South China Morning Post:
As you pointed out, RMB assets are attractive to foreign capital, but the RMB exchange rate has significantly fluctuated recently. We note that macro-prudential adjustment parameters for cross-border financing were raised yesterday. Will China continue to take measures to stabilize confidence and prevent a sustained and excessive fall in the exchange rate? Thank you.
Wang Chunying:
In recent years, the People's Bank of China and SAFE have established and improved the macro-prudential management of cross-border financing. Yesterday, we raised the macro-prudential adjustment parameters. The market has offered various analyses and interpretations, many of which I believe are accurate. This time, our primary adjustment was raising the parameter from 1.25 to 1.5. This change has increased the upper limit of the risk-weighted balance of cross-border financing for domestic financial institutions and enterprises, directly expanding access for enterprises to obtain financing from overseas, including banks. As previously mentioned, corporate cross-border financing is based on net assets, while banks are based on core capital. After the coefficient's increase, the expansion of overseas financing capacity will increase the source of cross-border financing, expand capital inflows, and help boost domestic liquidity, especially foreign currency liquidity. This change will balance supply and demand in the foreign exchange market and play a role in stabilizing foreign exchange market expectations. This policy has been well-received by the market. I notice that many companies are very interested in it, and they are also happy to see the coefficient increase.
We've discussed many issues related to the exchange rate. Whether viewed from the perspective of cross-border capital flows, foreign exchange settlement and sales data, the balance of payments, or even the maturity of the foreign exchange market and our policies, the RMB exchange rate has the potential to remain basically stable at a reasonable and balanced level moving forward. In the past, we have managed multiple rounds of external shocks, accumulated experience and improved our regulatory tools and measures. Not long ago, the PBC stated at a press conference that tools are meant to be utilized. We will adhere to comprehensive policies, focus on stabilizing expectations, and adopt different measures according to actual conditions to provide the market with a stable environment and expectations. This approach will facilitate foreign-related economic entities conducting business and investment activities. Thank you.
Yicai:
The current U.S. dollar interest rate remains at a high level, and there is a certain interest rate gap between the interest rates of China and the U.S. Against this background, could you tell me about any changes in China's foreign debt in the first half of the year? Thank you.
Wang Chunying:
Impacted by the Fed's interest rate hike, last year's external debt data experienced a slight deleveraging. However, the overall trend has stabilized since the beginning of this year. At the end of the first quarter, the total external debt balance stood at $2.5 trillion, representing an increase of $38.2 billion or 1.6% over the figure at the end of the previous year. China's external debt is anticipated to remain relatively stable in the first half of the year.
Looking at the composition of foreign debt, there are active and passive types of foreign debt. Different types of foreign debt demonstrate various characteristics of change, but these changes are relatively stable and moderate.
Let me talk about active foreign debt first. In recent years, cross-border financing of domestic entities has remained rational, with increases and decreases in active foreign debt being more moderate. Broadly speaking, cross-border loans obtained by enterprises, trade financing such as usance letters of credit, direct investment financing between affiliated enterprises, and interbank lending are all active foreign debts in which domestic entities actively use overseas resources. When the Fed's monetary policy was lax in the initial stages, these active foreign debts did not significantly increase leverage, so the adjustment pressure was relatively minor when the policy was tightened later. The balance of active external debt decreased by 6% last year and remained essentially stable in the first half of this year. During the previous round of external debt deleveraging in 2015, the balance of active external debt fell by 29%. Specifically, among the active foreign debts this year, only cross-border loans obtained by enterprises have declined, while the balance of other active foreign debts has moderately rebounded or remained basically stable.
Examining passive external debt, since the beginning of this year, overseas entities have been more proactive in allocating RMB-denominated assets, and passive external debt has remained basically stable. Passive external debt refers to foreign investors investing in domestic bonds and non-residents depositing in domestic banks. Recently, foreign investors have increased their holdings of bonds for two consecutive months, and the situation is improving month by month. Furthermore, the balance of deposits of non-residents from overseas rebounded in the first half of the year, reversing the decline of last year. This overall stability of the passive external debt balance reflects the long-term investment value of RMB-denominated assets.
Additionally, the structure of China's external debt has further improved, and the risk is generally manageable. In terms of the types of debt, in recent years, the growth of external debt has been driven by overseas investors investing in domestic bonds, most of which have had medium to long-term maturities. The share of external debt used for the purpose of financing, such as cross-border deposits and lending, fell to 53%. In terms of maturity, the proportion of medium and long-term external debt is rising, while short-term external debt is mainly being driven by cross-border financing and credit. These are the essential financial tools widely used by import and export companies to conduct international trade. The use of trade credit, whether it is received in advance or deferred, is a good indicator of the competitive edge of Chinese export companies' products, as well as import companies' choices for overseas suppliers. In terms of currency, the proportion of RMB-denominated external debt reached a historical high. At the end of 2022, the debt payment rate, debt rate, liability rate and the ratio of short-term external debt to foreign exchange reserves were all within the international safety zone. This means that China's foreign debt is safe. Also, China is a net creditor nation, and the synergy between external assets and liabilities is strong.
Overall, the ratio of China's external debt to GDP has remained at 14% to 16% in recent years. Cross-border financing is generally in line with the development of the real economy, and China's external debt is expected to remain stable in the future.
That is all from me in answer to your questions. Thank you.
