Opening-up is imperative to the flourishing of our country. In his report to the 19th CPC National Congress, Secretary-general Xi Jinping said: "We shall make new ground in pursuing opening-up on all fronts". In the third group study among the members of the Political Bureau of CPC Central Committee, Xi Jinping stressed: "A system of pursuing opening-up on all fronts that is diversified, balanced, secure and efficient should be built to develop an open economy of higher standards". The foreign exchange market is a window for China's reform and opening up and communication with the rest of the world, and a hub that connects domestic and foreign markets and resources. In recent years, under the leadership of the CPC Central Committee with Comrade Xi Jinping at its core, foreign exchange authorities have established "four consciousnesses". Following the underlying principle of pursuing progress while ensuring stability, foreign exchange authorities have been committed to pressing ahead with the foreign exchange administration reform, promoting the liberalization of the foreign exchange market, and preventing the risks associated with cross-border capital flows, thus safeguarding the national economic and financial security. In addition, the healthy and orderly foreign exchange market environment is conducive to making new ground in pursuing opening-up on all fronts.
I. China's cross-border capital flows have reached a basic equilibrium
Under the combined impact of both domestic and foreign factors, cross-border capital flows had shifted from long-term net inflows to net outflows for a while in the past few years, leaving China's foreign exchange market seriously affected by cross-border capital flows for a period of time. Under the leadership of the CPC Central Committee and the State Council, authorities such as the People's Bank of China and the State Administration of Foreign Exchange (SAFE) adopted multi-prolonged measures and policies, particularly the macro-prudential policy for the counter-cyclical regulation of cross-border capital flows, which has produced positive results and ensured stability of the foreign exchange market and national economic and financial security. Under the combined effect of the macroeconomic fundamentals, global economic and financial environments, policies and measures, the cross-border capital flows and the supply and demand of foreign exchange in China reached a basic equilibrium in 2017, with foreign exchange reserves recovering slightly, the RMB exchange rate against the USD rising stably and the RMB exchange rate against a basket of other currencies becoming basically stable.
(I) The supply and demand in the foreign exchange market has become more balanced. In 2017, a deficit of USD 111.6 billion was registered in banks' foreign exchange sales and settlements, down by 67% year on year. With spot and forward foreign exchange sales and settlements as well as options taken into consideration, the supply and demand of foreign exchange have moved towards an equilibrium since February 2017 and now stay basically balanced. Cross-border capital flows have also become more balanced. In 2017, non-banking sectors such as enterprises and individuals registered USD 124.5 billion in net outflows of cross-border capital, down by 59% year on year. Specifically, China posted USD 25.2 billion, USD 59 billion, USD 27.3 billion and USD 13 billion respectively in net outflows of cross-border capital from the first to the fourth quarter, indicating net outflows were on the decline.
(II) Market participants' behaviors in foreign-related transactions have become more stable. Amid the two-way fluctuations of the RMB exchange rate, enterprises' and individuals' behaviors in foreign-related transactions have been diversified rather than simplistic as they were previously, and more of them arrange cross-border receipts and payments, and foreign exchange sales and settlements based on real demand. In 2017, the surplus in foreign exchange sales and settlements under trade in goods and foreign exchange settlements under FDI were on an upward trend, cross-border financing continued stable growth, and outbound investment and individual purchases of foreign exchange declined systematically.
(III) The balance of foreign exchange reserves has perked up for 11 consecutive months. As at the end of 2017, the balance of foreign exchange reserves hit USD 3.1399 trillion, up by USD 129.4 billion year on year, representing rises for 11 straight months since February 2017.
(IV) The RMB exchange rate has risen stably against the USD and remained stable against a basket of other currencies. In 2017, the central parity rate of the RMB against the USD rose by 6.2%, and the CFETS RMB exchange rate index compiled by China Foreign Exchange Trade System climbed by 0.02%.
II. Favorable factors will help reduce risks associated with cross-border capital flows in China going forward
In 2018, following the underlying principle of pursuing progress while ensuring stability, the new vision for development and the requirements for high-quality development, China will witness rising stability and resilience in economic performance and may continue to see stable development with strong momentum for growth. As external demand is strengthened alongside the world economic recovery, the financial markets are further liberalized, and market expectations improve, China's balance of payments and cross-border capital flows will maintain a basic equilibrium.
The high-quality development model will help strengthen market confidence in the long term. In 2018, the first year of implementing the spirit of the 19th CPC National Congress, China will focus on the supply-side structural reform while stabilizing growth, promoting reform, adjusting structure, benefitting the people and preventing risks, so as to boost the sustainable and healthy development of the economy and society, which will consolidate the confidence of domestic and foreign market participants in investing and operating in China in the long term.
