China Forex: What is your assessment of China's cross-border capital flows in 2017?

Wang Chunying: The past year was a turning point for China’s cross-border capital flows，which shifted from net outflows to a basic balance. In the past three to four years，under the combined influence of internal and external factors，China's cross-border capital flows had changed from a long-term trend of net inflows to a net outflow situation. However，in 2017 cross-border capital flows improved significantly; supply and demand in the foreign exchange market tended to be basically in balance. First of all our foreign exchange reserves increased after two years of declines. In 2015 and 2016，for example，our reserves fell US$512.7 billion and US$319.8 billion，respectively. But in 2017 they rose a total of US$129.4 billion. Second，the international balance of payments remained in basic balance，with the current account balance holding to a reasonable range and cross-border capital flows showing net inflows. According to official data，China's current account surplus was US$109.8 billion in the first three quarters of 2017，the equivalent of 1.3% of GDP. The figures for 2015 and 2016 stood at 2.7% and 1.8% of GDP respectively. This shows that China's current account position has been relatively stable and this has contributed to an overall balance in the global economy. In the first three quarters of 2017，the surplus of non-reserve financial accounts was US$112.1 billion，while there was a deficit of US$434.5 billion in 2015 and a deficit of US$417 billion in 2016，respectively. Thus China’s cross-border capital flows changed from a net outflow to a net inflow. Finally，the renminbi exchange rate is expected to remain stable. With a two-way fluctuation of the renminbi，foreign-related transactions by enterprises and individuals displayed greater diversity，with demand for purchases as well as sales. This contributed to more balanced supply and demand on the foreign exchange market. Cross-border payments and settlement of foreign exchange were being made in accordance with actual need. In addition，there was growth in the surplus from foreign exchange settlements on the trade in goods and foreign direct investment in 2017. Cross-border financing continued to increase at a steady pace. Foreign investment and individual foreign exchange purchases declined in an orderly fashion.

China Forex: In your opinion，what were the main factors behind the shift in cross-border capital movements from a net outflow to a basic balance?

Wang Chunying: Domestic and international market conditions became more stable，and in China there was a basic balance between foreign exchange supply and demand. First of all，there was a steady improvement in the domestic economy，and that situation continues. In the first three quarters of 2017，China’s GDP grew 6.9% over the same period of the previous year，representing an increase of 0.2 percentage point from the growth in 2016. The economic structure was continuously optimized as economic efficiency and corporate profitability improved steadily (profits of industrial enterprises were up 22% in the first 11 months of 2017). The official Purchasing Managers' Index (PMI) was in the expansion range for all of 2017 with a monthly average of 51.6 -- the highest level since 2011. This strengthened market confidence and played a fundamental role in stabilizing China’s cross-border capital flows. Second，the reform and opening up effort has gradually deepened. Policies aimed at improving the renminbi exchange rate mechanism and promoting foreign investment were introduced. The bond market continued to expand and became more open with the help of the Bond Connect program while domestic A shares were included in the Morgan Stanley Capital International (MSCI) Emerging Markets Index. Finally，the external environment is likely to remain stable. Global economic growth has steadied after two years of slower expansion. The International Monetary Fund (IMF) estimates that global economic growth in 2017 was 3.6%，an increase of 0.4 percentage point from 2016. International political risks have eased and so-called "Black Swan" events have been reduced markedly. The US Federal Reserve has raised interest rates and shrunk its balance sheet，as expected. However，the overall US dollar index in 2017 fell 9.9% and the currencies of emerging economies have generally appreciated against the dollar.

China Forex: What are your expectations for cross-border capital flows in 2018?

