Market News International: 

What impact will the gradual narrowing of the China-U.S. interest rate differential (IRD) have on China's cross-border capital flows and exchange rates? Is SAFE concerned that the volatility of the yuan against U.S. dollar may cause foreign exchange losses for export enterprises? Thank you.

Li Hongyan:

The adjustment of monetary policies in major economies is a widely watched issue. We are continuously strengthening our tracking and monitoring efforts. In September this year, the Federal Reserve announced a 50-basis-point rate cut, signaling a shift from its two-year tightening policy and resulting in an adjustment to the China-U.S. interest rate differential. Looking ahead, uncertainties persist regarding the pace and trajectory of the Fed's rate cuts, with market expectations closely tracking changes in U.S. economic data. Historically, adjustments in the Fed's monetary policy have created spillover effects on global financial markets. While China's foreign exchange market has been affected, it has maintained overall stability, primarily due to support from domestic fundamentals. As China continues to pursue high-quality development and further economic opening-up, market resilience will strengthen, providing an even more solid foundation for foreign exchange market stability.

First, the continued recovery and improvement of China's economy helps strengthen the internal foundation for stability in the domestic foreign exchange market. Since the beginning of this year, the economy has maintained overall stability. Recently released GDP data for the first three quarters showed 4.8% year-on-year growth, positioning China at a relatively high level globally. China has strengthened countercyclical adjustments through macroeconomic policies, introducing a package of incremental measures to further drive economic recovery, boost market expectations and confidence, enhance economic vitality, and promote stable development in cross-border trade and investment. These measures provide a solid foundation for exchange market stability.

Second, the development of new institutions for a higher-standard open economy enhances the stability of the international balance of payments and the foreign exchange market. China's innovation-driven development strategy and comprehensive industry chain advantages will continue to play key roles. This will support stable foreign trade development, maintain the current account within a reasonable and balanced range, and strengthen internal-external economic equilibrium. Moreover, China's high-level institutional opening-up advances steadily, expanding cross-border investment channels, facilitating transactions, and promoting coordinated development of inbound and outbound investments. These measures will foster more balanced cross-border capital flows. Overall, maintaining balanced and stable international balance of payments helps preserve the yuan's stability at an adaptive and balanced level.

Third, the steady enhancement of China's foreign exchange market resilience helps adapt to and mitigate external environmental impacts. At the macro level, recent years have seen continuous improvement in the yuan's market-based exchange rate mechanism. The exchange rate's function as an automatic stabilizer for international balance of payments has strengthened, better releasing external pressures in a timely manner. At the micro level, businesses are utilizing forex derivatives more effectively to manage exchange rate risks and increasing cross-border yuan settlements to reduce currency mismatch risks. Since the beginning of this year, the forex hedging ratio of enterprises has reached 27%, while cross-border yuan usage in trade in goods has hit 30% – both at historically high levels. These positive macro and micro developments have alleviated the impact of forex market fluctuations on businesses, promoting more rational market expectations and transactions.

Regarding your concerns about the yuan exchange rate's impact on Chinese export enterprises, both theory and practice show that a country's exports are influenced by multiple factors, including external demand, domestic manufacturing capabilities and factor costs, with exchange rates being just one factor. Looking at China's situation, foreign trade has continued to improve this year. On the supply side, this improvement primarily stems from the enhanced competitiveness of domestic enterprises, while on the demand side, it relates to relatively stable global trade conditions. From a longer-term perspective, the main drivers of China's export growth have remained largely consistent.

From the perspective of exchange rate changes, this year the spot exchange rate of RMB against the US dollar has depreciated slightly by about 0.3 percent, and the RMB exchange rate has remained basically stable amid two-way fluctuations. Even the RMB exchange rate against the US dollar rebounding significantly in August and September was a general reaction of various non-dollar currencies to the weakening of the dollar. Moreover, the appreciation rate of the RMB is also at an average level globally, with its impact on imports and exports being relatively moderate.

SAFE has always paid close attention to changes within the situation. There are still some uncertain and unstable factors in the external environment. SAFE will monitor and evaluate international economic and financial situations as well as monetary policy trends of major developed economies. We will continue to accumulate and summarize response experiences, enrich the policy toolbox, and carry out countercyclical macro-prudential adjustments in a timely manner to effectively maintain the stable operation of the foreign exchange market. Thank you.