The sound economic fundamentals are still a driver of stable cross-border capital flows in China. China's economic growth is relatively high at the global level, and in particular, the economic structure is improved, the aggregate supply and demand is more balanced and the momentum for endogenous growth is strengthened. The domestic industrial chains and supporting facilities are being enhanced, and workers' skills are well matched with companies' requirements, which will help ensure smooth operations and high returns. At the same time, residents' incomes are on the rise, and their consumption is further upgraded, indicating high potential of the domestic markets, which will be a key consideration in attracting investments. Further, China's macro policies are well targeted, systems and regimes are flexible, financial markets are robust and foreign exchange reserves are adequate, indicating China will be capable of responding to and solving risks.
Making new ground in pursuing opening-up on all fronts will help balance cross-border capital flows. In 2018, the 40th anniversary of the implementation of the reform and opening up policy, the scope and level of opening up will be further expanded, market entry will be loosened, laws on foreign capital will be improved, and intellectual property rights protection will be intensified, so as to attract more capital to flow into the country on a long-term basis. With the smooth implementation of financial market reforms and opening up, foreign investors will become more aggressive in investing in China's capital market. Focusing on the Belt and Road Initiative, China will attach equal importance to "bringing in" and "going global" to make it easier to achieve balanced capital flows.
The external environment will be favorable as the global economic and financial performance remains stable. In 2018, the global economy will continue to recover, with its growth rate expected by the IMF to be 3.9%, up by 0.2 percentage point from a year earlier. The consumption and employment in the US will be generally optimistic and Trump's tax plan will be favorable to boost the country's economy and push up the expectations of inflation. Spurred by a greater momentum for stronger domestic demand and rising external demand, manufacturing PMI in the Eurozone set a new record in January 2018 and economies such as Germany, Italy and the Netherlands are expected to see higher growth rates, and therefore, the Eurozone may sustain a huge momentum beyond expectations in 2018. Japan's GDP has continued to rise for seven consecutive quarters and its manufacturing PMI reading has been above 50 for 16 straight months, and therefore, the country's central bank has recently expanded the prediction interval of economic growth in 2018. Benefitting from the perking up of the global economy, higher commodity prices and the positive results of domestic reforms, BRICS countries such as Russia, Brazil, India and South Africa have registered fast increases in foreign trade and their manufacturing PMI readings climb, indicating optimistic economic performance.
It should also be noted that China's cross-border capital flows are still susceptible to instabilities and uncertainties. First, major economies may be homogeneous in normalizing their monetary policies with resonance effect, which, coupled with the tax reform, infrastructure investment and trade protectionism in the US, may impact global financial markets and global capital flows. Second, the foundation for the stability of global financial markets is still weak. Although risk aversion is at a historical low across the world, yet the risk of adjustment after continued rallies of the stock markets in some developed countries, and political risks and geopolitical conflicts in some regions may lead to changes in risk aversion and heightened volatility of cross-border capital. Third, economic and financial risks still exist in China. The country is now still at a critical moment in addressing major economic and financial risks. The leverage ratio of enterprises remains high, and issues such as hidden debt of local governments, real estate market, shadow banking, and internet finance are to be addressed. As a result, market sentiment and confidence may be impacted during risk exposure and disposal.
III. Pursue All-round Opening-up with More Balanced Administration
As China's cross-border capital flows find an equilibrium, all the macro-prudential policies adopted earlier have regained their neutrality. Going forward, the two-way flows of China's cross-border capital will become a normal and remain generally balanced. Next, foreign exchange authorities will boost the balanced management of cross-border capital flows: first, regarding the purposes of management, foreign exchange authorities will look at the increases and decreases in foreign exchange reserves more reasonably, placing a stronger emphasis on dynamic equilibrium of the balance of payments while achieving a higher level of trade and investment liberalization and facilitation. Second, in terms of management philosophy, policy neutrality will be adhered to. In micro regulation of the foreign exchange market, the consistency in the policies and standards for two-way cross-border capital flows will be stressed: both capital inflows and outflows in compliance with laws and regulations will be supported. Third, in enforcement of foreign exchange laws, authenticity and compliance with laws and regulations will be stressed, and consistency, stability and predictability of enforcement standards across cycles will be emphasized, while illicit outflows and inflows, especially irregularities such as underground banks, fabricated transactions and market manipulation, will be cracked down on, so as to safeguard the normal order of the foreign exchange market.
