CCTV:
I'm concerned with the issue of cross-border capital flow you just mentioned. I would like to hear your comment on the situation in 2017 and your prediction for the new year.
Wang Chunying:
China's cross-border capital flow showed a trend towards achieving a basic balance in 2017. I believe you have all felt the changes long since. The data released also reflect some of the changes. Since you've raised this question, I'd like to share some of my perceptions with all of you.
First, 2017 was a turning point for China's cross-border capital flow as the country saw a change from net capital outflow to a basic balance between inflow and outflow this year. Over the past three or four years, affected by both internal and external factors, China had experienced a change from long-standing net inflow to net outflow. The net outflow had continued for a time. However, new changes have taken place since 2017 began. First, China's forex reserves reversed the falls of 2015 (512.7 billion US dollars) and 2016 (319.8 billion US dollars) and rose by 129.4 billion US dollars in 2017. Second, China has achieved a basic balance of international payments. The current account surplus remains in a reasonable range and there was the change to a net capital inflow. According to the most recent statistics, China's current account surplus was equivalent to 1.3 percent of China's GDP in the first three quarters of 2017. The ratio was 2.7 and 1.8 percent respectively in 2015 and 2016. The fall in the ratio indicates that China's current account is more balanced and this should be seen as a contribution to the rebalancing of the global economy. As for non-reserve financial accounts, they registered a deficit of 434.5 billion and 417 billion U.S. dollars respectively in 2015 and 2016, and a surplus of 112.7 billion U.S. dollars in the first three quarters of 2017. This also reflects the change from net capital outflow to net inflow. Last, expectations for RMB's exchange rates and market entities' international transactions have become more stable. In a market where RMB can both appreciate and depreciate, both enterprises and individuals prefer to diversify their international forex transactions instead of making only one-way transactions. This has contributed to a balance in the supply and demand of forex. Currently, market entities are relying more on their actual needs to make decisions on cross-border earnings and payments as well as on forex purchases and sales. In 2017, the forex surplus from trade in goods and the forex capital settlement of foreign-invested enterprises both displayed an upward trend. Cross-border financings continue to grow at steadier rates. Outbound investment and individual forex purchases both fell in an orderly way.
Wang Chunying:
Second, the market environment both at home and abroad has become more stable, pushing the supply and demand of foreign exchange in our country to a basic balance. First of all, the domestic economy has been further consolidated with a steady course of improvement. In the first three quarters of 2017, China's GDP grew by 6.9 percent year-on-year, 0.2 percentage point higher than the growth rate in 2016. The economic structure was continuously optimized, and the economic efficiency and corporate profitability continued to improve. The official purchasing managers' index (PMI) in 2017 continued to be in an expansion range, with the monthly average reaching 51.6 percent. All of these are essential and fundamental factors for stabilizing cross-border capital flows in our country. And the reform and opening up has gradually deepened. A series of policies to further improve the RMB exchange rate formation mechanism and promote the growth of foreign investment were introduced. The bond market continued to expand and Bond Connect was launched. The A shares will be included in the MSCI index. Finally, the external environment is showing signs of stabilizing. World economic growth is showing indications of snapping a two-year downtrend. The International Monetary Fund estimates that the global economic growth in 2017 was 3.6 percent, which is 0.4 percentage point higher than the global growth in 2016. International political risk eased. "Black Swan" incidents decreased remarkably. Despite the interest rate rise and portfolio drawdown by the U.S. Federal Reserve, the overall U.S. dollar index fell by 9.9 percent in 2017, and the currencies of emerging economies generally appreciated against the U.S. dollar. Thanks to a more stable market environment both at home and abroad, we can strike a balance between the supply and demand of foreign exchange in our country.
Wang Chunying:
Third, China's cross-border capital flows will remain generally stable in 2018. From a domestic perspective, economic development has entered a new era when the internal foundations will become more stable.
On the one hand, a high-quality development model helps to strengthen long-term market confidence. This year is the first for implementing the spirit of the 19th CPC National Congress. China will adhere to supply-side structural reform as the main feature of its economic roadmap, and will comprehensively push forward various tasks such as ensuring steady growth, advancing reform, making structural adjustments, improving living standards, and guarding against risks, and promoting sustained and healthy economic and social development. All of these activities will reinforce the willingness of domestic and foreign investors to invest and operate in our country on a long-term basis.
