Dear Secretary Yin Li, Acting Mayor Yin Yong, President Fu Hua, and distinguished guests:

Good afternoon, everyone! Since the beginning of this year, due to the impact of “high inflation” and “tight monetary policy”, the international financial market, including the foreign exchange market, has gone through a year of severe volatility, but China’s foreign exchange market has shown significant resilience. Now let me share some of my views on “U.S. dollar cycle and China’s foreign exchange market”, for your reference.

The U.S. dollar is characterized by long-term fluctuations and is an important factor affecting the global financial market. Since the collapse of the Bretton Woods system, the U.S. dollar has experienced three major cycles of appreciation and depreciation. The current cycle of dollar appreciation has lasted 11 years since mid-2011. After the international financial crisis in 2008, the world experienced an environment of low growth, low inflation, and low interest rates for a long period of time. Until 2021, the inflation began to rise sharply.

The big U.S. dollar cycle is driven by multiple factors. First, changes in long-term economic growth potential are an important determinant, and the growth rate of U.S. labor productivity is highly correlated with the trend of the U.S. dollar. Second, changes in interest rate spreads brought about by policy differentiation across countries drive cross-border capital flows and amplify cyclical fluctuations. Third, there is a self-reinforcing mechanism for the appreciation of the U.S. dollar. As the world’s leading financing currency, the U.S. dollar is caught in a cycle: “appreciation of the U.S. dollar → adjustment of asset prices in emerging markets → capital flowing back to the United States → appreciation of the U.S. dollar”.

From the perspective of a long-term historical cycle, the global macro-environment may shift from “great moderation” to “high volatility”. From the 1980s to 2019, the global macro environment was characterized by low inflation and low volatility, which can be regarded as the “Great Moderation Era”. However, this trend has changed in 2021. After the epidemic, the massive stimulus policies of major developed countries boosted demand, but the supply recovery was restricted by supply chain disturbances, tight labor markets, and international geopolitical conflicts. As a result, inflation in major developed countries was much higher than the policy target. The volatility of economic record in major developed countries rose sharply, and the global macro environment may have entered an “Era of High Volatility”.

To combat inflation, some of the world’s major central banks have rapidly tightened monetary policy. The Federal Reserve raised interest rates sharply and shrunk its balance sheet, tightening monetary policy in a speed rarely seen in history. The European Central Bank has also moved aggressively to raise interest rates, with the policy rate rising to the highest level since 2009. With inflation still high and economic drivers slowing down, the monetary policies of major central banks around the world are in a dilemma between stabilizing growth and controlling inflation.

Since the beginning of this year, “high inflation” and “tight monetary policy” have caused severe shocks in the international financial market. Global equity, bond and other financial asset prices fell across the board, while the U.S. dollar has strengthened rapidly. The U.S. dollar index has appreciated by nearly 20% since the start of the year to above 114, hitting a 20-year high. Since October, based on the market expectation, major central banks would slow down interest rate hikes, and the U.S. dollar index would fall from its highs, but its year-to-date appreciation was still rare over the past 40 years.

China’s foreign exchange market has shown new trend, and its resilience has been continuously enhanced. Compared with the previous two periods of U.S. dollar appreciation, the RMB exchange rate has become less sensitive to fluctuations in the U.S. dollar index since 2021. From a global perspective, the RMB depreciated at an average rate in comparison with currencies of the major developed and emerging market. Despite fluctuations, cross-border capital flows were in a stable and orderly manner on the whole.

The strengthening of the resilience of the foreign exchange market was driven by various factors. First, the RMB exchange rate showed more two-way fluctuations with greater flexibility, and its role as automatic stabilizer in adjusting the balance of payments became more prominent, thus releasing external pressure in a timely and effective manner. Second, the basic balance of payments surplus played a leading role. In the first three quarters of this year, China recorded a current account surplus of USD 310.4 billion, the highest in history for the same period; and the ratio of the surplus to the GDP in the same period was 2.4%, which remained within a reasonable range of equilibrium. At the meantime, direct investment showed a net inflow, and cross-border capital flows were steady and orderly. Third, the overall external debt structure has been improved. The traditional financing type of external debt rose slightly, and the type structure, currency structure and maturity structure of external debt have been optimized. Fourth, the proportion of RMB used by enterprises in the cross-border transactions continued to increase, which helped reduce the risk of currency mismatch in cross-border transactions. Fifth, the exchange rate hedging tools have been popularized, which significantly enhanced enterprises’ adaptability to exchange rate fluctuations.

