Policy Talking Points: Q&A on the Chinese Economy

来源: CHINA FOREX 2017 Issue 2 作者:Mu Zhiqian

In an effort to gain a better understanding of the state of China's foreign exchange administration,the value of the renminbi and how foreign exchange reserves relate to renminbi internationalization,Debra Lodge,Managing Director Global Markets,Head of RMB Business Development North America interviewed Mu Zhiqian a former consultant to the State Administration of Foreign Exchange. That discussion follows in question and answer form.

Q: The prolonged decline in China's foreign exchange reserves has stopped and some people say this is mainly due to curbs on capital outflows rather than renewed strength in capital inflows. Would you agree that this is the source of the improvement in the forex position?

A: The improvement in the forex position is not only a pleasant phenomenon,but also a dynamic driven by multiple factors. Currently,the global economy is experiencing a slowdown,and so is international trade. The Chinese economy is still under downward pressure,and efforts continue to reduce overcapacity,draw down inventories,promote deleveraging,cut corporate costs and shore up economic weak spots. Policy makers face challenges from inflation and deflation. However,China's foreign exchange reserves are holding at a relatively balanced level and that signals a stable economy. Granted,strengthened efforts to verify authenticity of transactions on the current account as well as capital account compliance supervision are also essential factors. In terms of the nation's forex position,taking into account the trade surplus and capital outflows,the net position in in surplus.

Q: If the forex reserves start to decline again will there be new controls on moving capital offshore?

A: The economy has vitality and the markets fluctuate. It is every government's responsibility to adopt dynamic management methods and guide market expectations according to the changes in the market and the overall economic situation. The management of expectations is a priority of financial regulation. It is not uncommon to see pessimistic views towards the Chinese economy. Some market players may even anticipate a depreciation of the renminbi. All of this plays a role in market sentiment. It would be unfair to say that speculative factors have not played a part in this situation. But the accumulated market issues,including asset bubbles,require market solutions. It is anticipated that future regulatory changes will have the aim of maintaining orderly and progressive capital flows. Of course,adjustments to policy will be made based on market conditions.

Q: How does this affect the campaign to make the renminbi an international currency? Is this a short term setback or a long term problem?

A: Renminbi internationalization is an objective and progressive process rather than a subjective or hasty one. By objective,I mean a process that reflects a balance between supply and demand. In other words,market demand will be met with renminbi assets and local currency settlement. There are two implications of "progressive." First,it is a gradual process that takes into account the growing role of the renminbi as a reserve asset. Second,renminbi internationalization and China¡¯s capital market liberalization are related and mutually reinforcing. The degree of foreign exchange regulation is unfolding. You are asking whether stricter foreign exchange regulation will affect renminbi internationalization. In response I would just say you have to learn to walk before you can run. But our foreign exchange regulation lays a solid foundation for renminbi internationalization.

Q: China recently concluded the "Belt and Road" summit. The initiative will probably result in more Chinese investment in offshore projects. Will this put new pressure on the foreign exchange reserves? 

A: The "One Belt,One Road" initiative is a well-rounded program aimed at creating global economic prosperity. It mainly focuses on infrastructure interconnection. There are 65 countries in the regions encompassed by the program and 44 of them have less industrial capacity than China. Capital exports do not only refer to currency but also the capacity to build infrastructure,including machinery and equipment,as well as raw materials,labor and technology. Moreover,if you take a dynamic view,the "Belt and Road" initiative is a global program that will be rolled out over time. It is also an accumulative process. The outcomes will ultimately benefit investors and add to foreign exchange reserves over the long run.

Q: The China Foreign Exchange Trade System (CFETS) said recently that authorities are considering a change in the method of calculating the parity rate for the renminbi against the US dollar to include "countercyclical variables" - meaning that the parity rate might not follow the previous day's closing rate so closely. CFETS said this would be designed to reduce the impact of irrational market expectations. Does this mean that China is no longer so eager to make the exchange rate driven by supply and demand on the market? Is this a temporary measure or something longer term? And would countercyclical variables be used for other parity rates -- or just the dollar?

A: The term "countercyclical variables" is quite new to the terminology of macroeconomic regulation. When applied to the renminbi exchange rate formation mechanism,it indicates a gradually maturing financial market. The exchange rate is not only an indicator of supply and demand,but it is also something that is used in managing market expectations. The core component of macro prudential management is "counter cyclical" actions in order to prevent dramatic fluctuations and thereby maintain stable conditions. The U.S dollar is the leading currency in the global financial system. There is no doubt that the use of "countercyclical variables" between the renminbi and the US dollar is essential. Whether this will be used for determining other parity rates against the renminbi depends on the outcomes of practice and developmental demands.

Q: Moody's recently reduced China's sovereign debt rating,citing concerns about the rapid rise in leverage levels. Do you expect this to have an impact on foreign exchange policy in terms of foreign borrowing?

A: Based on its professional assessment,Moody's reduced China's sovereign debt rating. I guess I don¡¯t need to comment on that. Personally,I think it is reasonable to have an objective rating rather than a high or low one which has no direct connection to foreign borrowing. There are two main components to China's foreign borrowing. These are government borrowings and borrowing of the nation's enterprises. The total of these two types of debt is clear and controllable. Any foreign debt that has been registered with the State Administration of Foreign Exchange will be paid back in full at the scheduled time.