Distinguished Secretary Cai Qi, Mayor Jining, Respectable Guests,

Hello everyone! The trend of the monetary policies adopted by the Federal Reserve and other central banks of developed economies is the focus of the current international financial market and a crucial factor influencing the changes in the global financial market. In comparison with the policy responses and market reactions after the 2008 international financial crisis, here I will talk about the exit of the easy monetary policies in major developed economies in response to the COVID-19 epidemic, and its possible impacts on international financial markets, the cross-border capital flows in emerging economies, as well as Chinese foreign exchange market.

In the face of the “sudden stop” in the global economy and liquidity crisis caused by the COVID-19, the central banks of major developed economies have implemented ultra-easy monetary policies. The current round of quantitative easing of monetary policies in developed economies is characterized by four features, namely, faster response, larger scale, direct access to entities, and fiscal coordination, making a much faster and stronger response than during the 2008 international financial crisis.

Driven by policy stimulus and vaccination, the global economy has achieved a rapid recovery. The global economy, especially the major developed economies, rebounded rapidly. In the second quarter of 2021, the US GDP has surpassed the level before the epidemic, and the Europe, UK, and Japan have also seen their GDP close to the pre-pandemic level. The flipside of the rapid global recovery is that the strong demand in developed economies continues to recover faster than supply, pushing up inflationary pressures.

With rapid economic recovery and inflation remaining stubbornly high, the central banks of developed economies have been prompted to signal a turnaround in monetary policy. The Fed’s tapering could begin soon, and the financial markets have already had sufficient expectations. It is expected that the timing of the first interest rate hike has been advanced to the second half of 2022. Other central banks, such as, the European Central Bank and the Bank of England, also generally strengthened their austerity stance.

The significant appreciation of the US dollar during the last monetary policy tightening cycle of Fed had had a big impact on emerging market economies. After the dollar index began its rapid appreciation in mid-2014, the currencies of emerging market economies depreciated sharply, and major emerging market economies also experienced significant capital outflows. From 2015 to early 2017, Chinese foreign exchange market also suffered a great impact. The depreciation of renminbi was accompanied by capital outflows and a decline in the value of foreign exchange reserves.

In the current monetary policy tightening cycle of Fed, the gaps between the United States and non-US economies in terms of both economic growth and monetary policy are smaller than the ones in the previous tightening cycle, which is expected to limit the appreciation of the US dollar. In terms of disparity of economic growth, the US economic growth was significantly better than that of the Europe during the exit of the last round of quantitative easing, while at present the US and Europe are more synchronized in growth. In terms of monetary policy differences, the last round of Fed’s bond-buying reduction coincided with the start of easing by the European Central Bank, but the current round of monetary policies of the US and European Central Banks are generally in the same direction.

Emerging markets are also less exposed to capital outflows than they were during the last round of Fed tightening. The current external account vulnerability of emerging markets has declined, the current account has generally improved significantly compared with the period of 2013-2015, and capital inflows have also been relatively limited in recent years.

It is expected that the influence of the current round of the Federal Reserve policy shift on Chinese foreign exchange market is controllable. The cross-border capital is expected to continue to flow in both directions, and the renminbi exchange rate will remain basically stable at a reasonably balanced level.

Firstly, Chinese economy is in a better cyclical position. During the last round of austerity, Chinese economy was in the midst of a combination of growth rate shift, structural adjustment and the digestion of previous policies, and faced considerable downward pressure. The industrial producer price index (PPI) remained negative for more than 50 months. At present, however, the national economy is recovering, the main macro indicators are in a reasonable range, and employment is basically stable. The solid domestic economic fundamentals will be the basic guarantee for Chinese foreign exchange market to cope with external shocks.

Recently, Chinese real estate market and related financial market experienced a little volatility, which is the stress reaction of market entities after the occurrence of individual corporate default incidents. Under the guidance of the financial authorities, the excessive contraction of risk appetite in financial institutions and financial markets has gradually been corrected, and financing behavior and financial market prices are gradually returning to normal. Since the 19th National Congress of the Communist Party of China (CPC), we have implemented macro-regulation of the real estate market and established a long-term management mechanism in accordance with the guidelines and policies set by the CPC Central Committee. As a result, the trend of financialization and bubblization in the real estate market has been contained, land and housing prices and expectations in the real estate market have remained stable, and the real estate industry has developed healthily on the whole. In the next step, the financial sector will actively cooperate with the Ministry of Housing and Urban-Rural Development and local governments to firmly maintain the healthy development of the real estate market and safeguard the legitimate rights and interests of housing consumers.

Secondly, the flexibility of the renminbi exchange rate has also been enhanced, enabling it to play a better role in self-regulation. During the last round of tightening, the renminbi exchange rate appreciated unilaterally in the early stage, and thus a certain amount of devaluation pressure accumulated in the foreign exchange market. In recent years, the formation mechanism of renminbi exchange rate has been continuously improved, and the two-way floating of the exchange rate has become stronger. Meanwhile, the People’s Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) have continuously improved their counter-cyclical macro-prudential management tools and accumulated more experience in risk response.

Thirdly, China’s capital inflow structure has been optimized and outbound investment becomes more stable. Before the last round of austerity, China’s foreign capital inflows were mainly traditional financing foreign debts, which were sensitive to exchange rate fluctuations. During the period of 2015-2016, China experienced a concentrated deleveraging of foreign debts. In recent years, the inflow of China’s foreign debt is mainly renminbi bonds invested by long-term overseas investors, which is relatively stable. In addition, the current “going out” of Chinese enterprises is more rational, and the future outbound direct investment is expected to be relatively stable.

In recent years, the PBC and the SAFE have gathered rich experience and sufficient policy tools in coping with external shocks, and they have also carried out forward-looking arrangements this year. In the future, we will adhere to the bottom-line thinking, follow developments in the international market closely, strengthen monitoring and risk warning of the foreign exchange market, and actively prevent against cross-border capital flow risks. At present, we have more foundation, conditions, capability and confidence to maintain the smooth operation of Chinese foreign exchange market.

I wish this year’s Annual Conference of the Financial Street Forum a complete success. Thank you all!