Q: Since the Fed initiated the QE tapering at the beginning of this year, some emerging economies have been struggling due to the currency depreciation and capital flight. Under such circumstances, what changes have occurred in terms of China’s cross-border capital flows and what are the main contributing factors?
A: Presently China still has a large amount of net inflows of cross-border capital. In January 2014, China reported USD 73.3 billion of surplus in sales and settlements of spot foreign exchange and USD 25.4 billion of surplus in sales and settlements of forward foreign exchange (signed contracts), each representing a record high. Amidst the overall currency depreciation in the emerging markets, the RMB exchange rate remained stable during the month, with the nominal and real effective RMB exchange rate indexes prepared by the BIS up 1.2 percent and 2.1 percent respectively.
Internal and external factors such as the real economy, the market, and seasonal fluctuations are the primary contributors to the massive amount of net inflows of foreign exchange. Customs statistics show that in January the surplus of imports and exports amounted to USD 31.9 billion, representing an increase of 13 percent year on year. Ministry of Commerce statistics show that within the month foreign capital disbursements amounted to USD 10.8 billion, up 16 percent year on year. Further, market sentiment prone to inflows continued after September 2013. Despite the polarization in the emerging economies, China has witnessed good economic performance and the RMB exchange rate has remained stable. Within the context of the key advanced economies continuing to maintain low interest rates, market players both at home and abroad remained bullish regarding the RMB and bearish regarding foreign currencies. In the run-up to the Chinese New Year, foreign trade businesses commonly accelerate exports and collection of expenses, resulting in a huge demand to convert foreign exchange into RMB. Additionally, huge amounts of compensation and funds for family maintenance are remitted by overseas migrant workers and overseas Chinese.
Q: Recently the RMB exchange rate has been on the decline both at home and abroad. On February 25, the spot rate hit a 7-month low in the domestic market. What do you think about this phenomenon?
A: It is true that the RMB exchange rate has presented bi-directional fluctuations both at home and abroad, which can be explained by the following four factors: (1) the recent movements in the RMB exchange rate are the culmination of the adjustments by market players of the RMB trading strategies during earlier stages; (2) the range of fluctuations has been normal as compared with the currency fluctuations in the advanced and emerging markets; (3) as the institutional reform of the RMB exchange rate deepens and the market begins to play a more decisive role in setting the rate, bi-directional volatility of the exchange rate will become normal, calling for efforts by market players to adjust their strategies and to adapt to any changes; (4) the bi-directional fluctuations of the RMB exchange rate at a balanced and rational level will be conducive to promoting an equilibrium in the BOP, creating a better foreign-related economic environment and guarding against financial risks.
Q: As the global economy is still facing a post-crisis period, with increasing complexity of the economic and financial environments both at home and abroad, will there be any risks from a massive amount of cross-border capital flight?
A: There is little likelihood that China will see massive and sustained cross-border capital flight in the foreseeable future. This can be attributed to two factors: the first is that China’s net inflows of cross-border capital through real economic channels, e.g., trade and investment, will remain massive due to the strong economic fundamentals. It is especially noteworthy that the country will gradually develop and put into practice a series of reform programs in related fields after the Third Plenum of the 18th Central Committee of CPC. This will play a helpful role in achieving the country’s mid- and long-term economic-growth objectives. Over the long term, a positive economic outlook and a huge market potential will continue to be a magnet for capital inflows. The restoration of the global economy, especially of the developed economies, will enable China to maintain a surplus in imports and exports. The second is that the fiscal and financial risks in the country remain under control. The robust current account, the dominance of mid- and long-term capital in the form of FDI in external debts and the abundance of foreign exchange reserves have strengthened the country’s capability to withstand any external impacts. Meanwhile, it should be noted that the country will face great uncertainties in terms of its external environment. Given that China's balance in the current account will gradually improve and the exchange rate of the RMB will tend to move in a rational direction toward equilibrium, there is still a likelihood that the country will witness bi-directional fluctuations of cross-border capital. Thus, it is necessary that with respect to this situation the market players adopt a rational perspective and adopt measures to cope with the changes.
Looking ahead, the SAFE will continue to intensify efforts to monitor cross-border capital flows, further increase policy and data transparency, improve pre-arranged policy planning to cushion the impacts of the bi-directional cross-border capital flows, and adopt rigorous measures to guard against risks so as to maintain the healthy and sustainable development of the foreign-related economy.
