China Forex: How would you characterize the performance of China's foreign exchange market in 2019? What do you expect in 2020?

Wang Chunying: The Chinese foreign exchange market remained stable，balanced and rational in 2019，despite a highly complex situation at home and abroad. The renminbi exchange rate was basically stable at a reasonable level. The central parity rate fell a modest 1.6% against the US dollar and lost 2.0% against the China Foreign Exchange Trade System (CFETS) basket of currencies in 2019. Over the same period，the dollar index rose by 0.2%，while the emerging market currency index (EMCI) dropped 1.3%. The figures showed the general stability of the renminbi rate compared with other non-US dollar currencies. In terms of supply and demand on the foreign exchange market，there was a basic balance. For example，the monthly average deficit of settlements and sales of foreign exchange by China's banks in 2019 was largely balanced，holding about steady with the situation in 2018. However，the cross-border payments and receipts of the non-banking sectors showed a small surplus. Foreign exchange reserves showed a modest increase. Additionally，cross-border investment and financing，as well as settlements and sales of foreign exchange remained rational. There was stability in 2019 in the utilization of foreign investment，overseas investment and cross-border financing by enterprises. At the same time，purchases of foreign exchange by individuals recorded a steady decline over the year.

In 2020 China's cross-border capital flows are expected to be generally steady despite the uncertainties in the external environment. Despite the unfavorable factors of a slowdown in global economic growth，the impact of protectionism on international trade and investment，the increasing vulnerability of international financial markets，and unstable international political developments，China's foreign exchange market will continue to be supported by sound economic fundamentals and proactive government policies. The huge potential of China's economy and its resilience will assure long-term growth. On the policy front there is sufficient room for an active fiscal policy combined with a stable monetary policy and deeper reform measures. Although the new year is young，there have already been a number of measures put in place. The Law of the People's Republic of China (PRC) on Foreign Investment took effect in  the beginning of 2020. The Securities Act of the PRC has been issued. The accelerated opening up of the financial sector will enhance China's business environment，building on a foundation of past achievements. China's global business environment ranking rose 15 places in 2019 after climbing 32 places in 2018. China's foreign exchange market will benefit from its growing maturity. With the gradual improvement of the renminbi exchange rate formation mechanism，exchange rate flexibility has increased and risk mitigation capabilities have been enhanced. Furthermore，market players have behaved more rationally and in a more orderly way. The domestic economy，as well as steady policies and markets will play a role in China's cross-border capital flows in 2020. It is expected that the capital movements will remain stable and basically balanced.

China Forex: Could you give us a rundown of policies put in place in 2019 to strengthen statistical monitoring as they relate to preventing risks in cross-border capital flows?

Wang Chunying: Efforts to enhance the balance of payments statistics in 2019 mainly focused on upgrading support systems and perfecting the method of compiling data. As a result，the quality and transparency of data have been improved. Allow me to outline the steps taken by SAFE:

First，SAFE revised rules and regulations related to balance of payments statistics. The Guidelines for the Declaration of Balance of Payments Statistics through Banks (2019) was revised and issued in 2019. Additionally，the Guidelines for the Statistics of External Financial Assets，Liabilities and Transactions (2017) and the Rules for the Verification of the Statistics of External Financial Assets，Liabilities and Transactions (2017) were also revised. Also，support systems such as trade credit investigations and the automatic verification of data collection were strengthened. On-site and off-site verifications were combined. With these measures，data could be reported in a more timely and comprehensive manner，while the ability to prevent risk from cross-border capital flows was enhanced.

Second，SAFE intensified efforts to analyze data and increase the transparency of balance of payments statistics. Regional data on overseas payments and receipts were added to the seven categories of data，including the balance of payments and international investment position that had been published in the past. Moreover，the Report of Statistics on China's Overseas Direct Investment in 2018 was jointly released by SAFE，the Ministry of Commerce and the National Bureau of Statistics. Meanwhile，SAFE provided timely analyses of potentially market-moving data via press conferences and public statements.

SAFE also strengthened its research and application of statistical methods. For example，SAFE branches conducted research into the feasibility of the direct declaration of international payments and receipts by non-financial enterprises. Additionally，SAFE made a significant effort to assess the impact of innovative financial business，supply-chain financing and other new models of business on the balance of payments statistics.

