An another important press conference by SAFE on cross-border flows to share with our foreign readers.
The main officials attending this press conference from SAFE is Mr. Wang Yungui, head of comprehensive department; Wang Chunying, deputy head of balance of payments; Du peng, deputy head of current account management; Guo Song, head of capital account management; as well as Zhang Shenghui, head of management of inspection.
Q1 (Journalists from yicai.com): Before 2014, our FX management policy is mainly focused on dealing with FX inflow; now that things have changed, I am wondering if our policy tool box can deal with the new situation. What are the tools we have for now? What are the tools that we have been researching on, such as Tobin tax? Is there any market guidance management materials that you can share with us after last year’s lessons?
A: (Wang Yungui) Let me answer your question briefly. Prior to 2014, we did face a long term FX inflow pressure of around 10 years; our FX reserves have been accumulated on an annual basis for a number of years. During the circumstance and situation at that time we did come up with a lot of tools, and we can say we have effectively dealt with cross-border funds inflow as well as its pressure on FX management and the macro economy. After 2014, following the potential rate hikes of the US as well as the increasing volatility of global financial markets, a number of emerging economies have faced FX outflow pressures, with China not being the exception here as well.
Facing the FX outflow pressure, we believe we do have enough tools in our toolbox to deal with this pressure – since 2H last year till now, we have come up to the conclusion that we do have enough tools to deal with this. This toolbox includes a multiple kinds of tools – for current account management that already achieved full convertibility, we tend to stress the authenticity and compliance of transaction. Thus, for the past period of time, we have stressed the banks to inspect on authenticity and compliance check of trade of goods and services, which achieved good results. Some of the transactions were fake or fabricated to achieve fund outflow, which we have inspected and checked. We have dealt with some of the criminal cases involved as well, which is effective. For capital account items that still hasn’t achieved full convertibility, our approach is through management of “leaving traces”- for instance for direct investment that has already basically achieved convertibility, including FDI and ODI, we asked market participant to register at banks when conducting transactions – the registration requirement is basically to “leave trace” of your transaction, which we will use big data analysis to track these traces and conduct comprehensive analysis, compliance checks and inspections. These tools are quite effective. For partially opened capital accounts, such as QFII and QDII, we have liaised with related departments to conduct approvals and and supervision, which also achieved good results. So far, through the qualified institutional investor regime, it is beneficial to welcome both inflows and outflows in the capital market. Foreign funds invested in China’s stock, currency and bond markets; and Chinese firms invested in foreign capital markets, of which QDII also achieved great results.
Therefore, we find the risk to be controlled in terms of volume and the micro-level activities are still robust. The tools we used are still effective. Going forward, we will continue to develop new tools, including what the journalist has talked about whether will there be a Tobin tax consideration – we have to say Tobin Tax is one of the tools we are researching on as part of our tool box. The related international experience is quite varied, including financial transaction tax of Latin American countries, we are also conducting related research. The policy making on collecting non-interest required reserves for forward FX sales by PBOC is also a good tool from our perspective. Going forward, we will continue to research, including policies that encompass FX debt macro-prudential policies, which is also within the scope of the tool box. Thus, we believe our policy tools are effective under the current circumstance, and the related measures can be effectively executed with the positive coordination from the banks.
Q2 (Journalist from FT): What do we have on the cross-border fund monitoring by SAFE?
A: (Wang Chunying) We continue to have quite frequent monitoring, including observation and analysis of different sorts of data on a daily basis. For the recent situation, Yungui has just briefed you on this. Judging from the situation last December, this January, February and even March, there has been a clear trend of relaxing pressure of FX outflows. For instance, the declining trend of FX reserve reduction, falling FX net outflow from both FX sales and cross-border settlements. Also using working days and trading days to conduct daily estimate, the FX outflow pressure has been relieved on a gradual basis. In March, up till the 18th, the daily FX net sales has continued to decline by 9% compared to February, and the daily cross-border settlement outflow has declined by 30% from that of February. FX daily outflow has declined by 79% on a daily basis, there has been certain days with a net FX inflows. RMB exchange rate is quite stable on a general basis. Yesterday, the exchange center’s RMB NEER based on CFETS, BIS and SDR currency basket, has declined by 2.8%, 2.5% and 1.5% from year-end 2015, which is not too drastic. From the more detailed performance, the asset-liability adjustment of the market participants’ currency structure has been more stable – primarily, there has been less FX deposit increase among the residents, as FX deposit increased by 8.3 billion USD in February, 11.3 billion less than January. On the other hand, there has been slower pace of paying FX debt, for instance, the cross-border financing of imports has declined by 2.5 billion USD, 7.2 billion less than that of January.