On the other hand, a fully-opened new pattern will help the equilibrium flows of cross-border capital. This year marks the 40th anniversary of the launch of China's reform and opening up. We will attract more long-term capital inflows by further expanding the scope and level of opening up, relaxing market access in an orderly manner, continuing to improve relevant laws and regulations, and strengthening intellectual property rights protection. At the same time, we will continue guiding and supporting outbound investments, in order to form a situation where capital inflows and outflows will be more convenient and balanced.
From an external perspective, international economic and financial operations remain stable, and the external environment will generally continue to be favorable. The global economy will continue to recover. The International Monetary Fund's forecast for global economic growth is 3.7 percent, 0.1 percentage point higher than 2017. At the same time, the normalization of monetary policies in the major economies continues moving forward steadily, which will have a relatively modest impact on the international financial market.
Therefore, under these conditions, China's cross-border capital flows in 2018 is expected to continue steady operation.
China News Service:
What do you think about the fluctuations in the balance of foreign exchange settlement and sales by banks in recent months? Will the trend continue?
Wang Chunying:
Thank you for your question. Recent months have indeed witnessed fluctuations in the balance of foreign exchange settlement and sales by banks, but the overall scale is not large. These fluctuations indicate the minor differences between the performance of the real economy and the financial sector in different months. But they do not change the balance of China's forex supply and demand.
On the one hand, from a statistical point of view, given China's enormous scale of foreign trade, it's normal that small fluctuations in the real economy will lead to surplus or deficit in foreign exchange when there tends to be a balance between forex supply and demand. Even in the past several years, when China faced pressure on forex inflows, there were also fluctuations.
On the other hand, banks will adjust their positions independently according to the balance of foreign exchange settlement and sales. Therefore, despite minor surpluses or deficits, there has been a balance between forex supply and demand in recent months.
When we talked to the media friends a while ago, a lot of friends were concerned about the question you mentioned. I would like to take this opportunity to communicate with you on the use of the data on cross-border capital flows in China. We are monitoring three types of data: forex settlement and sales, foreign-related receipts and payments by banks on behalf of clients, and international balance of payments. The first two are released monthly, and the latter is announced quarterly. Each set of data has its own specific meaning, and we should be careful when using and assessing them.
When Chinese enterprises and individuals and other market players receive foreign exchange funds, they can choose their own accounts according to their needs, or sell them to banks. If they sell them to banks, it will count as a foreign currency exchange, and they will be included in the statistics of foreign exchange settlement and sale. Therefore, bank purchasing and selling is the main body of foreign exchange supply and demand in China, but not all. The factors that affect the supply and demand of foreign exchange include the increase and decrease of foreign exchange positions in banks, and the sale of some overseas institutions in the foreign exchange market between domestic banks.
Wang Chunying:
The banks' foreign-related receipts and payments on behalf of clients refer to the cross-border money collection and payment that enterprises and individuals make through banks. The data cover only the clients' cross-border payments and receipts rather than the banks' foreign assets and liabilities. The Balance of Payments is a record that summarizes all transactions made between our country's residents and non-residents according to the international standard, and also a comprehensive indicator to measure our country's foreign-related transactions and cross-border capital flows. Currently, the statement is drawn up and published as per the international standard, but in a quarterly frequency instead of monthly or higher. We are making efforts to further shorten the interval. These three sets of data have different focuses and complement each other, and so should be differentiated when being put to use.
The data of foreign exchange reserves in the statement presents changes of foreign exchange reserves after ruling out changes of the exchange rate and the price of assets, which is the optimal indicator in general for the overall supply and demand in the foreign exchange market. The foreign exchange reserves of our country have been increasing since the second quarter of 2017 after a continuous decrease of nearly three years in the past, which indicates that China's foreign exchange market has basically realized the supply-demand balance. The banks' purchase and sale of foreign exchange as well as their foreign-related receipts and payments on behalf of clients also reflect the supply and demand of foreign exchange in different terms and perspectives. The slight surplus and deficit marked by fluctuations around the balance line do not affect the perceptions on the overall supply-demand balance of foreign exchange.
CGTN:
How do you see the change of China's outbound investment in 2017? And what's the government's attitude toward China's outbound direct investment? What kind of policies will it take as the next step?
Wang Chunying:
Thanks for your questions. Last year, the overall growth of China's outbound direct investment (ODI) is slower than before, with an improved structure and steady use of foreign exchange. On the one hand, we believe that domestic companies' ODI has returned to rationality. According to the statistics, the ODI that China's non-financial business made in 2017 dropped by 29.4 percent to US$120.1 billion, equivalent to that of 2015, demonstrating that the growth in 2016 was irrational. And it registered positive growth in November and December. The statistics also showed that ODI capital used in foreign exchange purchasing decreased 12 percent from 2016.
