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    “Interpretation of China’s Operation and Management of Foreign Exchange Reserves by the State Administration of Foreign Exchange (SAFE)”——Transcript of an Online Interview
“Interpretation of China’s Operation and Management of Foreign Exchange Reserves by the State Administration of Foreign Exchange (SAFE)”——Transcript of an Online Interview


Interpretation of China’s Operation and Management of Foreign Exchange Reserves  


10 a.m., June 12, 2014 


Huang Guobo, Chief Economist, SAFE  

Guan Tao, Director of the Balance of Payments Department, SAFE 


During his visit to Africa, Li Keqiang, premier of the State Council, noted: “Excessive foreign exchange reserves have already become a great burden for us because they will become the monetary base of our country and will affect inflation.”

According to data of the People’s Bank of China (PBOC), by the end of Q1 2014 China’s foreign exchange reserves were the highest in the world, at US$3.95 trillion, accounting for one-third of the world’s total. In order to balance receipts and payments under the current account, the State Council recently issued Several Opinions on Supporting the Stable Growth of Foreign Trade, which points out the need to further enhance imports.

How can we revitalize stock assets and control incremental investments? How can transform this burden into wealth? How should we properly operate and manage our foreign exchange reserves? At 10 a.m. on June 12, 2014, Huang Guobo, chief economist of the SAFE, and Guan Tao, director of the SAFE’s Balance of Payments Department, accepted an exclusive interview with to interpret China’s operation and management of its foreign exchange reserves.

·         [Host] Dear Netizens, you are welcome to watch the online interview on Foreign exchange reserves, an issue frequently mentioned by State Council Premier Li Keqiang during his visit to Africa, have become a great burden for us because they will become the monetary base of our country and will affect inflation. How can we revitalize our stock assets and control incremental investments? How can we transform this burden into wealth? How should we properly operate and manage our foreign exchange reserves? Today we have invited two guests— Huang Guobo, chief economist of the SAFE, and Guan Tao, director of the SAFE’s Balance of Payments Department, to interpret China’s management of its foreign exchange reserves and to respond to relevant topics about which Netizens are concerned. 2014-06-12 10:02:45

·         [Netizen SS] During his recent visit to Africa, Premier Li Keqiang indicated that “our huge foreign exchange reserves are a heavy burden.” What makes the reserves a “burden”? Can you list the pros and cons? 2014-06-12 10:03:12

·         [Huang Guobo, Chief Economist of the SAFE] This question can be seen from two perspectives. First, the maintenance of massive foreign exchange reserves is of great significance to our country. For example, since 1997 there have been a number of global crises, such as the subprime crisis and the European sovereign debt crisis, but they had little influence on our country. A very important contributing factor was that we had massive and adequate foreign exchange reserves. Both the strength and position of our country were improved during the crises. 2014-06-12 10:07:00

·         [Huang Guobo] Since 2007, Western central banks have pursued a quantitative easing monetary policy and have pumped a large amount of capital into the market. But foreign exchange reserves have served as a “flood discharge area,” effectively isolating our real economy and the external impacts, sustaining favorable external conditions for our economic restructuring, transformation, and upgrading, and providing a precious window for time. Therefore, in recent years, our foreign exchange reserves have actually played a significant role in the smooth and effective operation of our macro economy. On this basis, we should see that our country is a big developing country, with our total volume of international trade approaching US$4 trillion, foreign debt of over US$800 billion, and foreign direct investments (FDI) of over US$2 trillion per year. Our outward direct investments (ODIs) are also growing very rapidly. Financial and real economic activities both require huge foreign exchange reserves to enhance confidence and provide payment guarantees. Hence, it is necessary to have adequate foreign exchange reserves. 2014-06-12 10:07:22

·         [Huang Guobo] However, the excessively rapid growth of foreign exchange reserves reflects the imbalance in China’s international payments and presents a series of challenges: first, it increases macro-control difficulties. On the one hand, excessive foreign exchange reserves increase the supply of domestic currency and pose potential inflationary pressures at home.  On the other hand, they raise the reserve requirement ratio (RRR) and increase hedging pressures on the central bank and further restrict monetary policy. Second, they increase the asset-liability risks of the central bank. Since foreign exchange reserves account for over 80 percent of the total assets of the central bank, there is a mismatch in the monetary mechanism of its assets and liabilities, thus presenting huge exchange-rate risks and hedging pressures. 2014-06-12 10:09:14

·         [Huang Guobo] Third, foreign exchange reserves increase our operational challenges. Compared with the large amount of foreign exchange reserves, the capacity of the international financial market is limited and there are constraints on large-scale investments; asset safety and price risks are caused by the frequent outbreaks of international financial crises, as well as by the freezing of assets and other extreme risks triggered by political and diplomatic conflicts. Fourth, resource, environmental, and other costs are also growing; for instance, exports of some raw materials and labor-intensive products may easily increase pollution and place additional pressures on resources and the environment. 2014-06-12 10:10:15

