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    Deepen Financial Reform, Expand Financial Opening-up and Unswervingly Follow the Development Path with Chinese Characteristics
Deepen Financial Reform, Expand Financial Opening-up and Unswervingly Follow the Development Path with Chinese Characteristics

Pan Gongsheng, PBC Deputy Governor and SAFE Administrator

Since 1994, especially since July 2005, China has been continuously pushing ahead with the reform of the RMB exchange rate formation mechanism. As a result, the RMB exchange rate has seen its formation and adjustment more and more marketized and its flexibility increasing. At the same time, financial institutions and market participants have become better adapted to RMB exchange rate fluctuations and adjustments, with risk hedging tools more diversified and RMB internationalization making constant progress. Although the US recently designated China as a so-called “currency manipulator”, the continuity and stability of China’s foreign exchange management policies will not be affected. Financial reform will continue to go deeper and financial opening-up will be further expanded. We will follow unswervingly, as always, the path of development with Chinese characteristics.

I. The US designation of China as a so-called “currency manipulator”, essentially a political maneuver amid protectionism and unilateralism, will be remembered as a typical case of absurdity in international financial history.

On August 5, in violation of common sense and professionalism in world trade and international finance, the US Treasury designated China as a “currency manipulator” for not intervening in Chinese currency devaluation. This move, in total disregard of the fact that the unilateral US tariff hikes prompted by protectionism had caused adjustment across the board on international financial markets, was also inconsistent with the conclusion of the Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States released by the US Treasury this May. It was part of the overall US strategy to trigger and escalate China-US trade frictions, fully demonstrating the lack of transparency and the arbitrariness of US policy assessment as well as the possibility that any price adjustment unwelcomed by the White House on international markets will be willfully attached a political tag of foreign government intervention. Former US Treasury Secretary Lawrence Summers wrote recently that China does not fit the template for a “currency manipulator”, and that the move of the US Treasury labeling China a “currency manipulator” and asking the International Monetary Fund (IMF) to intervene was unjustified, which would surely do grave damage to the credibility of the US government and Treasury.

In the newly released report on the annual Article IV consultation with China, the IMF stood by the basic judgement it had held since 2015, reiterating that the RMB exchange rate was broadly in line with China’s economic fundamentals, which is ample proof that the US accusation is groundless and untenable.

The short-term adjustments lately seen in the RMB exchange rate were spontaneous reactions of financial markets to the surprise US announcements of unexpected tariffs. Since April 2018, the US has triggered and kept escalating trade frictions with China, which have become the primary influence on short-term movements of the RMB exchange rate. On June 15, 2018, while China-US trade talks were making headway, the US announced abruptly tariff hikes on USD50 billion worth of imports from China, and three days later threatened to impose higher tariffs on an additional USD200 billion of Chinese imports, sending the RMB into dramatic adjustment against the US dollar, with the onshore CNY/USD spot rate posting a monthly fall of 3.4 percent. In December 2018, as trade tensions eased after Chinese and US leaders met during the G20 summit, the RMB resumed the upward trend. In May 2019, however, the US once again raised tariffs unexpectedly on Chinese goods, bringing down the onshore CNY/USD spot rate by 2.4 percent for the month. On August 2, the US further threatened to increase tariffs on the remaining USD300 billion of Chinese goods, leading to sharp fluctuations in the RMB exchange rate. After the start of trading on August 5, the offshore and onshore RMB weakened beyond 7 per US dollar successively. For the two trading days of August 2 and August 5, the onshore CNY/USD spot rate fell by 1.9 percent approximately. All these fluctuations, as we can see, were natural market responses to external impact on the RMB.

II. The politicalized and capricious policies of unilateralism and protectionism of the US will be dark clouds over global financial markets.

