An Interview with the Officials at SAFE on the Issues of the Increase of Foreign Exchange Reserve in

1. People’s Bank of China recently released the balance of foreign exchange reserve, from which we can see that there is a sharp increase of the balance of foreign exchange reserve in the third quarter of this year. What’s your opinion?<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Officials at SAFE: The national balance of foreign exchange reserve totaled USD2648.3 billion at the end of the third quarter of 2010, increased by USD194 billion than that of the second quarter. The balance of foreign exchange reserve increased by USD55.1 billion in the first half of this year. The main reasons of the sharp increase of foreign exchange reserve in the third quarter are as follows. Firstly, the development of our foreign economic trade is maintaining stable. Moreover, some domestic enterprises repatriate foreign exchange on stock market. For instance, Agricultural Bank of <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />China is financing USD10.0 billion on Hong Kong stock market. Furthermore, currency conversion and the variation of assets price increased the foreign exchange reserve.

2. According to the financial data collected by the People’s Bank of China, there was an increase of RMB289.565 billion in foreign exchange reserve. Does that mean ‘hot money’ has arrived and the market might be suffered from it again? What’s your opinion towards the inflow of investment capital in the future?

Officials at SAFE: Recently, the inflow of investment capital in China is still under great pressure. On the one hand, our macroeconomy operates in a stable manner and the prospect of economic growth is promising. The local currency is expected to experience appreciation in the future and foreign capital inflow provides the driving force to some extent. On the other hand, the operation of international financial market is still experiencing unstableness. Our macroeconomic control is confronting a number of issues, including anticipated management inflation and assets price control for excessively increase. The factors mentioned above may be conducted by a few means, including foreign trade, foreign investment and banks, which accelerate the fluctuation of cross-border capital flows.           

It is required to adopt comprehensive measures in order to prevent the risks that result in the flow of ‘hot money’. The State Administration of Foreign Exchange has conducted specialized action to cope with and combat ‘hot money’ in China from the beginning of this year. The action mainly focuses on those high openness activities involving inflow of capital which include goods trade, service trade, direct investment and individuals. In the long run, Renminbi exchange rate formation mechanism is expected to be gradually improved and further explore the basic function of market mechanism in order to prevent ‘hot money’ interest arbitrage. Meanwhile, it is expected to focus on essential channels and links, strengthen the cooperation between supervision, apply severe combat all kinds of illegal foreign exchange business and take strict precautions against the inflow of ‘hot money’.