·         [Netizen Gao Yuan Mu Chang] Director Yi Gang has repeatedly indicated that the marginal costs of further increases in our foreign exchange reserves surpass their marginal revenue. Does this mean that China’s foreign exchange reserves have already exceeded a reasonable size? How does one determine what is a reasonable size? 2014-06-12 10:11:55      

·         [Huang Guobo] This is actually a tough question, about which various parties may have different views and measurement criteria. But, in general, when size is considered, it is necessary to also take into account a country’s macro-economic conditions, including its economic openness, its capability to utilize foreign capital and to engage in international financing, and the maturity of its economic and financial systems. 2014-06-12 10:11:27    

·         [Huang Guobo] Specifically, the basic function of foreign exchange reserves is to guarantee a country’s external payments. If the domestic currency is an internationally-accepted hard currency, then it can be the currency of payment.  But in the case where the RMB is not yet a generally-accepted “hard currency,” we need foreign exchange to guarantee our payments. With sufficient guarantees, we can prevent difficulties in external payments and risks of a significant devaluation of the RMB exchange rate. We have noted that an IMF study has proposed a package of the following composite indicators: foreign exchange reserves shall be equivalent to 100 percent 150 percent of the sum of 30 percent of the short-term external debt, 15 percent of portfolio investments, 10 percent of exports, plus 10 percent of broad money. 2014-06-12 10:12:16

·         [Huang Guobo] This is one of numerous concepts. We think that this indicator is relatively comprehensive because it considers the needs for payments of imports, repayments of external debt, and foreign exchange outflow channels, such as securities redemptions and foreign exchange purchases by domestic residents. But when applied to China, it still ignores some special national circumstances. For instance, China has such large-scale FDI (i.e., foreign direct investments) and some of the principal and profits of the FDI may need to be remitted.  But this is omitted from the indicator. In addition, it does not take into account our need for ODI and the need for foreign capital to support China’s economic and financial systems reforms.  In terms of the concept, a reasonable size is still open to discussion, but a broad consensus must be reached. 2014-06-12 10:14:12

·         [Huang Guobo] For more than a decade, the massive foreign exchange reserves have prevented an overly rapid appreciation of the exchange rate and have effectively supported fast economic growth, employment growth, and growth of income and fiscal revenue. The deep problems from the sustained growth of foreign exchange reserves include the persistent imbalance in international payments and the continuous serious overdrawing of scarce domestic resources and serious environmental pollution. The huge costs of the foreign exchange reserves cannot be absorbed by the real economy so they are held mainly in the form of financial assets and flows overseas.  The direct and indirect national benefits are obviously insufficient to offset the problems and costs. The foreign exchange administration departments will deeply implement the spirit of the 18th CPC National Congress and the 3rd Plenary Session of the 18th CPC Central Committee, further accelerate transformation of the economic development mode, focus on the central task of maintaining a basic equilibrium in the balance of payments, and insist on “expanding domestic demand, making structural adjustments, reducing the surplus, and promoting a balance” to maintain a reasonable and stable size of foreign exchange reserves. 2014-06-12 10:16:43

·         [Host] Some Netizens have asked whether there are excessive foreign exchange reserves. How can we change this situation? 2014-06-12 10:17:37

·         [Guan Tao, director of the SAFE’s Balance of Payments Department] This question can be answered in the following way. First, the Chinese government has long made it clear that it does not seek more foreign exchange reserves, an increase or decrease of which will be reflected in the country’s balance of payments. At the end of 2002, the 16th Party Congress included for the first time that maintaining a balance of payments is one of the four objectives of macro control. It was pointed out at the Central Economic Work Conference in late 2006 that the major contradictions in China’s balance of payments have shifted from a shortage of foreign exchange to an excessive trade surplus and overly rapid growth of foreign exchange reserves. Therefore, in the past years our primary work has been “to make structural adjustments, expand domestic demand, reduce the surplus, and promote a balance,” and the Chinese government has been making efforts in this direction. We can see that this policy has brought about certain results, for instance, in recent years the current account surplus (mainly trade in goods and trade in services) as a proportion of GDP has declined from its peak level of 10.1 percent in 2007 to about 2 percent, which is much lower than the internationally-accepted rational standard. This shows that we have made great achievements in improving the external equilibrium in our economy and in our balance of payments. 2014-06-12 10:19:16    

