China is moving ahead in its effort to control the novel coronavirus and gradually get the country open for business again. Financial authorities are doing their part in that process. In two press conferences held by the Joint Prevention and Control Mechanism of the State Council，Pan Gongsheng，deputy governor of the People’s Bank of China (PBOC) and administrator of the State Administration of Foreign Exchange (SAFE) and Xuan Changneng，SAFE deputy administrator，explain the measures taken by China’s financial system，and talk about their expectations concerning the Chinese financial markets. Here are excerpts.

01

Q: What measures have been put in place in the financial system to support the efforts to control the novel coronavirus epidemic? What further steps are planned?

Pan Gongsheng: China's financial system has put in place a number of measures to provide financial support for the containment of the epidemic.

The PBOC has used monetary policy tools to release ample liquidity into the market. For example，it injected 1.7 trillion yuan into the financial system on February 2 and 3 via open market operations. These exceeded expectations. The additional liquidity was an intensified counter-cyclical adjustment with the aim of stabilizing market expectations.

Additionally，other measures have been taken to help smooth market operations，including those aimed at the stock，bond，money，and foreign exchange markets. China has strengthened its financial market infrastructure covering issuance，trading，clearing and settlements. Although the stock and foreign exchange markets experienced sharp fluctuations in the first few trading days following the Spring Festival，they have since returned to more normal trading. The stock market rebounded moderately and then stabilized while the renminbi exchange rate maintained two-way fluctuations that were within a reasonable and balanced range. This indicates that China's financial markets have become more resilient and mature.

In addition，China's financial authorities have jointly announced a series of measures to provide support for controlling the novel coronavirus outbreak，ensuring supplies of daily necessities and maintaining stable growth of the real economy. In February，30 measures were announced jointly by the PBOC，the Ministry of Finance，the China Banking and Insurance Regulatory Commission，the China Securities Regulatory Commission and SAFE. The regulators called for efforts by banks，bond and insurance companies to maintain continuity and convenience in financial services. The measures covered payments，cash，credit and financial market infrastructure with the general aim of reducing costs and simplifying procedures.

Moreover，the PBOC has promised to provide a total of 300 billion yuan in low-cost，special funds for re-lending to support suppliers of key medical items and daily necessities. In the meantime，financial support for small and micro-businesses，private enterprises and a wide range of manufacturers has also been strengthened. An increase in medium and long-term loans as well as a reduction in overall financing costs are among the tools employed. For companies encountering hardships because of the virus outbreak，financial institutions have been asked not to hastily call in or suspend loans.

Next，financial authorities will continue to work to satisfy the people’s basic needs for financial services，and for the healthy and continuous growth of the national economy. They will carry out the above-mentioned 30 measures，intensify counter-cyclical adjustments in monetary policy，and help keep financial markets basically stable. For areas that are more severely impacted by the coronavirus，further financial support measures will be implemented.

02

Q: In terms of foreign exchange policy，what steps have been taken?

Xuan Changneng: "Green channels" have been set up to facilitate foreign exchange payments for imports or receipts from donations. They also include payments under the capital account and cross-border financings related to controlling the coronavirus epidemic. Local foreign exchange authorities，including those in Hubei province，have instructed banks to use special measures for handling special problems. Urgent issues need to be given priority. Between January 27 and February 12 there were 1,370 such green channel transactions. Most of these were for purchases of masks，protective clothing and related materials.

Meanwhile，SAFE has improved its ability to process information while limiting person-to-person contact. Companies have been encouraged to conduct foreign exchange business via the Internet or mail. If that is not possible，special appointments can be made. Currently，foreign exchange settlements and sales by individuals，international transactions outside China via credit cards，the trading of goods and service，registration of overseas debt and other main foreign exchange business can be dealt with through the ASOne system – SAFE's digital service platform. This platform can be used for 86% of the types of applications for foreign exchange-related administrative licenses. Between January 27 and February 12，the system accepted 479 applications，and 466 of them were completed. There also were 915,000 foreign exchange transactions handled by banks on behalf of individuals and 830,000 of these were processed online. This shows that individuals have also shifted to using the online system for overseas payments of tuition fees and for other foreign exchange transactions.

Additionally，under SAFE's instructions，the Shanghai Clearing House and the China Foreign Exchange Trade System have eliminated or reduced fees for foreign exchange transactions and clearing operations for  institutions in Hubei.

03

Q: China is helping enterprises resume operation. What has been done by SAFE to support the enterprises hit hardest by the disruptions? What measures apply to those outside the epicenter?

Xuan Changneng: SAFE has been providing strong support for companies to resume operation and for society to return to normal.