Furthermore, the ODI structure has further improved. According to the Ministry of Commerce, the main sectors of China's ODI were rental and commercial services, retail and sales, manufacturing and information transmission, as well as software and IT services. The proportion of ODI in these sectors was 29.1 percent, 20.8 percent, 15.9 percent and 8.6 percent. No new investment projects were made in the real estate, sports and entertainment sectors. New investments in countries along the "Belt and Road" accounted for 12 percent of the total, rising 3.5 percentage points from 2016.
In conclusion, China's investments overseas slowed with steady growth last year, and the momentum will be maintained in 2018.
Wang Chunying:
The Chinese government has a clear management principle regarding the policies of direct outbound investment. In August 2017, the National Development and Reform Commission (NDRC), the Ministry of Commerce, the People's Bank of China and the Ministry of Foreign Affairs jointly issued a Notice on Further Guidance and Regulation of Outbound Investment, clarifying the categories of outbound investments which are encouraged, restricted and banned. Last December, the NDRC released the Management Methods of Enterprises' Outbound Investments, which will come into effect in March. The institutional framework for regularized management has taken shape.
The SAFE will act in accordance with the latest policies and requirements of the authorities in charge of outbound investment to guide enterprises' "going out" in a stable and orderly manner. We remain committed to encourage enterprises to participate in international economic competition and cooperation, and integrate themselves into the global industrial and value chain. We have insisted on the principle of market-oriented operation following the international convention in which enterprises serve as the main player and government as the guide. We have continued with the reform to streamline administration, delegate powers, enhance regulation where necessary and provide better services.
In detail, we support capable domestic enterprises to conduct authentic and qualified outbound investments, and to participate in the "Belt and Road" construction and international industrial-capacity cooperation, thus, to promote the transformation and upgrading of the domestic economy and deepen the win-win cooperation between China and other countries. In addition, we remain committed to deepening reform while guarding against risks. We have kept a close eye on irrational outbound investments in some sectors and potential risks during the investment process, urged banks to strictly follow operational principles, and strengthened the examination of investment authenticity and its compliance with relevant regulations, so as to promote the sustainable and sound development of direct outbound investment and safeguard national economic and financial security. All in all, the SAFE has worked consistently with relevant policies.
CNR:
In 2018, the Fed will raise interest rates and shrink its balance sheet. The United States tax reform will also be implemented. How do you think these factors will affect China's cross-border flow of funds? And how will the State Administration of Foreign Exchange respond to it?
Wang Chunying:
We have also paid close attention to this issue. In 2017, the Federal Reserve raised interest rates three times and started downsizing its balance sheet. The Trump administration passed the tax reform act. Despite this, the situation of China's cross-border capital flows improved markedly. The supply and demand of the foreign exchange market has recently been more balanced. This shows that the development and changes in cross-border capital flows in China are actually the result of a combination of factors, both external and internal.
The external factors have many aspects. Taken together, the current external environment for cross-border capital flows in China is relatively stable. The influence of external factors, with the normalization of the monetary policy of the US Federal Reserve, are gradually weakened. Or, we may say, the market has quickly adapted to the changes. The domestic economy has stabilized steadily. The overall stability of cross-border capital flows in China is expected to remain stable. Here I would like to share with you how we look at this issue.
First, factors such as a rate hike by the Federal Reserve and tax reform by the U.S. government have not magnified the external market volatility, and the prospect of a relatively stable external environment is expected to continue. Previously, the normalization of the Fed's currency policy had led to relatively faster appreciation of the U.S. dollar and outflow of international capital from emerging economies. However, the related influences are gradually weakened with more restrictive factors. In 2017, the Federal Reserve raised interest rates three times and started downsizing its balance sheet. In theory, this helps to increase the U.S. interest rate and the exchange rate. However, in fact, the U.S. dollar index fell by 9.9 percent in 2017. The dollar index rose slightly, supported by optimism over U.S. tax reform, but fell again recently. The short-term federal funds rate increased by 75 base points year-on-year, but the long-term interest rates did not change much.
At the end of 2017, the yield on a U.S. 10 Year Treasury Note was basically the same as that at the end of 2016. This reflects the impact of many constraints. From the United States domestic situation, the inflation rate remained low. The Core Personal Consumption Expenditure Index (core- PCE), which is the preferred measure of the Fed, dropped from 1.9 percent in early 2017 to 1.5 percent at the end of the year. Also, judging from the long-run potential growth of the United States, Fed policymakers forecasted a rate of 1.8 percent, well below the rate during the economic boom. In addition, the U.S. government has said that it does not want the U.S. dollar to be too strong. All these factors will constrain the U.S. dollar exchange rate and interest rate increases. Judging from the external situation of the United States, we can see the economic recovery of other developed economies, especially the euro area, is relatively fast. Recently, the ECB raised its forecast for economic growth in 2018 and began to reduce the scale of its quantitative easing monetary policy. The improved political stability of Europe is also good news for the euro to gain strength while putting pressure on the dollar.