·         [Guan Tao] Second, we should take a two-pronged approach to cope with the excessive foreign exchange reserves, which are embodied in both high flows and high stocks. Our foreign exchange reserves have now basically reached US$4 trillion. Thus, to resolve the flow problems and control the balance of payments, we must take a major measure by accelerating the transformation of the mode of economic development and the restructuring and transformation of the mode of economic growth from being driven by investments and exports to being jointly driven by consumption, investments, and exports. Another measure is to increase imports while stabilizing exports to promote a trade balance. While improving the quality of foreign capital utilization, we shall also steadily expand capital outflow channels, increase capital exports, and facilitate a two-way, orderly, and rational flow of cross-border capital. Moreover, we shall continue to improve the market-oriented RMB exchange-rate formation mechanism, cultivate the domestic foreign exchange market, give further play to price leverages in the exchange rate to adjust the balance of payments, strengthen the monitoring of cross-border capital flows, and fine-tune the response plans. We shall guard against shocks of large capital inflows as well as the possible risks of concentrated capital outflows, carry out two-way monitoring and early warnings, and maintain our bottom line. 2014-06-12 10:21:41

·         [Guan Tao] Another feature is to revitalize our stock assets. Given that we have such a large quantity of foreign exchange reserves, in order to improve their operation and management systems, we shall constantly make innovations and widen the channels and methods for applying foreign exchange reserves and shall raise their utilization efficiency according to the principles of “complying with the law, paying for use, improving benefits, and regulating effectively,” as well as in accordance with the overall national plan for reform and opening up and the objective requirements for economic development. All of these things cannot be accomplished overnight. Many domestic reforms, especially structural reforms, will be a long-term process. In addition, some reforms in the foreign economic sector should not be carried out in haste, but rather they need to be coordinated and matched with other domestic reforms. 2014-06-12 10:24:11

·         [Guan Tao] Also, when promoting an equilibrium in the balance of payments, we shall give due consideration to our growth, employment, and inflation objectives instead of only focusing on the foreign exchange or an equilibrium. Furthermore, now that the balance of payments is also an international financial problem, it is constrained by the external environment; changes in the external environment will affect the evolution of the balance of payments. As a result, regarding the issue of promoting an equilibrium in the balance of our international payments, we must have confidence and courage as well as patience and perseverance. 2014-06-12 10:26:59

·         [Host] Now let’s look at how foreign exchange serves the real economy. China has noted that finance must serve the real economy; then how do such huge foreign exchange reserves serve the real economy? Why don’t we use our large foreign exchange reserves to invest in domestic infrastructure or to solve the pension and health-care problems of our citizens? 2014-06-12 10:27:27

·         [Huang Guobo] As I see it, the foreign exchange reserves must first of all guarantee our normal needs for foreign exchange purchases in the foreign exchange market, meet the needs of residents and enterprises in all respects, and play a supporting role in basically balancing supply and demand in the foreign exchange market. On this basis, due to various reasons such as the previous strong expectation that there would be an appreciation in the RMB exchange rate and the high interest rate spreads between China and other countries, people are unwilling to hold foreign exchange and foreign exchange reserves are increasing. Aside from guaranteeing the people’s needs for foreign exchange purchases in the foreign exchange market, there is the problem of how the foreign exchange reserves can support the real economy on such a basis. 2014-06-12 10:27:57

·         [Huang Guobo] We have done some work on this. During the past few years, we have been considering what the foreign exchange reserves can do based on the requirements of the CPC Central Committee and the State Council and on the layout of the economic and financial reforms and the actual needs of the real economy.  We have thereby applied the foreign exchange reserves at multiple levels. On the one hand, the PBOC and the SAFE have actively adjusted the foreign exchange surpluses and deficits of banks and the capital market by making many innovations in the instruments of the foreign exchange market (such as the spot exchanges and foreign exchange options) and in some platforms (such as the entrusted loan platform for foreign exchange reserves), and by supporting banks that have insufficient foreign exchange positions and adjusting their capital surpluses and deficits by means of loans. 2014-06-12 10:28:50

·         [Huang Guobo] Nevertheless, foreign exchange funds have been offered to back up some key foreign cooperative projects and industries with national support. We have provided substantial financial support not only to SOEs but also to banks (including private banks), private enterprises, and small and micro enterprises to “go out” and “bring in” so as to mitigate their shortages of foreign exchange funds. In addition, we have cooperated with some international financial agencies, with a focus on the economies in the emerging markets, to meet local needs for investment and financing and to create a favorable international environment for Chinese enterprises to “go global,” to make investments, and to develop local trade. 2014-06-12 10:33:38

·         [Huang Guobo] Since foreign exchange reserve investments are also much needed in many areas at home, such as infrastructure construction and development, there is a common concern whether the foreign exchange reserves can be used in these areas. Foreign exchange reserves are mainly intended for imports and investments, and if they are to be pumped into the domestic sectors, the primary focus should be on whether foreign exchange or RMB is needed in these sectors. If foreign exchange is needed, we can purchase foreign exchange in certain ways and some investment entities can invest with foreign exchange capital. This issue can be addressed in such ways. 2014-06-12 10:36:46