Since 2018, US protectionist measures on trade have triggered severe turmoil in the global financial market, leading to sharp fluctuations and rapid contagion not only in stock market and foreign exchange market, but also in prices of large-category assets. After the US imposed additional 10 percent tariffs on China’s USD200 billion imports in September 2018, the global stock market (MSCI Global Index) plummeted, with the biggest drop of 18.0 percent. After the US twice escalated tariff measures against China in May and August 2019, the biggest falls in the global stock market reached 6.3 percent and 4.4 percent respectively. Gold price has appreciated by 17.0 percent since May 2019, once exceeding USD 1,500 per ounce, which also revealed a sharp rise of global risk aversion. Since April 2018, the most significant weakening of the exchange rates of emerging market currencies recorded 14.8 percent. It’s evident that the unilateralism and capriciousness of the US policies is a major source of the highly intensified shocks in the financial market. Just as Mr. Larry Summers, former US Treasury Secretary, noted that “there is significant risk of a recession since the financial crisis in 2008”.

The monetary policy of the FED is critical to the stability of the global financial markets. Nevertheless, the US government continuously imposes pressures on the Fed, seriously threatening the independence and professionalism of its monetary policy. Donald Trump changed the tradition that successive U.S. presidents did not comment publicly on monetary policy, repeatedly expressing dissatisfaction with the Fed’s monetary policy and a strong dollar and even openly threatening to fire current Chairman Jerome Powell, and attempted to influence FED’s decision by nominating new board members. As the 2020 US presidential election approaches, the frequency of Trump’s public comments on the Fed and the USD exchange rate has been on the rise. Since June 2018, he has lashed out at Fed’s policies or the USD exchange rate more than 30 times. In particular, after RMB weakened beyond 7 per US dollar in early August, aside from designating China as a currency manipulator, Trump denounced Fed for its non-action, and demanded for a cut by 100 basis points as soon as possible, implicitly pointing to the issue of USD exchange rate. Recently, four former chairs of Fed have released a joint declaration, stating that although it often occurred that politicians called for looser monetary policies around elections, monetary policies based on current political (rather than economic) needs would lead to worse economic performance in the long run, which could undermine public confidence of the central bank and result in unstable financial markets. They have called for maintaining Fed’s independence, and keeping monetary-policy decisions from short-term political pressures.

III. The PBC will further enhance the flexibility of RMB exchange rate in the market oriented reform, and the foreign exchange market will gradually return to the fundamentals after absorbing short-term shocks.

Although the RMB exchange rate was hit by trade frictions and the US designated China as a currency manipulator, our established policies of comprehensively deepening reforms and further opening up will not waver. We will continue to implement the managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies, persistently push forward market oriented exchange rate reform, and improve the RMB exchange rate formation mechanism, so as to keep the exchange rate basically stable at a reasonable and equilibrium level. As a responsible big country, China adopted a responsible attitude during the Asian financial crisis and global financial crisis, and made significant contributions to the gradual post-crisis recovery of the world economy. We will remain firmly committed to the previous G20 summits’ commitments including non-adoption of competitive devaluation and no use of the exchange rate as a tool to cope with international trade disputes.

The resilience and potential of the Chinese economy provide a solid base for the stability of RMB exchange rate. Despite that the RMB exchange rate will be subject to trade frictions and other external shocks, we judge it will not depreciate in disorder, and the foreign exchange market will eventually return to fundamentals after a brief shock.

Firstly, economic performance has been stable and is expected to firm going forward. The fundamentals for sound economic growth over the long term remain unchanged as economic growth is expected to outpace most major economies and the RMB remains a strong currency. According to Bank for International Settlements, from 2005 to June 2019, RMB appreciated by 38 percent in tems of nominal effective exchange rate, and 47 percent in terms of real effective exchange rate, topping all other G20 countries. Though there have been huge uncertainties in recent China-US trade frictions, the marginal effect of US tariffs on China has been declining. Since the beginning of 2019, with favorable fundamentals, the Chinese economy has on the whole maintained stability while making steady progress, and the major macroeconomic indicators have performed within a reasonable range. Achievements have been made in economic structural adjustments, with growth resilience enhanced and macro leverage ratio remaining basically stable.