Second, the sound performance of the domestic economy played a fundamental role in ensuring steady cross-border capital flows, and I'm sure it will play a bigger role in this field in the future.
Above all, China's economic growth is faster than many other countries'. Continuous improvement has been made in industry chains and infrastructure. The domestic labor force's skills can meet the demands of enterprises. As a result, Chinese enterprises can operate smoothly and make comparatively high profits. In the first 11 months of 2017, the profits made by industrial enterprises above the designated size rose 22 percent as compared with the same period of the previous year.
Furthermore, individual income increased continuously, and consumer spending was further upgraded. This means the domestic market has great potential, and it's very important to investors.
Also, China has clear overall objectives and flexible mechanisms. The financial market is running smoothly with sufficient foreign exchange reserves. We are thus capable of responding to risks.
China is working hard to open up on all fronts. The business environment has been optimized. The domestic market is becoming more open. The market-based mechanism for setting the RMB exchange rate has been continuously improved. All these factors are a boon to stabilizing market expectations and attracting foreign investments.
China also adopted many measures to reduce taxes and fees. Given the fact that the United States and European countries have strengthened supervision to ensure investment safety, I'm sure Chinese and overseas investors will make investments in a rational and cautious manner after considering all factors.
Regarding how to respond to the problem you mentioned, we will keep a close eye on all exterior factors, follow all changes, and make sound analyses so as to find proper solutions.
We will improve data collection and oversight of the cross-border capital flows, make a timely analysis, and make predictions of possible changes. We will continue to carry out reforms and fend off risks. We will improve trade and investment facilitation, promote capital account convertibility at a steady pace, and provide better services to the real economy, thus making a contribution to the new opening up campaign of the country. To safeguard the country's economic and financial safety, we will fend off risks in the cross-border capital flows, improve the macroprudential regulation system and micro-regulation system, and clamp down on law-breaking activities.
Reuters:
Since last year, the RMB has appreciated rapidly against the US dollar. Will it influence exports and the economy? Last week, media reports said that China may slow down or stop purchasing U.S. government bonds. Statistics from the U.S. Department of the Treasury last November showed that China slightly cut its holdings in U.S. treasuries. What's your comment on this?
Wang Chunying:
I would like to first answer your questions regarding U.S. government bonds. We also learned the information from the news report. The management of foreign exchange reserves in China always holds the principle of diversification and decentralization. One of our major tasks is to ensure that foreign capital is under security, maintain and increase its value. As for the specific type, such as the U.S. government bonds you mentioned, we believe the actual performance of these foreign exchange reserves is objectively decided by the market, professionally operated in accordance with the market requirements. Those who pay attention to the global market and China's foreign exchange reserves should notice that, no matter which foreign exchange is or who the market player is, the Chinese department in charge of operating foreign exchange reserves is a quite responsible investor. The measures they took not only stabilized the international financial market, but also ensured that China's foreign exchange reserves maintain and increase their value. And as you mentioned just now, China slightly cut back on its holdings of U.S. government bonds last November. Actually, the report named other investors besides China.
With regard to the RMB exchange rate, the recent growth of it resulted from the Chinese economy achieving sustained sound growth and the depreciation of the U.S. dollar. Currently, the Chinese economy sustains a steady and robust growth rate, a balanced supply and demand, providing a very strong impetus for economic growth. All of these will keep the RMB's stable position in the global monetary system. At the same time, there still are uncertainties brought by the recovery of the world economy and the normalization of the currency policies in major economies.
The RMB exchange rate will more likely move in both directions in the future. As for its influence on exports and the economy, the statistics I just released, as well as the data published by the Customs and Ministry of Commerce earlier will give you the detailed introduction. We believe that, acting in accordance with the decisions and plans of the 19th CPC National Congress and the Central Economic Work Conference, China will continue to deepen the reform on the market-based mechanism for setting the RMB exchange rate, improving RMB exchange rate flexibility, in a bid to maintain its general stability at an adaptive and equilibrium level.
China Daily:
Did companies make any change to manage risks after the stronger fluctuations of the RMB exchange rate in 2017? Will the State Administration of Foreign Exchange work out any plan in 2018 to guide companies to manage risk?