·         [Huang Guobo] But if RMB is needed for domestic infrastructure projects, some problems may be created because if the foreign exchange reserves are converted into RMB, there will be a secondary settlement of foreign exchange, RMB will be arbitraged, and the foreign exchange reserves will not decline substantially. During these years, in response to this problem, the SAFE has, on the one hand, met the needs of the real economy (including that of infrastructure investments) for foreign exchange funds and demands by the general public for foreign exchange purchases; on the other hand, we have supplied abundant foreign exchange funds through the banking system to address the needs for infrastructure investments. Another issue of common concern is whether the foreign exchange reserves can resolve the pension and health-care problems for our citizens. As mentioned above, in addition to the “secondary settlement of foreign exchange,” this also involves the problem of uncompensated distribution and use of the central bank’s liability-backed foreign exchange assets. 2014-06-12 10:38:47

·         [Huang Guobo] What are foreign exchange reserves? In our country, foreign exchange reserves are now held by the central bank and are formed by foreign exchange purchases supported by the PBOC’s liabilities. These funds correspond to the PBOC’s liabilities, and if they are used to cover pension and medical expenses without compensation, the central bank will be left with a mountain of debt and no assets and it will lose its robustness. Therefore, when talking about uncompensated use of foreign exchange reserves, we must keep in mind that foreign exchange reserves actually correspond to liabilities; in other words, we borrow funds to buy foreign exchange.  But how can this debt be repaid if you divest these assets? This issue should be taken into consideration. 2014-06-12 10:44:47

·         [Host] Is it because of large inflows of hot money that our country now holds so much in foreign exchange reserves? Will foreign exchange reserves increase significantly in the future? 2014-06-12 10:48:50

·         [Guan Tao] We have also paid great attention to this issue. If hot money is the main source of our foreign exchange reserves, there will be high volatility and there will be a lot of impact.  This issue has been under discussion since I first started to work at the SAFE. Our foreign exchange reserves doubled in 1994 and at the time everyone was discussing the source of these foreign exchange reserves—whether they came from a trade surplus or from hot money inflows. We have been tracking and monitoring this issue. The foreign exchange reserves reflect the balance of payments, namely the composition of the surplus in the balance of payments.  So we can conclude that the increase in foreign exchange reserves basically comes from the surplus in the current account and direct investments. 2014-06-12 10:48:18

·         [Guan Tao] We have calculated that during the thirteen years from 2001 to 2013, the current-account surplus and net inflows under direct investments amounted to US$3.8 trillion, while during the same period the foreign exchange reserve assets from trade increased by US$3.7 trillion. This means that trade and investment activities can basically account for the foreign exchange reserve growth during the past thirteen years, which is closely related to our real economic activities. This has strong policy implications for us; specifically, with the goal of reducing the surplus in the balance of payments and the accumulation of foreign exchange reserves, it is insufficient to simply rely on hot money controls.  We have to find the structural reasons and accelerate the transformation of the economic development mode and the restructuring of the domestic economy. Therefore, this is not only an academic question, but also a question that has strong policy implications. 2014-06-12 10:52:29

·         [Guan Tao] Concerning the issue of hot money or arbitrage fund flows, based on our analysis and practical knowledge, this is mainly associated with the pro-cyclical financial operations of domestic enterprises. In good economic times, there are RMB appreciation expectations, so enterprises convert foreign currencies into RMB and hold them in RMB. When foreign exchange is used, they either owe it to their overseas counterparts or borrow it from the bank to make external payments. In the aftermath of the 2008 crisis, there was a critical economic phenomenon whereby the major developed countries successively resorted to a quantitative easing monetary policy, which led to strong global liquidity and low interest rates for the major currencies. Thus before the crisis, the JPY was the arbitrage currency, but now the USD and EUR are both arbitrage currencies. The European Central Bank has just expanded its monetary policy and EUR arbitrage will be further improved. Under these circumstances, because of the generally expected appreciation of the RMB and the high interest rates for the RMB in China, enterprises engage in arbitrage behavior. There are inflow pressures during good times, but in the case of the volatile situation and downturn in the domestic economy in late 2011, expectations were changed and there were outflow pressures. 2014-06-12 10:53:36

·         [Guan Tao] So the hot money we refer to is different from that which is understood internationally. Internationally, hot money refers to asset and currency speculation by “financial conglomerates.” But in China, hot money refers to capital that is manipulated by our enterprises and ordinary people based on the interest-rate spreads. Hence, in late 2008 and early 2009 there were acute fluctuations in China’s foreign debt, with heavy inflows during the first three quarters of 2008 and substantial outflows later in the year, but we did not face a crisis because we had large foreign exchange reserves and adequate solvency. Additionally, unlike elsewhere many of our arbitrage activities were based on actual operations instead of entry into speculative fields, so we were relatively stable. 2014-06-12 10:58:14