First of all，there are "green channels" to make foreign exchange business more convenient. Under SAFE's guidance，banks have simplified procedures for foreign exchange business related to mounting inventories as a result of the outbreak. Imports of key materials for resuming production，exports of finished products，and the production or distribution of materials for controlling the epidemic have all benefited from the changes. Companies in Hubei or in key industries have been given top priority.

Second，there were 12 measures passed by the State Council to facilitate trade and investment and these are being implemented at a rapid pace. Some of the measures were designed to expand trials that will facilitate trade-related foreign exchange payments and receipts as well as streamline procedures for payments and receipts in merchandise trade by micro and small e-commerce companies. Others were to improve the reporting of foreign exchange transactions related to the trade in goods. Some were aimed at making cross-border financing easier. They consist of expanding the pilot program for facilitating payments and receipts under the capital account，reforming the registration of enterprises' overseas debts，and lifting restrictions on the number of permitted foreign exchange bank accounts under the capital account. The efforts have benefited trade，investment and the real economy since their introduction，helping reduce operating costs. In the future these steps will be expanded for private firms，especially micro，small and medium sized businesses struggling to survive the effects of the outbreak.

Third，SAFE has been making use of technology to facilitate cross-border investment and financing，and foreign exchange settlements for micro，small and medium sized companies. SAFE improved the cross-border，pilot blockchain finance platform in an effort to address the lack of cheap financing available to smaller businesses. A pilot program was begun in March last year. More than 170 banks joined the program rolled out in 22 provinces，autonomous regions and municipalities. During the first year of operation，the platform processed US$15.9 billion in loans to nearly 2,500 businesses，75% of which were medium and small-sized enterprises. Since the Lunar New Year holiday this year，87 China-based businesses have received more than US$200 million in loans through the platform. Hubei has been included in the program since January 2020.

SAFE has also continued with its effort to facilitate cross-border e-commerce settlements. It also guides banks and payment institutions to provide e-payment under the current account，relying on electronic information on transactions. These measures are aimed at helping micro，small and medium sized companies.

Last but not least，SAFE has released its operating procedures for online administrative approvals via its portal so that administrative permits can be obtained online more easily.

04

Q: Will China's de-leveraging policy be influenced by the coronavirus epidemic?

Pan Gongsheng: China has achieved a lot in its campaign to achieve de-leveraging. Thanks to the package of measures in recent years，the macro leverage ratio has remained basically stable at about 250% for nearly ten consecutive quarters. With regard to structural de-leveraging，measures have been very effective. Enterprises' leverage ratio has declined by five to six percentage points over the past two years from the 2017 peak. Household and government sectors also have seen slower growth in leveraging. At the same time，China has been one of the few countries that maintain a normalized monetary policy. As a result，China has ample policy tools to cope with downward pressure on its economy. At the same time，during the implementation of monetary policy，it is reasonable to take into consideration a balance between external and internal factors including economic growth，the leverage ratio，inflation expectations and the exchange rate. Presently，it is more important to maintain economic growth in the face of the epidemic as well as other structural and external reasons for slower growth. The PBOC will try to balance economic growth and a stable leverage ratio as it employs making monetary policy.

05

Q: There has been an obvious drop in the rate on China's interbank market after the PBOC’s recent liquidity operation and the interest rate adjustment in early February. Has this brought a fall in actual lending rates? Will the PBOC cut the rate of the medium-term lending facility (MLF) further and accelerate the declining trend in lending rates in the near future? What will be the central bank's next move to stabilize the market and market expectations?

Pang Gongsheng: The PBOC announced a cut in the required reserve ratio (RRR) for bank deposits by 0.5 percentage point on January 1，freeing up a  total of 800 billion yuan. After that，more money has been made available on the Chinese market since the PBOC launched a total of 1.7 trillion yuan open market reverse repo operations on February 2 and 3. These measures fully demonstrate the determination of the central bank to stabilize market expectations and boost market confidence. As for current market operations，the winning bids on seven-day and 14-day reverse repos have decreased by 10 basis points to 2.4% and 2.55%，respectively. With the additional funds，interest rates on the financial markets have fallen. The overnight repo rate and the seven-day repo rate on the inter-bank market on February 6 were approximately 1.8% and 2.3%，respectively. We can say the market has been fairly stable.

With respect to the Loan Prime Rate (LPR)，which is based on the interest rate for loans that 18 banks offer their best customers，it will reflect the change in the general interest rate on the market as the changing rates on financial and monetary markets will influence expectations for the LPR. Afterwards，the adjustment in the LPR will have a strong effect on commercial bank loan pricing. That is because commercial lenders set interest rates for loans by adding or subtracting so many basis points based on the LPR.