(I) Policies for a higher level of trade and investment liberalization and facilitation will be adopted. First, law-based administration will be adhered to so as to satisfy authentic demands for foreign exchange under the current and capital accounts in conformity with regulations. Second, efforts will be made to serve the building of a trade giant and support and cultivate new trade formats. The regulatory system, service system and policy framework will be improved to continue to support the healthy development of new trading formats and models such as cross-border ecommerce, market purchases and comprehensive foreign trade services, and to standardize the development of cross-border payments through third-party payment institutions. Third, the Belt and Road Initiative will be focused on, with equal importance attached to "bringing in" and "going global". The new framework of foreign exchange administration for foreign-owned enterprises under the model of pre-establishment national treatment plus negative list will be studied to build stable, equitable, transparent, predictable and law-oriented business environment and protect legitimate interests of foreign-owned enterprises. International production capacity cooperation will be promoted under the Belt and Road Initiative. Efforts will be made to standardize and guide ODI, with focus on supporting capable and eligible domestic enterprises to make outbound investments in an active and steady manner, under the principle of classified management.
(II) The two-way liberalization of the financial market will be pressed ahead with. First, the securities market will be boosted for two-way liberalization. Further efforts will be made to promote the liberalization of domestic stock and bond markets, by improving bond connect, studying Shanghai-London Stock Connect and supporting Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. The foreign exchange administration system for qualified institutional investors (QFII, RQFII, QDII, RQDII) will be reformed and improved. It will be made easier for market participants to allocate assets in larger space. The domestic market for derivatives such as commodity futures will be further opened up. Second, the open and competitive foreign exchange market will be opened up and improved. Efforts will be made to deepen the foreign exchange market, expand transaction participants, diversify transaction instruments, and expand the scope of transactions to boost market liberalization and satisfy participants' demands for risk mitigation. Third, education on risks will be intensified for market participants. Enterprises will be guided to build the awareness of "financial neutrality" and use various instruments on the foreign exchange market for hedging, so as to ensure sound exchange rate risk management.
(III) The macro-prudential management system for cross-border capital flows will be built. The monitoring, early warning and response mechanism for the macro-prudential management of cross-border capital flows will be built and improved. The macro-prudential assessment system for cross-border capital flows will be built for the banking sector. Policy toolkits will be diversified, including management instruments aimed to reduce sharp fluctuations in cross-border capital, such as provisions of risks; the macro-prudential management policies focusing on bank and short-term capital flows. Efforts will also be made to adjust the short-term fluctuations of the foreign exchange market in a counter-cyclical manner to safeguard the security of the financial system and the equilibrium of the balance of payments.
(IV) The micro-regulatory framework for the foreign exchange market will be enhanced. First, the cross-cyclical stability and consistency of policies will be ensured. The order of the foreign exchange market will be maintained in accordance with laws and regulations, the cross-cyclical consistency between law applicability and enforcement standards will be ensured, and a tough stance on foreign exchange irregularities will be maintained. Second, the authenticity, legality and compliance reviews will be conducted. Foreign exchange authorities will perform their review obligations in anti-money laundering, anti-tax avoidance and anti-terrorist marketing to protect the legitimate interests of market participants and crack down on price manipulation, false advertisement and consumer misleading. Third, penetrating regulation of cross-border transactions will be enhanced under the tracing principle. Fourth, the national security inspection of foreign investments will be ensured.
(V)The operation and management capabilities of foreign exchange reserves will be strengthened. First, the coordination with monetary policy, foreign exchange rate policy, and cross-border capital flow policy will be further intensified to guard against systematic risks and make full use of the roles of foreign exchange reserves in ensuring external payment, and safeguarding stable foreign exchange rate and national economic and financial security. Second, investment capability building will be stepped up, and monetary and asset structure will be optimized so as to ensure security and liquidity while maintaining and increasing value. Third, key national strategies like the Belt and Road Initiative will be applied in a diversified way to boost international production capacity and equipment manufacturing cooperation to go deeper.
2018 is the first year to implement the spirit of the 19th CPC National Congress, the 40th anniversary of the implementation of the reform and opening up policy and a year crucial to securing a decisive victory in building a moderately prosperous society in all respects and to the implementation of the 13th Five-year Plan. Guided by the Xi Jinping thought on socialism with Chinese characteristics for a new era, foreign exchange authorities will uphold the underlying principle of pursuing progress while ensuring stability to fulfill the three tasks of serving the real economy, controlling financial risks and deepening financial reforms. Following the philosophy of balanced management, foreign exchange authorities will be committed to making new ground in pursuing opening up on all fronts, serving the development of the real economy, guarding against risks arising from cross-border capital flows and safeguarding national economic and financial security, in a bid to make new contributions to securing a decisive victory in building a moderately prosperous society in all respects and striving for the great success of socialism with Chinese characteristics for a new era.
(The original text is available at caixin.com)