·         [Guan Tao] Whether vast foreign exchange reserves will be accumulated in the future depends on how we predict the future balance of payments. According to our basic judgment, on the one hand receipts and payments under the current account will tend to be more balanced due to the acceleration of the economic restructuring and the transformation of the economic development mode. On the other hand, we encourage enterprises to go global.  This will also increase the export of capital and direct investments, thus contributing to a gradual transition from the past net inflows to a more balanced state. 2014-06-12 11:00:09

·         [Guan Tao] Third, as the RMB exchange rate becomes more market-oriented, the market will believe that the RMB exchange rate has basically reached a balanced and reasonable level, which will trigger two-way fluctuations and will restrain risk-free arbitrage activities. Just like the situation since this February, as a result of two-way fluctuations, expectations will diverge and corporate financial operations will be adjusted, thus also relieving the stresses of capital inflows. Furthermore, there are many instabilities and uncertainties worldwide, making two-way fluctuations of cross-border capital flows a new normal. Therefore, the future balance of payments will move closer to an equilibrium and the momentum of accumulating foreign exchange reserves will tend to slow down. 2014-06-12 11:00:53

·         [Host] What is the investment income from the foreign exchange reserves? What are the measurement criteria for high or low investment income? Is it sufficient merely to just exceed the rate of inflation?    

·         [Huang Guobo] During these years, foreign exchange reserves operations have faced low interest rates in the global environment. This implies low income from bond purchases or deposits because the central bank has flooded the market with capital and has lowered interest rates. Owing to a fairly low rate of return and a volatile global financial market, foreign exchange reserves have faced a low-income and high-risk environment. In the past several years, including last year, China’s foreign exchange reserves have maintained stable growth and have realized fairly good operating earnings in this low-income environment. Perhaps you will ask why good operating earnings have been realized in a low-income environment. This shows that the diversified asset allocations that have been vigorously promoted in recent years have exerted a waxing and waning hedging effect among the various currencies, markets, and financial assets, which is a major reason for the generally fairly good earnings. In addition, confronted with a complex and ever-changing market, the reserves managerial personnel have actively seized all kinds of opportunities to reap profits, and the team has stood the test of several crises and the impact of significant market volatility. The excellent operations and management team for foreign exchange reserves investments has been very helpful. 2014-06-12 11:02:46

·         [Huang Guobo] Another issue of common concern is why we should compare the income of the foreign exchange reserves with inflation. We often consider the safety of foreign exchange reserves and whether their value is preserved or increased from a basic starting point – that is,  whether their purchasing power is maintained – but how can we measure this? We should compare the rate of return on the foreign exchange reserves and the inflation rate, and if the former is higher than the latter, purchasing power is maintained. In China today, the rate of return on foreign exchange reserves is far above the inflation rate in the invested countries, which suggests that the purchasing power of the foreign exchange reserves has been maintained, or has even been improved, and their safety is guaranteed. 2014-06-12 11:07:49

·         [Huang Guobo] I want to make two points about how to treat the rate of return on the foreign exchange reserves. Significantly different from the management of general investments, foreign exchange reserves must have sufficient liquidity because their primary function is not to make a profit from investments but to guarantee China’s ability to make external payments under normal and extreme circumstances. Therefore, the fundamental principles for reserves management are safety, liquidity, and then appreciation. What does liquidity mean? Just like cash in your hands, the liquidity yield is very low. For example, if you compare demand deposits and time deposits, the yield of the former is low whereas that of the latter is much higher and the revenue from some wealth management products may be even higher. Foreign exchange reserves must first have sufficient liquidity, which will lower their overall rate of return. After their liquidity requirements are met, longer-term and more diversified investments with much lower liquidity but with much higher income can be made. This is basically a structural consideration. 2014-06-12 11:08:49

·         [Huang Guobo] I would like to add one thing. An internationally and domestically accepted investment benchmark management mode has been introduced to foreign exchange reserves during these years.  What is an investment benchmark? An investment benchmark is used to analyze the historical market data according to the objectives and requirements of the foreign exchange reserves and actual market conditions and to constantly optimize the analysis based on predictions of trends in future economic and market developments to determine the investment structure and the investment tools for the foreign exchange reserves. It has been shown that the investment benchmark mode for foreign exchange reserves, which has its own features and also draws upon the experience of domestic and overseas peers, accommodates current needs for large-scale operations and management. Such an investment benchmark system has helped the operations and administration team for foreign exchange reserves withstand the tests of all crises and over the years has generated extra income from the foreign exchange reserves. 2014-06-12 11:11:58

·         [Netizen Sha Bo Tou Xiao Wai] Since there are many uncertainties and great risks in the current international financial market, how can we prevent risks in the operation and administration of our foreign exchange reserves? 2014-06-12 11:14:25