The reason that contributes to this situation has to do with both changes of internal and external environment. For one part the financial market has gradually stabilized from volatility. After observation of USD index, since the fall from January it has kept a low-volatility fluctuation; the volatility index that reflects the market risk aversion situation, VIX, has fallen from the annual high in mid-February, which signifies a stabilization of global market volatility. On the other hand, RMB exchange rate has kept a stable range, with certain days having quite significant appreciation. For these couple of days, both appreciation and depreciation has been quite stable. Moreover, apart from the authenticity and compliance requirement on FX transactions to curb excessive speculations, there has been no further policies on FX management, which stabilized market sentiment.
Going forward, cross-border fund flows will keep stable on a general basis. On March 16th, the SAFE website has disclosed the FX sales and cross-border fund flows situation of February and attached a Q&A with the journalists on it, which provides everyone with a relevant introduction. In terms of main items, goods net exports and net FDI will remain robust. FX debt of enterprises have stabilized from the past year of deleveraging. Judging from the external environment, the market has reduced its expectations of Fed raising rates. If Fed continues to make monetary policy according to market expectations, it will continue to stabilize the global markets and capital flows. From a economy standpoint, this year’s annual growth target is 6.5% -7%, which is quite high growth comparatively speaking from a global basis. Therefore, the fundamentals of attracting foreign funds to come in has not been changed. We have discussed with FX outflow pressure with a number of specialists and academics from both China and the world, one of the famous foreign academics asked us a rhetorical question: where could you find a growth in the world that can achieve stable return of 7%?
Q3: (Journalist from economic information under Xinhua) As you just introduced and we also sent a message on our official weibo account in March, SAFE has increased authenticity requirement of banks since 2015. I am just wondering if such increase of supervision will have an impact on trade of enterprises?
A: (Du Peng) It is always an important task for SAFE to promote convenience of trade and serve the real economy. Since 2012, we have implemented the reform on FX managment system on goods trade. Through these reforms, we relaxed our supervision and cancelled the system of examining foreign trade on a transaction basis, and implemented the classification management on enterprises following the “reward the good ones, and limit the bad ones” doctrine. Till the end of 2015, we have 655,000 enterprises under the “enterprise list of goods foreign payments”, of which enterprises graded as “b” or “c” (less-credible enterprises) were as many as 5216, less than 1% of all enterprises. It reflects that most enterprises has been compliant to laws and regulations, which continue to enjoy the benefit of the policy. For those “less than 1%”, the regulation will be more severe. i don’t think it has an impact on normal trade, but rather have an effect of promotion. I want to stress that FX managment’s key role is still to serve the real econmy. Under the current circumstance, the direction of FX management reform has not been changed and the pathway towards facilitating goods trade and investments will not be altered. In the meantime, we will continue to enhance risk management, stressing on authenticity and compliance requirements, and enhance monitoring, early warning, inspection and punishment strength on violations of law or regulations. It is required to maintain normal FX market order via authenticity checks to keep trade of goods to be authentic and law-compliant.
In 2015, we have furthered our approach to certify and regulate authenticity checks of goods trade payments, without changing the current regulatory framework. But there is no additional regulation. To be clearer and more meticulous on certain regulatory requirement, is mainly devoted to deal with abnormal violations of certain enterprises under current circumstance, and the main purpose was to prevent cross border balance of payments risk. In the recent years, we have discovered some illegal enterprises taking advantage of the goods trade channel to conduct arbitrage or allocate cross border funds in violation of regulations, such as lack of true transaction-based FX payments, FX transfers via trade channels. There are also some using “offshore transfer sales” to construct fake trades and take advantage of the onshore-offshore interest gap. Thus, it is necessary to enhance authenticity checks and special inspections, in order to prevent and punish violations by the enterprises. It is also for the sake of creating fair competition environment for those who have been compliant with regulations.