The using of RMB assets as natural hedge has become increasingly prominent. Since the beginning of this year, the bond yields of major countries in the world have generally risen and prices have fallen, but RMB bonds have become one of the few financial assets with stable prices. Unlike other emerging market bonds, RMB bonds are quasi-safe assets, with risk-return characteristics closer to those of developed countries. China’s macroeconomic policy is dominated by itself, and the interest rate and exchange rate trend are relatively independent, which endows RMB bonds with a better diversification effect in global asset allocation.

Looking ahead, China’s foreign exchange market will maintain a stable operation. On the one hand, the risk of economic recession in major developed countries is rising. As inflation is still above the policy target, the monetary policy will generally remain tight, and the U.S. dollar may remain high and volatile in the short term. Financial institutions predict that the momentum of U.S. dollar appreciation weakening, and the strong appreciation cycle may come to an end. On the other hand, the sound long-term economic fundamentals of China’s economy remain unchanged. The “20 optimized measures” will further improve the epidemic prevention and control in a more scientific and precise way, and make it more efficient in coordinating epidemic prevention and control as well as economic and social development. The effective implementation of various policy measures to stabilize economic growth in the early stage will further unleash the growth momentum of the Chinese economy. In addition, the financial authorities have issued a number of financial support policies in tandem with the real estate market authorities and local governments to support rigid and improvement demand for housing, to maintain stable and orderly real estate financing, to increase financial support for ensuring timely deliveries of presold homes, and to protect the legal rights and interests of housing consumers, which will help stop and weaken risk spillovers, and stabilize market expectations and confidence. The above-mentioned policies have played an active role in counter-cyclical adjustment and produced positive market effects. We will adhere to the guidelines and policies of the central government on the development of the real estate market. We will adhere to the principles of marketization and the rule of law, and promote the healthy and sustainable development of China’s real estate market by taking account of long-term and short-term factors, as well as seeking both temporary and permanent solutions. In the future, changes in the internal and external macro-environment will help maintain the sound operation of China’s foreign exchange market.

Over the past ten years, we have coordinated opening-up and security, and have achieved remarkable results in the reform and opening-up of the foreign exchange sector. First, the market-oriented formation mechanism of the RMB exchange rate has been gradually improved. The exchange rate has become more flexible, two-way fluctuations have become normal, and the RMB exchange rate has remained basically stable at a reasonable and balanced level. Second, we have made steady progress in opening-up of the capital account, and a relatively high level of convertibility has been achieved. Specifically, cross-border direct investment has become basically convertible, cross-border securities investment has enjoyed two-way opening-up through multiple channels and at multiple levels, and independent cross-border financing activities by market entities have become operable under the framework of macro-prudential management. Third, the subjects, scale, and products of foreign exchange market transactions have grown rapidly, and at the meantime, an open and diversified foreign exchange market with sound functions and orderly competition has basically taken shape. Fourth, the international balance of payments was basically balanced, with greater stability and resilience. The ratio of the current account to GDP has always been maintained within a reasonable range, around 2% in recent years. Cross-border trade, investment and financing became more vibrant, and the scale of cross-border payments grew rapidly. Fifth, the “macro-prudential management plus micro regulation” framework of the foreign exchange market was established. The early warning and response mechanism for the supervision of cross-border capital flows has been continuously improved, and the macro-prudential tools have been further improved. Sixth, we have ensured the safety, liquidity, as well as value preservation and appreciation of the foreign exchange reserve assets.

In the future, we will earnestly implement the guiding principles of the 20th National Congress of the Communist Party of China. Through coordinating financial opening-up and security, we will make every effort to build a foreign exchange management system that is compatible with a high-level of opening-up. We will deepen the reform and opening-up in the foreign exchange sector, and improve cross-border trade and investment and financing facilitation, so as to maintain the stable operation of the foreign exchange market as well as the national economic and financial security.

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