·         [Huang Guobo] The international market is highly volatile. Facing an uncertain market, we shall first set clear and efficient authorization mechanisms with distinct authorization boundaries and make rapid responses and effective decisions. Now there is a set of clear-cut and explicit authorization mechanisms that guarantees highly effective administration and operation of our foreign exchange reserves. On this basis, we have been operating our foreign exchange reserves based on the principles of safety, liquidity, value preservation, and appreciation, always placing priority on risk prevention and safety assurances and then engaging in prudent, standard, and positive investment operations. 2014-06-12 11:13:50

·         [Huang Guobo] You may wonder what our specific measures are to prevent risks. On the one hand, the most important means to prevent the risks of large-scale financial assets is always diversification. Don’t put all of your eggs in one basket; when one door shuts, another opens. Not everyone can judge the market accurately, but whatever risks may occur, they can be tolerable and can be compensated for by other investment income. During these years, the foreign exchange reserves team has done a lot of work in this respect and its most fundamental response has been to diversify the reserves in terms of currency, assets, and investments. 2014-06-12 11:16:10

·         [Huang Guobo] Furthermore, the foreign exchange reserves team has always adhered to a prudent investment philosophy, avoided making investments without first making accurate judgments or thorough analyses, observed a very rigorous risk management system, and carefully assessed and prospectively analyzed the various possible risks to the foreign exchange reserves. In the case that all risks could be identified, advanced risk management technologies have been applied to carry out early warnings, timely tracking, and all-round and multi-dimensional monitoring and management of a wide range of risks. Over the past years, we have accumulated an excellent and effective risk management system. What role has it played? For example, when the subprime crisis erupted, we did not have any product with a subprime mortgage problem in our foreign exchange reserves. 2014-06-12 11:17:30

·         [Huang Guobo] Moreover, in addition to investment risk prevention, internal controls are critical. Great importance has been attached to internal controls, and an internal control system of checks and balances has been established according to the requirements of standardization, routinization, and institutionalization, and various regulations and operating procedures have been constantly improved. Meanwhile, the foreign exchange reserves administration department has been regularly audited by the relevant departments and has actively accepted external supervision and increases in the transparency of policy and administration in a variety of ways. 2014-06-12 11:21:13

·         [Netizen Xiao Xiao Dou Ya Cai] Despite such huge foreign exchange assets, ordinary people know very little about how to manage and utilize them. Can information on the operation and administration of the foreign exchange reserves be more transparent? 2014-06-12 11:21:28

·         [Huang Guobo] During these years, the transparency of information about the foreign exchange reserves has been continually improved due to quite a number of channels to distribute information. For instance, as per the Regulations on the Disclosure of Government Information, we have distributed information through the SAFE’s Web site, press conferences, exclusive media interviews, expert forums, and so forth. Additionally, relevant information is also regularly released in such publications as the Annual Report of the State Administration of Foreign Exchange and the Report on the Balance of Payments. Overall, the degree and standards for disclosure of information regarding our foreign exchange reserves meet the IMF’s General Data Dissemination Standard (GDDS).  We are also certainly aware that information transparency can be further enhanced. So we will gradually raise the transparency of information about our foreign exchange reserves in line with international norms, continue improving the channels and means of information disclosure, and increase communications with Netizens and the general public. 2014-06-12 11:22:50

·         [Huang Guobo] I would like to stress one point. The scale and trading volume of our foreign exchange reserves are so large that if we disclose too much investment information, it may trigger market fluctuations, imitation, and speculation, which, on the one hand, will destabilize the international financial market, and, on the other, will affect the management, investment, and normal operations of our foreign exchange reserves. So we have prudently mastered the methods and degree of disclosure. The following is a counter-example. Amid the subprime crisis, some countries frequently disclosed structural data about investments based on their own systems. When these countries were coping with the crisis, realizing assets, and stabilizing financial market operations, information was expected by the market in advance because it had been too transparent, which increased the difficulties in the crisis response and the volatility of the financial market. Therefore, we have to give overall consideration to these issues. 2014-06-12 11:23:50

·         [Netizen Lou Shang Ren Jian] China’s foreign exchange resources are centralized in the hands of the state in the form of foreign exchange reserves. Why do we not vigorously promote the policy of “foreign exchange held by the people”? On a number of occasions, the SAFE has proposed “allowing the people to hold foreign exchange.”  Isn’t that the case of transferring some foreign exchange reserves to the people? 2014-06-12 11:24:24

·         [Huang Guobo] The SAFE encourages private application and investment of foreign exchange funds and the realization of “foreign exchange held by the people” to alleviate the pressures of centralizing foreign exchange in the state. Over the years, the SAFE has constantly improved the foreign exchange management system to guarantee the legal demands for foreign exchange purchases by banks, enterprises, and residents. Now foreign exchange is not limited to import payments by Chinese enterprises. In the foreign exchange link with enterprises “going global,” the SAFE has imposed no limits and basically has adopted an open policy. Individuals can hold foreign exchange in many ways and are allowed to purchase up to US$50,000 of foreign exchange per year. There are QDIIs and other channels for outward investments. And the travel, shopping, overseas study, visits, and other swap channels are all open. 2014-06-12 11:24:39