China Forex: What will be done in 2020 in the area of compiling and disseminating balance of payments statistics?

Wang Chunying: SAFE will upgrade its efforts to strengthen balance of payments statistics in 2020 by providing data in a more transparent way. It will also improve its statistical mechanism and include more related market participants in its data collection. It will also make use of more innovative methods for making on-site and off-site verifications.

As in the past，SAFE will continue to provide its statements on the Balance of Payments，the International Investment Position，the International Trade in Goods and Services，the External Balance Sheet of International Banking Industry，China's External Portfolio Investment Assets (by country or region)，Foreign-related Receipts and Payments by Banks on Behalf of Customers，Banks' Settlement and Sale of Foreign Exchange and the Overview of Transactions in China's Foreign Exchange Market.

SAFE will also push ahead with the upgrading of related statistical systems. The Detailed Rules for the Implementation of the Declaration of Balance of Payments Statistics through Banks (2020) and the Rules for the Verification of the Statistics of External Financial Assets，Liabilities and Transactions (2020) will be issued and put into effect. SAFE will also take its first step towards including all non-financial enterprises in balance of payments statistics，by adding an appropriate number of large non-financial enterprises to the tabulation of external financial assets and liabilities in 2020. 

Additionally，SAFE will adopt innovative statistical and verification methods. There will be a strengthening of direct and indirect declarations，as well as intensified efforts to verify trade credits.

China Forex: What has SAFE focused on in promoting the development of China's foreign exchange market? What future development plans can we expect?

Wang Chunying: After decades of effort in developing the domestic foreign exchange market，progress has been made in expanding trading tools，bringing in more market participants and improving infrastructure. The increased trading volume on the domestic foreign exchange market，which reached US$29 trillion in 2019，is an indication of that progress. Although there still is room for further improvement，the current focus in China's foreign exchange market is on promoting risk management at the enterprise level. This is critical to the healthy development of the market over the longer term. Enterprises need to focus on their own business instead of foreign exchange speculation. They need to evaluate the risks involved in each transaction in order to trade foreign exchange effectively.

While the exchange rate remained relatively stable in 2019，it has become more flexible with wider movements in both directions. There was a 7.7% gap between the highest and lowest points of the renminbi against the US dollar over the year，for example.

Increased exchange rate flexibility is a key part of the managed floating exchange rate system that takes its cue from market supply and demand but with a reference to a basket of currencies. Consequently，market players need to adjust to new market circumstances.     

However，the ability of Chinese enterprises to manage risk is relatively weak. A 2019 survey by SAFE of over 2,400 enterprises in more than 20 cities showed that some companies assumed the exchange rate would move in one direction only，ignoring the evidence of increased two-way fluctuations in the market. Larger enterprises generally had a greater aversion to risk. Moreover，it was found that enterprises in eastern China，particularly those owned by the central government，were more adept at foreign exchange hedging. Some enterprises that responded to the survey said they made relatively few transactions in foreign exchange derivatives due to a lack of experience and market knowledge. Additionally，the survey revealed that some companies were too concerned about short-term profit and loss on their hedging transactions.        

Accordingly，SAFE will push forward the development of the foreign exchange market by boosting the risk management capabilities of market players.

Efforts will be made to ensure a more open and competitive foreign exchange market，with the market playing a decisive role in the allocation of foreign exchange resources. SAFE will improve the regulation of renminbi foreign exchange derivatives based on actual market needs. It will expand the two-way opening of the market，ranging from facilitating exchange-rate risk management for financial investments by overseas institutions，expanding the pilot programs for foreign exchange settlements and sales by securities companies to exploring ways for domestic banks to participate in overseas markets. SAFE will also improve the market infrastructure，including upgrading the trading and clearing facilities in the China Forex Exchange Trade System and the Shanghai Clearing House. Rules and regulations will be revised and there will be improvements in the mechanisms for introducing market makers into the trading environment. Methods of reviewing their market conduct will be optimized.

In the aspect of awareness and ability enhancement，SAFE will continue to guide enterprises to rationally deal with renminbi exchange rate fluctuations and focus on their own core business instead of making speculative trades. Furthermore，SAFE will arrange training sessions on risk assessment and maintaining reasonable currency positions on their balance sheets.