The PBOC is still assessing the impact of the coronavirus on China's economy，but authorities have sufficient policy tools to deal with the impact. In monetary policy，the PBOC will strengthen counter-cyclical adjustments and maintain reasonable，ample liquidity to provide a sound monetary and financial environment for the real economy. Additionally，it will make further market-oriented reforms in the interest rate system. That is，the LPR mechanism will be improved for better transmission of monetary policy and the reduction of financing costs. Furthermore，structural monetary policy tools，including a targeted cut in the bank reserve requirement as well as the re-lending and re-discount rates will support the weaker segments of the national economy.

06

Q: Given the uncertainties in foreign trade，what are your expectations for China’s balance of payments?

Xuan Changneng: In recent years there has been a basic equilibrium in China's balance of payments. This is a reflection of the improvement in the economic structure and the effectiveness of the nation's opening-up and reform policy. Events with a short-term influence，such as the novel coronavirus，will not have that much of an effect on the balance of payments. For one thing，China's current account has entered a more balanced stage，thanks to sound domestic economic development and the upgrading of the economic structure. The size of the current account surplus relative to the country's gross domestic product (GDP) has remained within a reasonable range in recent years. According to preliminary data，the current account surplus last year was US$177.5 billion，equal to 1.2% of GDP. By deepening the reform and opening up further，China's overall economic performance has been able to remain stable. Medium- and long-term foreign capital inflows have held steady and cross-border capital flows have remained basically in balance.

The impact of the epidemic outbreak will be short-lived. China's balance of payments is expected to continue with a basic equilibrium in its current account and cross-border capital flows.

A small surplus is expected for China's current account. There are four reasons for this conclusion. First，Chinese products remain competitive owing to the nation’s structural upgrading and complete industrial chain in manufacturing. In addition，the US and China have reached an agreement on a phase one trade deal，which will benefit trade and economic exchanges between the two countries. This is helpful to stabilizing China's foreign trade. Second，the recent deficits in China's service trade have remained generally stable. This indicates a change in Chinese consumption habits and a rise in China's soft power. Third，the structure of China's outbound investment has been continuously optimized. The return on overseas investment has gone up and investment income is expected to increase further at a gradual pace. Fourth，China has a savings rate of more than 40%. This is conducive to keeping the current account balance in a reasonable range.

Simultaneously，cross-border capital flows will remain steady as China pushes ahead with its reform and opening up program. This is because the fundamentals of China's long-term economic growth and high-quality development remain unchanged and the improvement in the domestic business climate is expected to help stabilize medium- and long-term capital inflows. Inbound and outbound direct investment are expected to show an overall surplus. In terms of capital flows related to the bond market，a net inflow of investment capital is expected as China opens up the market further. The wider opening of the bond market in particular will attract foreign central banks and other institutions to allocate renminbi assets in the medium and long term. Additionally，the structure of overseas debt has been improved. The growth of overseas debt in recent years is mainly due to the increase in foreign investors' holdings of domestic bonds. That has reduced the risk of a mismatch between currencies and maturities. Furthermore，the two-way fluctuation of the renminbi exchange rate in recent years has led to more reasonable market expectations. As a result，Chinese enterprises and individuals are more rational in their foreign exchange transactions. The contagion of the disease has not affected the general trend of the renminbi exchange rate. 

Overall，China is confident it can keep a basic equilibrium in the balance of payments in a complex and changing external environment. This reflects the nation's financial resilience and the stable fundamentals of the Chinese economy.

07

Q: What is the central bank's assessment of the financial markets，particularly the stock and foreign exchange markets? How do you see these markets performing in the future?

Pan Gongsheng: China's financial markets，including the stock and foreign exchange markets，re-opened on February 3 after the Spring Festival holiday，as scheduled. This shows China's determination to maintain market order and confidence in its economy. It also shows greater maturity on the part of market players. On the first day of trading after the holiday，there was significant volatility in A-shares and the onshore renminbi rate，as expected. However，subsequently，the stock market began to stabilize. The renminbi rate has fluctuated a bit but not by much. Additionally，there has been a basic balance in cross-border fund flows as well as foreign exchange supply and demand. China's foreign exchange reserves in January rose.

It can be concluded that the stock and foreign exchange markets have performed normally after a brief period of volatility. The financial markets，which are sensitive to risk，have shown confidence in China's ability to control the epidemic and grow the economy. As I have said before，the impact of the epidemic on China's economy will be temporary，and the fundamentals of China's long-term，high-quality economic growth have not changed. Also，the Chinese government has plenty of policy tools to support stable economic growth. It is firmly believed that China's stock and foreign exchange markets will show a steady performance.