·         [Huang Guobo] During these years, there has been much policy space for “foreign exchange held by the people.”  The problem with the policy was there were strong expectations for a one-way appreciation of the RMB, so people were unwilling to hold foreign exchange. The foreign exchange inclination toward liabilities and the local currency inclination toward assets were similar cases, suggesting that residents and enterprises were both reluctant to hold foreign exchange. Given this situation and the large current-account surplus and the continuous inflows of foreign investment over the years, the accumulation of foreign exchange was centralized in the foreign exchange reserves. The current scale of foreign exchange reserves is not the objective of the PBOC or the SAFE, but the foreign exchange reserves should execute macro policies and undertake the task of market stabilization. Efforts must now be made to further advance the policy of “foreign exchange held by the people,” further fine-tune foreign exchange management policies, and, more importantly, continue to improve the RMB exchange-rate formation mechanism and enhance the flexibility of two-way exchange-rate fluctuations. In this way, people will not expect a one-way appreciation and will be more willing to hold foreign exchange, thus gradually allowing the policy to be achieved.  There is optimism in the future as current exchange rates are expected to take on two-way trends and the appetite for holding foreign exchange will tend to rise. 2014-06-12 11:26:08

·         [Host] One Netizen asked that since the price of gold has been falling recently, is gold bargain-hunting under consideration? 2014-06-12 11:29:19  

·         [Huang Guobo] We have just talked about the issue of “foreign exchange held by the people.” As far as holding gold is concerned, China now has a rational structure with both official gold reserves and active holding and purchase of gold among the people. Hence, the policy of “gold held by the people” has been well achieved. Let me quote some basic data. China is now the world’s largest producer of gold, with annual output of about 400 tons. It has not only produced its own gold, but it has also imported gold in large quantities. Data from the Census and Statistics Department of the Hong Kong SAR Government show that in 2013, Hong Kong exported a total of 1,495 tons of gold to Mainland China, with net imports of 1,158 tons from Mainland China. The imports and exports basically reflect private purchases and demand. Therefore, private investment and consumption needs are growing rapidly in China and “gold held by the people” is being realized. 2014-06-12 11:30:20

·         [Huang Guobo] How does one purchase and import gold? Actually, gold is purchased with foreign exchange. In other words, this not only realizes the goal of “gold held by the people,” but also helps ease pressures from the growth foreign exchange reserves.  So it has produced very good momentum. Because foreign exchange reserves are huge whereas the gold market is relatively small, both in terms of annual production and capacity, the investment of foreign exchange reserves will have a significant influence on the gold market. For example, if the price of gold is pushed up, then people will have to pay more for gold and the cost of gold will also go up, which will be unfavorable in terms of our high consumption of gold. Because of this, when planning to invest foreign exchange reserves in the gold market, we must take into consideration its influence on the market and whether it will be beneficial for consumer groups in China that import a large quantity of gold. 2014-06-12 11:31:56

·         [Huang Guobo] From another perspective, private demand for gold purchases is actually large but it is fragmented and intangible, and it is conducted through multiple channels and by multiple subjects that have less influence on the market, so this is more efficient in terms of the gold trade. In addition, gold held by the people has both investment and consumption roles with higher allocative efficiencies. Therefore, overall consideration must be given to the increase and investment of official gold holdings by our country as well as to private gold holdings. 2014-06-12 11:34:19

·         [Host] A Netizen asked that since China possesses massive foreign exchange reserves, but enterprises are often cash-strapped to launch overseas investments, how can we better support enterprises to “go global”? 2014-06-12 11:35:04  

·         [Huang Guobo] We have taken a series of key initiatives during these years. First, the SAFE and the state macro-control departments have actively promoted a basic equilibrium in the balance of payments. Under the architecture of a basic equilibrium, enterprises and various investment subjects and consumer groups will increase their investments abroad and the consumption of imports and foreign exchange will be used more by the real economy. On this basis, the SAFE has done a lot of work, such as removing the policy obstacles for enterprises to purchase foreign exchange in order to “go global.” During the past few years, we have set up the entrusted loan office, greatly alleviating the banks’ shortages of foreign exchange funds and providing them with strong backing. In order to better support enterprises to “go global,” we have supported the banks’ foreign exchange reserves to fund the creation of a macro environment with an improved balance of payments and balanced fluctuations of the RMB as well as some advanced micro policies, such as further deregulating the capital account. 2014-06-12 11:35:24

