China's Forex Market Finds a New Balance

来源: CHINA FOREX 2017 Issue 3 作者:Wang Chunying

China's capital outflows have eased significantly this year,and supply and demand on the domestic foreign exchange market have been more in balance.

China's foreign exchange reserves have also continued to rise this year. As of the end of July,China's foreign exchange reserves reached US$3.08 trillion,up US$70.2 billion from the end of 2016. Between February and July China posted six consecutive months of increases in its reserves.

The deficit from bank sales and settlements of foreign exchange on behalf of customers narrowed significantly over the January-July period. The deficit totaled US$109.3 billion over the seven months,down 47% from the same period a year ago. The monthly average deficit between February and April was US$12.2 billion,though the monthly average between May and July was US$17.9 billion. This was partly the result of heavier remittances of profits from foreign-funded enterprises and seasonal demand from individuals for foreign travel. It also compared with low January's US$19.2 billion. Considering other factors such as forwards and options,China¡¯s foreign exchange supply and demand has tended to be on a more balanced footing since February.

The payments and receipts from non-bank sources was somewhat more balanced. From January to July of 2017,the deficit from non-bank sources -- enterprises and individuals --  was US$106.2 billion,marking a year-on-year decrease of 47%. The average deficit in the first two months of the year was US$22.4 billion,down 17% from a year earlier. In January and February,there was an average US$4.6 billion monthly surplus of foreign exchange receipts and payments but between March and July,there was an average monthly deficit of US$6.3 billion.

The renminbi exchange rate also remained basically stable over the first seven months of this year. From January to July,the mid-rate for the renminbi against the US dollar appreciated 3.1%,while the spot rate on the domestic market,referred to as the CNY rate,gained 3.2% and the offshore rate,known as CNH,was up 3.7%. Judging from this year's trading patterns,two-way volatility of the renminbi has increased significantly.

Among the main market entities,the interest in buying foreign exchange became more moderate. The ratio of customers purchasing foreign exchange from banks compared to the total of foreign exchange transaction by customers was down from January to July in 2017. In this period the ratio was 67%,down nine percentage points from the same period in 2016. The figure was 68% and 67% in the first and second quarters respectively,and 63% in July,showing an easing trend of foreign exchange purchases by enterprises.

On the other hand,the exchange ratio related to foreign exchange settlements has risen. From January to July,the ratio of customers selling foreign exchange to the banks compared to the total of foreign exchange earnings by bank customers was 62%,up 2 percentage points from the same period last year. The ratio was 62% and 63% in the first and the second quarter and 62% in July,indicating that market participants were more willing to make foreign exchange settlements.

Stabilizing Trend

The foreign exchange surplus from sales and settlements related to merchandise trade grew rapidly,and the gap between imports and exports narrowed. From January to July of 2017,the trade surplus fell by 20% year on year,according to customs data,but the surplus from foreign exchange settlements and sales related to merchandise trade rose 73% year on year. Although the surplus on settlements and sales was lower than the actual trade surplus,the gap dropped 48%.

Meanwhile,cross-border financing continued to rise. According to published data,as of the end of the first quarter of this year,China's total foreign debt reached US$1.44 trillion,up US$17.1 billion compared with the end of 2016,with steady growth recorded over four consecutive quarters. From preliminary data,foreign debt continued to rise in the second quarter. In addition,over the first seven months of this year,the balance of domestic foreign exchange borrowings rose by US$4.1 billion,while that of the same period of last year dropped US$58.3 billion. The number of enterprises purchasing foreign exchange to repay foreign exchange loans fell 57%.

Outbound foreign direct investment became more reasonable. According to the Ministry of Commerce,from January to July,China's outbound direct investment reached US$57.2 billion,down 44% from the same period of 2016,and slightly below the level for the same period in 2015. Outbound foreign direct investment in June stood at the highest level since December 2016,reaching US$13.6 billion. While that was down 11% year-on-year,it was up 66% over the previous month and was followed by a US$9 billion in July,the second highest level this year. The above data showed that irrational foreign investment has ebbed,though there is still interest from enterprises in taking a bigger role in the global market.

Forward foreign exchange selling and settlements shifted from deficit to surplus,driving banks to continue to sell foreign exchange into the market. From January to July in 2017,the surplus on forward foreign exchange settlements and payments was US$12.1 billion,compared with a deficit of US$45 billion in the same period in 2016. This shows that expectations of a depreciation of the renminbi have been weakening. Banks continued to sell down their foreign exchange balance,providing additional supplies of foreign exchange for the market.

Purchases of foreign exchange by individuals tended to become more stable. From January to July,individual purchases of foreign exchange (including domestic purchases and bank card spending) fell by 8%. Individual purchases of foreign exchange in May,benefiting from the Labor Day and Dragon Boat Festivals,climbed 16% over the total for the previous month. Individual purchases of foreign exchange in June and July increased by 5% over May,but there was a year-on-year decrease of 1%,indicating that the purchases of foreign exchange by individuals had become more rational.

Meanwhile,remittances of profits by foreign-invested enterprises have also increased. From January to July,remittances for payments of dividends and bonuses as well as profit distributions by foreign companies rose 31% year on year. Monthly payments from May to July increased by 82% over the January-April level,indicating that demand for repatriation of profits by foreign investors could be fully met.

Stronger Growth

The state of the domestic economy,policy directives and other factors played a role in stabilizing the market. In the first half of 2017,China's economy grew 6.9% year on year after posting 6.8% growth in the fourth quarter of 2016. At the same time,the mechanism for setting the mid-rate of the renminbi against the US dollar has been improved,demonstrating greater flexibility. Authorities were also actively guiding the market,and that led to more rational purchases of foreign exchange by businesses and individuals.

Global financial markets have also contributed to the overall situation. The weaker US dollar has reduced depreciation pressure on the yuan against the US currency. Although the US Federal Reserve raised interest rates in March and June,and signaled it would begin shrinking its balance sheet,the dollar index fell 9.1% in the first seven months of this year. This reflected internal and external factors. On the domestic side,the new US administration has been unable to live up to market expectations in terms of policy implementation. Moreover,the administration has signaled it does not want a strong US dollar. On the external side,the economic recovery of the euro zone helped strengthen the euro against the dollar while fresh market uncertainties were avoided as French voters rejected a populist wave and threw their support behind a more traditional candidate in the presidential election.

The domestic economy continues to show signs of improvement. In June this year,the International Monetary Fund raised China's economic growth forecast for 2017 to 6.7%. The small fluctuations in economic performance throughout the year will not have a significant impact on market expectations.

Meanwhile,the continued opening of financial markets and other policies will play a positive role in guiding market sentiment. For example,the interaction between bond markets in Hong Kong and the mainland through the Bond Connect program and the addition of Shanghai and Shenzhen A shares in the MSCI Emerging Markets Index provided great support for the actual inflow of funds and market confidence.

With policy guidance of the market,the foreign-related transactions of the domestic market will remain relatively stable,outbound foreign investment will be more rational and external liabilities will grow in a more stable fashion reflecting actual demand.

Finally,the market impact of the Federal Reserve's monetary policy adjustment has weakened. If the dollar exchange rate remains stable,it will help the stability of the renminbi and keep China's cross-border capital flows relatively stable. Of course,there are still many uncertainties in the domestic and global environment. There is a need for close attention to any changes in the situation and to strengthening the nation's real-time monitoring and analysis.

The author is director of the Balance of Payments Department of the State Administration of Foreign Exchange.