Q4: (Journalists from US Global Market News) According to Wall Street Journal, China has been propping up its currency using non-public derivative trading. What is your comment on this?
A: (Wang Yungui) My general understanding is that, there have been all sorts of financial products on both onshore and offshore FX markets. For instance, onshore FX market has forward and swap products. The developments of these products was to, first, support flexible fluctuation of the currency, and second, to support reasonable hedging of enterprises and institutions, which is both reasonable and effective in its due process. Regarding the relevant transactions on the offshore market, we have to follow the financial regulators’ requirements of the offshore markets. The spillover effect of this on forex market, could have some misleading guidance on all sorts of products, but under full control in the due process. We don’t think relevant derivative trading has such a huge impact on our currency. Overall, our currency has followed the trend of maintaining basic stability.
Q5: (Journalists from CCTV) We would like to ask, based on recent reports, that domestic residents have been buying insurance products in Hong Kong. Would you please generally introduce the policy making on this?
A: (Wang Yungui) We have noticed relevant news. Regarding this, we have following convictions and thoughts: first, for Chinese residents to buy insurance products offshore, it needs to comply with policies according to China’s insurance regulatory departments (CIRC). Second, it needs to comply with FX managment rules on individuals. Forex management for onshore residents’ offshore insurance purchases is based on two scenarios: scenario 1, if it’s Chinese nationals traveling abroad, going on business trips or studying abroad, and they need personal insurance of accidents or possible sickness, it’s relevant to the service trade transaction, which is allowed and supported under the current FX management framework. Everyone who has gone abroad knows that there is no limit to buy insurance at this case, whether it’s travel insurance, accident insurance or insurance to prevent diseases – all supported by SAFE. Second scenario, is for Chines nationals to buy life insurance products or insurance products related to investment. These two types of insurance, according to us, belongs to finance and capital account transactions. The FX management regulations and policies so far, does not stipulate an opening for such products, or simply to say, the FX management policy hasn’t been opened for such transactions. We believe these transactions contain risks. In January, 2016, China Unionpay conducted a check on the offshore acquirer banks, and found out several offshore acquirer banks evading certain FX management policies. What is that policy? In 2004 and 2010, SAFE has sent two regulations regarding using bank cards, it supports buying insurance products for Chinese nationals under the framework of service trade stipulated above, but the quota is equivalent to 5,000 USD, which means single transaction should not surpass 5,000 USD. The January inspection by China Unionpay shows certain offshore institutions evading certain regulations of SAFE. Therefore, we request them to adjust and receive good feedback of coordination. Overall we believe, the capital account liberalization is still processing orderly, and the transactions of certain institutions and Chinese nationals on this were on uncharted territories, which we believe contains a lot of risk.
Q6: (journalists from Economic Daily) You just mentioned the Fed rate hike expectations, which is expected to be in June. But certain Fed officials have pointed out that there might be a rate hike in April. My questions is: if Fed’s rate hike is earlier than market expectations, will it create extra pressure on capital flows and RMB ?
A:(Wang Yungui) We don’t speculate on Fed’s rate hike’s timing, as Fed has a variety of indicators to consider its pace of rate hikes. But judging from the past, Fed rate hikes does have a lot of impact on global capital flows. Emerging economies including China and a lot of developed and developing countries have faced the issue of USD flowing back to the US. During this process, we believe certain amount of flows were a correction of a influx of capital towards emerging economies. For instance, after 2008 global financial crisis, certain countries carried out quantitative easing policies, a large number of cheap money flowed to emerging economies, including China. Post-2008, China has experienced a period of time with huge FX inflow pressure. Now Fed has conducted a rate hike policy, drawing back certain funds, which is a normal cyclical move. During this rate hike process, there generates certain FX outflow pressure, but our observation so far is that it is still tolerable and acceptable since 2H 2014. Also during this process saw a number of institutions repaying their USD-denominatd FX debt, and made structural arrangements on some trade financing products in advance. These conducts was helpful for corporates to deleverage and is helpful to avoid risks. So far since June 2014, there has been a 790 billion USD FX reserve drop, which is still tolerable. So far we still have 3.2 trillion of FX reserves, and has shown a declining trend of cross-border capital flows since December 2015. Whether it’s the decline in FX reserves, cross-border outflow or FX net sales’ decline, all shows the Fed rate hike’s impact on cross-border capital flows has been gradually consumed and dissolved, judging from the 3 data mentioned above.