·         [Huang Guobo] By the way, “going global” refers to both many opportunities as well as many risks, so it is critical that one make money with one’s capital, do things within one’s capabilities, and clarify rights and responsibilities. In the international market, whether opportunities can be seized depends on your capital strength and the cost of funds. Zero-cost and low-cost funds must be short. Bad for fair competition, these funds may cause blind and vicious competition and may undermine corporate profitability. The support of foreign exchange for enterprises to “go global” must be based on the premise of effective risk preventions and clear liability subjects, and must adhere to market-oriented operations with the aim of safeguarding fund security and fair returns. 2014-06-12 11:39:12

·         [Host] The size of the foreign exchange reserves is so large, but investment income is always negative.  Does this mean our foreign exchange reserves are operating at a loss, and how can we improve the level of returns on outward investments? 2014-06-12 11:43:25  

·         [Guan Tao] For this question, Mr. Huang just provided an explanation. China’s return on foreign exchange reserves investments is higher than the inflation rate in the invested countries, so foreign exchange reserves operations and administration have effectively attained the targets of value perseveration and appreciation, without incurring losses. Beginning from when our external financial assets and liabilities were publicized in 2004, by subtracting liabilities from assets China has been a net external creditor with net external assets. Except for 2007 and 2008 when investment income registered a small surplus, in the other years there was always a deficit. Such a situation did exist, for example, in late 2003 when China was the second largest net creditor, next only to Japan, as reflected in its net external assets of US$1.97 trillion.  But its investment income was US$-59.9 billion. However, the negative income did not mean that our outward investments were in the red. 2014-06-12 11:43:46

·         [Guan Tao] Because investment income differences reflect the return of foreign investments minus the income of outward investments, they are different business entities. We make profits by investing in other countries and vice versa. Just because they make money does not mean we lose money. Take FDI in China for example.  Profits are repatriated after the investment and management. Nevertheless, they bring us funds, technologies, and management experience, create job opportunities, increase our tax revenue, and expand our international market. As a result, it is not the case that we lose money. The balance of payments statement shows that our return on investments abroad amounted to US$167.7 billion in 2013, with a considerable part being derived from the investment income of foreign exchange reserves. As we have calculated, from 2005 to 2013, China’s return on outward investments averaged 3.3 percent, almost the same as that of the developed countries. 2014-06-12 11:54:43

·         [Guan Tao] As to why our investment income is negative after offsetting the balance, this reflects the structural problems in China’s opening up. For one thing, we make use of foreign investments (mainly FDI) and the return on foreign investments in China is high, which is a direct reason for our negative investment income. From 2005 to 2013, the return on foreign investments in China averaged 6.7 percent while that in the developed countries was 1 percent to 3 percent. Why is that? Because 60 percent of the foreign investment that we utilized was FDI. As equity investment, FDI has high stability but poor liquidity. Risks are shared and normally there is a demand for a high risk premium. 2014-06-12 11:58:47

·         [Guan Tao] In addition, the advantage is that such kinds of capital inflows are long term and stable and thus they avoid monetary and debt crises that are brought about by the introduction of foreign capital by many emerging countries through foreign debt or portfolio investments. Another reason lies in the mismatch of the subjects of our external assets and liabilities. It can be seen from the external balance sheet that our country is a creditor and the private sector is a debtor. If the foreign exchange reserves are excluded, the external net liabilities of the private sector would total approximately US$2 trillion. At the national level, China is an immature net creditor, but from the perspective of the private sector, it is a mature net debtor. From the development stage of a net debtor, we conform to a reasonable pattern in the balance of payments, featuring a current-account and trade surplus and an investment deficit. 2014-06-12 12:02:16

·         [Guan Tao] However, our investment income is negative and China is a net creditor, which indicates that there is much room for improvement in the utilization efficiency of our foreign exchange reserves. Based on this, the financial openness of a country should be measured by the ratio of its financial assets and liabilities to GDP. We are now the world’s second largest economy, but our financial openness is low. In 2013 external assets and liabilities were 1.1 times GDP, as compared with the following figures in some developed countries: 3.2 times (in the US), 2 times (in Japan), 3.7 times (in the Eurozone), 1.2 times (in Russia), and 1.4 times (in South Korea). Also, a considerable part of our outward investment assets is foreign exchange reserves and the ratio would be lowered to 0.65 times if they were to be removed, so there is much room in this regard. 2014-06-12 12:07:30

·         [Guan Tao] Therefore, on the one hand, we must further promote the policy of “foreign exchange held by the people” and expand private outward investments to develop decentralized, diversified, and market-oriented modes and channels for outward investments and application of foreign exchange funds in the future. On the other hand, we must utilize foreign capital in a more active, rational, and efficient way. Based on financial openness, market tolerance, and risk management ability, we shall work along both lines   further improving the quality of FDI utilization and trying to use foreign capital in other forms because of the lower costs   to change our negative investment income. 2014-06-12 12:11:08

·         [Host] Thank you, and thanks for the attention of our Netizens. See you next time. 2014-06-12 12:13:43  

(The original text was published on


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