserves lends significant weight to Chinas position in international financial markets, any information disclosed about investments might give rise to market turbulence and cripple our investment activities. Most countries choose to be very careful when disclosing information related to foreign exchange reserves. Specific transactions are generally not disclosed to the public and are not required to be disclosed by the data dissemination standards of the relevant international organizations. To ensure the safety, liquidity, value maintenance, and increment in our foreign exchange reserves, we have established a comprehensive set of investment decision-making processes and various risk management and internal control systems, which have been developed to guarantee appropriate and effective progress in reserve operations and management. Reserve operations are regularly subject to audits by the relevant departments. Furthermore, any comments and suggestions from different sectors are highly valued, investigated in a timely and in-depth manner, and kept as reference for the operation and management of the foreign exchange reserves. (To be continued) 2010-07-02/en/2010/0702/936.html