Wang Chunying: In 2018，China’s cross-border capital flows will remain generally stable. From a domestic perspective，China’s economic development has entered a new era with a more stable foundation. On one hand，a development model that emphasizes quality growth helps strengthen long-term market confidence. We are now in the first year of implementing the principles and policies of the Communist Party's 19th National Congress. China will adhere to its objective of achieving a structural transformation of the economy，make overall plans to promote steady growth，push ahead with reforms，improve people’s livelihood and work on risk prevention in order to ensure sustained and healthy social and economic development. This will consolidate the long-term confidence of domestic and foreign investors in China. Meanwhile，this new pattern of a full opening up of the economy will help balance cross-border capital flows. In 2018，the 40th anniversary of the reform and opening up program，more long-term capital inflows will be attracted through the expanding scope of the opening of the economy. Market access is being enhanced in an orderly manner，as foreign investment laws are liberalized and intellectual property protection is strengthened. At the same time，foreign investment will be effectively guided and supported in a more convenient manner that promotes balanced capital flows. From an external perspective，the international economic and financial performance has been stable as the global environment becomes generally favorable. In 2018，the global economy will continue to recover. The IMF expects the global economic growth rate to be 3.7%，0.1 percentage point higher than in 2017. Meanwhile，the normalization of monetary policy in major economies will continue to make steady gains，and this will have a relatively mild impact on international financial markets. Therefore，on the whole，China’s cross-border capital flows in 2018 will remain steady without significant changes.

China Forex: What specific work was done by the State Administration of Foreign Exchange (SAFE) in 2017 in order to improve the transparency of statistics on the international balance of payments and enhance the international standing of China's statistical data? What measures are planned for the future?

Wang Chunying: In order to give full play to the role of the balance of payments in macroeconomic analysis and decision-making and enhance the contribution of financial services to the real economy and society at large，SAFE made 87 releases of data in 12 broad categories related to the international balance of payments over the year in 2017. SAFE was acting in response to a G20 initiative to reduce the gap among member countries in their international balance of payments statistics. The main areas of concern for China were preliminary and official quarterly international balance of payments，the international investment position，external financial assets and liabilities of the Chinese banking sector，direct investment data of financial institutions，China’s semi-annual data of external securities investment assets with details by country or region，and China’s monthly international balance of payments statistics prepared in accordance with international standards，such as trade in goods and services. In addition，bank foreign exchange settlements，foreign exchange settlements processed by banks on behalf of customers，the general situation of foreign exchange market transactions in China，and exchange rates of various currencies against the US dollar were also areas where there were new efforts.

In the future，in order to improve data related to international payments and maintain a statistical system that meets international standards and the requirements of prudential supervision with Chinese characteristics，SAFE will continue to adhere to the principle of planning for the long term while focusing on present needs. SAFE will seek to improve the statistical system and the manner of data collection based on the policy of fostering continued development and the opening up of China’s economy and financial system. This is aimed at addressing new requirements from a new situation and meeting new business challenges. China will also seek to improve the transparency of statistics as it bolsters the quality of flow and stock data related to foreign economic activities in accordance with the latest international standards. This includes addressing data deficiencies under the G20 second phase initiative (2016-2021) and the transparency requirements of the Special Data Dissemination Plus methodology as proposed by the International Monetary Fund. This effort takes openness as the guiding principle and non-disclosure as the exception.

In 2018，it is necessary to continue to pay attention to the international balance of payments，international investment position，international trade in goods and services，foreign exchange receipts and payments processed by banks on behalf of customers，foreign exchange settlements and other international standards，and to engage in preparing，publishing and interpreting the relevant data of international payments of Chinese characteristics. Second，it is necessary to address the remaining deficiencies in our statistics as opposed to the higher requirements of international standards，to test new internal statistical products and improve statistical transparency gradually.

China Forex: In 2017，what specific work did SAFE undertake in order to consolidate the statistical basis for the international balance of payments? What new plans have been made to improve the statistical system for the international balance of payments and for data quality in 2018?

Wang Chunying: With the active work and unremitting efforts of all staff in the field of collecting statistics under the international balance of payments，the framework of a system of Three Horizontals and Three Verticals based on the Declaration of Statistics of International Balance of Payments has basically been put in place in 2017. From a horizontal perspective，there are three direct reports (foreign financial assets and liabilities and transaction statistics)，indirect reports (statistics of foreign payments received through domestic banks)，surveys (trade credit investigation and international travel cash expense proportion survey and the like). From a vertical perspective，each type of statistical project includes supporting documents on three aspects，such as basic rules，operational guidelines and verification rules，forming a complete system from statistical rules and answers to data verification. Specific tasks include the issuance of foreign financial assets and liabilities and transaction data business guidelines needed to solve routine problems in the reporting process and guide the reporting entities in filling in required data. Second，the issuance of statistics on foreign financial assets，liabilities and debts in order to conduct verification rules on statistics of foreign payments through domestic banks，to study the rules on the verification of trade credit data，to facilitate reporting entities in conducting data self-examination，and to guide SAFE personnel in developing enhanced data quality control and verification practices，in order to improve data quality.