Q7: (from Xinhua News Agency): I want to talk about the issue of buying offshore insurance products further – apart from certain legal risks as you mentioned, does that also concern the current capital outflow situation, and is there any individuals using this route to move funds offshore?
A:(Wang Yungui) Just as I said, the two offshore card use policies were based on two documents in 2004 and 2010. The 2010 document covered the 2004 document, but the core is consistent – we believe the purchase of accident insurance or certain illness insurance are within the range of current account, which is totally allowed and without restrictions. As long as you bought it with each transaction below 5,000 USD using cards, there is no issue with that. This is not a new policy and has been enacted since 2004. Quite recently, under the capital account category, certain individuals were buying health insurance or investment products when traveling abroad. These products we believe was purchased due to overseas asset dispersion, but such transactions, as I just said, belonged to capital account transaction and was not supported by policies. We don’t think this transaction has anything to do with the current outflow, as it could be a diversification usage for asset allocation. So my point is it does not equal capital outflow.
(Wang Chunying): Just now Yungui has given us an introduction on the policies regarding relevant insurance purchases, but it is in fact not a policy adjustment. Just as Yungui has stressed, we have made it clear in 2004 when we carried out such policy . But as journalists have raised a question why we did it now, we believe it is consistent with our check on authenticity and compliance. As long as it’s authentic, compliant transactions under current-account, we believe it is totally reasonable. When you overdrew funds overseas due to consumption, and your bought FX to payoff your remaining dues, its is also not disallowed. A lot of us may carry VISA or cards of other international organizations, we also conduct certain screening and classifying through onshore payer banks and receiver banks offshore. The policy is consistent for all of us, no matter it is for Unionpay card or other international cards. We have to specifically stress that card payments is only a fraction of different payment methods. We didn’t change our consistent approach of current account convertibility under the basis of authenticity and compliance, regarding the card payments, just to clarify a bit.
(Wang Yungui): SAFE will continue to support card usage for normal, regulatory-compliant consumption spending during travel, in order to facilitate international communications. We won’t change our policies with regards to consumption offshore and onshore FX payback.
Q8:(Journalists from Securities Times) My question is that as people have anticipated a rate hike by the Fed during June – September, will there be a occasional volatile moments for cross border flows, despite Mr. Wang just talked about a stabilization trend? Also, Governor Zhou has mentioned a potential clampdown on ultra-short-term cross-border speculations.What do you think is a good timing for Tobin Tax to come up?
A: (Wang Yungui) There will be a consistent existence of the Fed’s rate hike’s impact on global capital flows, and we haven’t denied that. What kind of impact will US rate hikes have on China’s cross-border capital flows, we can look at what happened during the past several rounds of rate hike cycle. We generally believe that US rate hike will exert a pressure on China’s cross-border capital flows, as there was no cheap USD flowing around during the rate hikes. When cheap USD were not around anymore, the domestic institutions that have borrowed FX debt as well as domestic institutions that needs to invest and consume abroad, will make certain financial arrangements, which is completely normal. Rate hikes will have a pressure on FX management, but we believe we do have a variety of tools to handle it, and so far the FX outflow has been within tolerable range for us. We have also made policy arrangements with regards to rate hikes by Fed. Market participants have preempted such need in advance, including paying back trade finances via purchasing FX. This is supported by us. It helps our micro participants evade currency risks, and reduce our FX debt dependency on a macro level. Regarding cross-border capital outflows, a policy toolbox was needed for FX management, including what Governor Zhou mentioned certain transaction taxes, including Tobin tax. In fact, Tobin tax is not an easy tax category. It was proposed by Tobin, an American economist, to “mix sands into the fast-flowing chains of the global capital flow”, so as to reduce the speed of capital flows. In the past PBOC and SAFE have conducted certain policy, which is effective. We believe we still need to research on whether to adopt Tobin tax for short-term capital flows in the future. We also saw countries like Brazil and Argentina, who adopted a 6% or certain percentage of financial transaction taxes, have merely a short-term impact, so we need evaluate further. We need to learn and reference foreign and domestic experience, especially from both theory and practice, to match with domestic practices. Under the framework of not affecting trade and investment facilitation, it will increase the trading cost of short-term speculative funds. We need to take into effect relevant policies and measures, which we will continue to research on. SAFE will follow closely with PBOC, as long as it’s helpful to the real economy and helps healthy development of the economy, it is all within our tool box.