Wang Chunying:
I would really like to convey more information on risk management in exchange rate to the market players through the media. Since 2017, Chinese companies have further improved their risk management to adapt to market changes. In fact, the risk tolerance of the companies is directly related with their awareness and management of the risks. After the fluctuations, we are pleased to have seen that most companies no longer simply gamble on the appreciation or depreciation of the RMB exchange rate, and there are less irrational behaviors or responses out of panic. The State Administration of Foreign Exchange has also asked the banks in many ways and channels to inform the market players and clients of the risks, and to guide the companies to establish risk-neutral awareness and sound risk management.
Risk-neutral awareness really matters, but we still see many companies not putting due risk management in place due to the following two main reasons. First, inadequate understanding towards the risks. Some companies are still used to gambling on either appreciation or depreciation of RMB, and make subjective judgments rather than proper risk management. Second, insufficient understanding towards hedging. Hedging is actually an investment to reduce risk, just like spending a little money on insurance. Some companies are unwilling to pay the money, or regard hedging as a means of speculation and ignore its essential function of offsetting the risks of uncertainty. They lack the awareness of controlling risk exposures, and even pursue profits in the risks sometimes rather than taking prudent hedging measures. Some companies may find their judgments wrong when the foreign exchange market fluctuates, but a unified adjustment of the risk exposures may lead to unbalanced supply and demand of foreign exchange, aggravate the fluctuations of the RMB exchange rate and the interest rate, and contribute to panic and chaos in the market, eventually increasing systematic risks and harming their own business.
In the future, as the mechanism for promoting the liberalization of the RMB exchange rate improves, companies must enhance serious risk-neutral awareness to manage exchange rate risks. In 2018, the State Administration of Foreign Exchange will continue to motivate companies to improve their management of foreign exchange risks and create a better environment for the reform of the mechanism. Reform must take the market into consideration, and market resilience in face of risks is often related to risk awareness and risk management of the market. If companies do not change their fixed mindset, still gambling on appreciation or depreciation instead of taking hedging moves, they may not be able to adapt themselves to even normal fluctuations, and may take irrational actions out of panic. In turn it will hinder the reform. Therefore, the State Administration of Foreign Exchange will give more guidance to the market, and I also hope you can help us with it. Meanwhile, we will urge financial institutions to continue their instructions to clients on risks, help companies enhance risk-neutral awareness and improve the management of exchange rate risks. We will also push forward reform in the foreign exchange market, diversify products, attract more market players, expand the market, open up the foreign exchange market further, and improve the infrastructure of the foreign exchange market. Through these efforts, we will improve services and increase the attractiveness and global competitiveness of our foreign exchange market, and safeguard the market players from risks more effectively.
Financial Times:
The problems involving onshore guarantee for offshore loans drew considerable attention last year. Do you think the problem is no longer troubling, or will it affect China’s forex policies?
Wang Chunying:
The onshore guarantee for offshore loans is a practice in capital management. After the reform of cross-border guarantees in 2014, it developed rapidly, playing a positive role in lowering costs, diversifying financing channels and improving policies and environments for domestic enterprises involved in overseas financing and investment.
However, recently, we noticed that there were subtle changes and new problems in the practice. I’ll give you some examples. First, the contract fulfillment rate is rising. Since 2016, both the amount and contract fulfillment rate of onshore guarantee for offshore loans provided by domestic banks and other financial institutions have expanded. Second, some enterprises are taking advantage of the practice to escape market supervision. Since the second half of 2016, relevant policies have been improved, but we discovered that some domestic institutions use the practice to escape domestic market supervision. Last but not least, some domestic banks didn’t have a strong sense of compliance. They did not examine carefully the authenticity of the information they were given, the prospects for contractors being able to fulfill the agreements and the financial backup that enables debtors to pay back their loans. Some banks only checked the information in a formalistic way. We have demanded they correct these wrong practices during the course of our inspections.
In view of those problems, we have reiterated the responsibilities of the banks in handling relevant business. For example, they are required to confirm the qualifications of concerning parties, find out how the fund will be used, check the background regarding the transactions, ensure the primary source of payment, and evaluate if the contract can be fulfilled. They are also required to intensify the check of collateral, and establish a regular risk evaluation system for contract fulfillment.
Generally speaking, we have asked the banks to be more responsible when examining the businesses concerned. However, we are not changing our policies. On the contrary, we will continue to support the practice among banks and other market entities. Thank you.
Xi Yanchun:
Thank you, Ms. Wang. That's all for today's press conference. Thank you all.