Secondly, cross-border capital flows are generally stable. As China gradually expanded areas of opening up and comprehensively implemented the management model of pre-establishment national treatment plus a negative list, the domestic business environment has been further improved and foreign direct investment still enjoys great development potential. In recent years, China has continuously promoted high-level opening up of the financial market, and created a favorable policy environment for foreign investors, including those from the US, to allocate more resources to RMB assets. So far, the sizes of Chinese bond market and stock market have been ranking high in the world, but only around 2 percent and 3 percent of the financial assets were held by foreign investors. With Chinese bond market and stock market more widely included in major international indices, given the relatively high yield in the Chinese bond market against the expansion of negative interest rates worldwide, there is still great potential for foreign investment.

Thirdly, China’s external debt has been more stable. In recent years, China’s external debt growth is not high compared with its economic size. By end-2018, China’s external debt ratio (outstanding external debts/GDP), debt ratio (outstanding external debts/annual export proceeds in foreign exchange) and debt servicing ratio (external debt principal and interest repayment/annual export proceeds in foreign exchange) stood at 14.4 percent, 74.1 percent and 5.5 percent respectively, far lower than the internationally accepted alarm level. The structure of external debt continued to optimize, as foreign central bank investors continued to increase their holdings of Chinese bonds for medium- to long-term asset allocation. As a result, the proportion of debt securities in outstanding external debt increased continuously from 8 percent at end-2014 to 22 percent at end-2018. Such kind of capital is relatively stable, hence unlikely to be “deleveraged” in times of exchange rate changes.

Fourthly, the RMB exchange rate showed more two-way fluctuations, and foreign exchange market entities became more adaptive and rational. Since the “8.11” exchange rate reform, the RMB exchange rate has been more flexible, with its fluctuation ratio approaching that of currencies of major developed economies. The two-way fluctuations of the RMB exchange rate have become regular, and the depreciation pressure has been timely released. At present, individual foreign currency purchases have been more stable, outbound direct investment by enterprises has been more reasonable and orderly, foreign currency stockpiling has been gradually disappearing, and enterprises’ awareness of exchange rate risk management has been further enhanced.

IV. The PBC will maintain the continuity and stability of foreign exchange administrative policies, continuously enhance the liberalization and facilitation of cross-border trade and investment, and improve the cross-border capital flow management framework for opening-up at a higher level.

The foreign exchange authorities will maintain policy continuity and stability to serve the new pattern of China’s comprehensive opening-up. We will implement the decisions and arrangements of the CPC Central Committee and the State Council, and fulfill our responsibilities by seizing the long-term trend while respecting market forces. We will firmly adhere to our commitments to reform and ensure supply of foreign currencies to enterprises and individuals with regular demands, thus supporting import and export, profit distribution, two-way cross-border investment and other production and operation activities of enterprises, as well as meeting individuals’ actual demands of travelling and studying abroad. Current account payments arising from our people’s real needs will remain unaffected. In addition, we will continue to vigorously promote the liberalization and facilitation of cross-border trade and investment, and further carry out pilot facilitation reforms including trade receipt and payment facilitation, electronization of tax filing for trade in services, and delegation of external debt cancellation to banks, with a view to better serve the real economy. We will continue to deepen the reform of “streamlining administration, delegating powers, strengthening regulation and improving services”, optimize the online system of “Internet Plus government services” released by the State Administration of Foreign Exchange (SAFE) in June, and foster a more open, fair and convenient business environment.

We firmly believe that in the future, China’s foreign exchange administration will adapt to the opening-up in a more open environment; capital account opening-up, two-way opening-up of the financial market and the RMB internationalization will be promoted in a coordinated way at a higher level; and the liberalization and facilitation of cross-border trade and investment will be further advanced. We have the confidence and capability to effectively prevent risks arising out of external shocks, maintain stability of the foreign exchange market, and promote stable and sound development of the financial market and the financial system.

(Source: China Financial News)

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