In 2018，SAFE will continue to improve the statistical system for the international balance of payments，study and improve statistical methods，standardize the verification process，enhance verification tools and continuously improve data quality. It will continue to revise the statistical system according to the changes in business development，such as revising the external financial assets and liabilities and trading statistics system，revising the declaration and supervision system of international balance of payments，and promulgate guidelines for trade credit investigation. It will continue to engage in forward-looking statistical research，such as on international freight expenditures data as specified by partner countries and regions. It will also examine data preparation under international trade in services as required for different countries and territories，and organize the international experience and information relevant to international balance of payments data to enhance statistics theory as it applies to China's international balance of payments.

In addition，SAFE will continue to strengthen data quality control based on the combination of on-site and off-site verification.  It shall insist on using off-site and on-site verification，verification briefings and other methods to improve data quality. It will continue to strengthen indirect reporting，direct reporting，off-site verification and feedback concerning trade credit routine，to promote trade credit verification and improve the verification efficiency at the operational level. It will carry out on-site verification of the direct declaration of the main parties directly under the jurisdiction of the central bureau. It will standardize the on-site verification process on the basis of past experience. Moreover，it will continue to pursue statistical capacity-building by revising the statistical system related to the balance of payments，providing training and guidance to staff engaged in the declaration process at SAFE branch offices.

China Forex: How will SAFE promote the development of the foreign exchange market in 2018?

Wang Chunying: In 2018，SAFE will continue to promote the deepening of development of the foreign exchange market and its opening up to the outside world. It will also facilitate exchange rate risk management of market participants and promote the market-based reform of the renminbi exchange rate. It will broaden the scope of transactions，improve the management of transactions to meet the needs of the real economy and financial hedging and gradually expand the scope for foreign exchange market investment transactions. It will also expand the available trading tools，support the demand for innovative markets in financial institutions and diversified foreign exchange derivatives under risk management，and facilitate foreign exchange services for market players by financial institutions. It will also expand the scope of market players，continue to promote the participation of non-bank financial institutions in the domestic foreign exchange market，and facilitate the participation of overseas institutions in the onshore market. It will also improve the market infrastructure，such as foreign exchange trading and liquidation，such as the China Foreign Exchange Trading System & National Interbank Funding Center (CFETS) and the Shanghai Clearing House，in order to ensure the operational efficiency of the foreign exchange market. It will strengthen market supervision，improve the monitoring and risk prevention in the foreign exchange market，promote the implementation of the Guidelines for China’s Foreign Exchange Market and cultivate the risk-neutral awareness and risk management capabilities of market players.

China Forex: SAFE is currently amending the Pilot Measures for the Franchise of Individual Domestic and Foreign Currency Exchange. What are the main principles of this revision?

Wang Chunying: In order to further promote the compliance operations of the entities engaged in individual domestic and foreign currency exchange and better meet the multi-level exchange needs of the public，SAFE launched a revision of the Pilot Measures for the Franchise of Individual Domestic and Foreign Currency Exchange. The revised principles include improving market access and exit mechanisms and adding new requirements for good credit conditions concerning key investors in order to promote the healthy，long-term development of the industry. It also is important that we resolutely implement the State Council’s policy of simplifying and decentralizing administration and further streamlining the approval process by reducing the pre-reporting requirements and areas where filing is needed under the premise of risk control，so as to encourage businesses to combine their own service capabilities for developing the reasonable and orderly expansion of business scope. It is also necessary to strictly adhere to the rule of law，abolish administrative regulations with preferred administrative orders，and change the management concept of Big and Complete，and return the market-based powers to the market. Effective measures put in place to deal with the daily management loopholes and enhance post-transaction supervisory measures，in order to ensure the regulatory effect based on the typical cases and regulatory experiences of the past. SAFE will seek to comply with the needs of market development and actively promote business innovation. It will also seek to examine the management experience regarding business of domestic individuals through electronic channels such as Internet websites and mobile terminals，while studying the feasibility of integrating POS machines and third-party payment institutions into non-cash renminbi-type payment channels.