Q9: (Reuters) As we all know, the regulatory side has been focusing on stability of RMB relative to a basket of currencies. But judging from CFETS’s data, RMB is a bit overvalued and a bunch of analysts believe it has been overvalued by 10%. Do you believe there will be a reasonable timing when RMB will be revert to its fair value?
A: (Wang Yungui) The policy arrangements by PBOC and SAFE regarding RMB currency was very reasonable from my perspective. We now talk about three main points: 1) RMB currency is based on market supply and demand, references a basket of currencies, and follow a managed and adjusted floating exchange rate regime. Theses three sentences didn’t say where fair value of the currency were, but tells it should reflect domestic market’s supply and demand on an institutional basis. At the same time, it should reflect changes in different global currencies. During this process, there will not be a laissez-faire policy that keeps market moving freely, it is still a managed floating regime. Only when the status is stable could you discover the reasonable equilibrium value or where the market fair value is. Regarding what you said that RMB was overvalued, if you investigate certain enterprises and institutions, there will be institutions that tell you that RMB has been undervalued. Regarding this issue, it is not meaningful talk about from a pure pricing standpoint, as certain enterprises used USD to settle, certain used euros, yen and won to settle their transactions. We tend to focus on a stable exchange rate across a basket of currencies. Regarding RMB-USD bilateral exchange rate, we believe it needs to reflect domestic supply and demand. It is at normal state for currencies to appreciate or depreciate, and it is also a normal state to keep basic stability against a basket of currencies. For the past period, there has been certain depreciation for RMB against the USD, but there has also been some appreciation against other currencies. Comprehensively hedging all currencies, RMB is basically stable against the basket of currencies. Just as Chunying has said, no matter is the CFETS, SDR or BIS basket, the direction is quite consistent, but the value might be slightly different, which shows basic stability of the RMB currency. Any institutions in the market speculating the fair value of RMB, would take certain policy risks on itself.
Q10: (Yicai newspaper) Any policy thinking on FX rate expectations management?
A: (Wang Yungui) – Expectation management is crucial as the financial market stresses confidence. Different from the real economy, confidence was extremely important to the financial market. Regarding expectations management, I believe the most important factor is to tell the truth to everyone. Financial market contains flock effect, as residents don’t know what the market really will perform and they tend to follow big institutions on this. We always tell everyone to focus on fundamentals regarding the RMB, such as GDP, labor productivity, CPI, trade surplus, which all reflects fundamentals. Governor Zhou, Yi and Pan all said one statement that RMB doesn’t have a base for long-term depreciation – it is in fact telling us that appreciation and depreciation of the currency rate was a norm, but long-term depreciation was lack of market base. I believe expectation management was extremely important and we need to tell the truth to everyone, as a responsible government and institutions. For instance we kept saying that trade surplus is still 590 billion USD and FDI inflow continues to increase. Chinese enterprises were paying down FX debt and delveraging, which is a good sign. Overall, with regards to RMB currency rate, we continue to stress that there is no base for long-term depreciation. The reasoning was complicated, but we believe all residents should look at market fundamentals, and that’s why we collect all these data to help us understand that.
Q11: (Shanghai Securities News) Premier mentioned the rollout of “Shenzhen-HongKong connect” during this year, what is the preparation by SAFE so far on the technical preparation on this?
A: (Guo Song) Shenzhen-Hong Kong Connect wasn’t prepared by SAFE. The first issue was that all funds are settled in RMB and is close-ended, so there is no FX management issue.