China’s cross-border capital outflow has eased significantly in the first quarter, and supply and demand of foreign exchange tend to be basically balanced, according to the foreign exchange sales data for the first quarter newly released by the State Administration of Foreign Exchange (SAFE) on April 20.
Some said previously that the ease in capital outflow has something to do with foreign exchange control. Wang Chunying, spokeswoman for the SAFE, made a response at the press conference of the Information Office of the State Council yesterday that the SAFE didn’t take any new measure on exchange and cross-border receipt and payment since China’s cross-border capital flew out.
Wang emphasized that “the open window” won’t be closed and China wont’ adopt the old path of capital control to manage foreign exchange. In addition, China will prudently and orderly promote liberalization of Chinese capital account.
Cross-border capital outflow eases significantly
According to statistics, deficit of foreign exchange purchases and sales of banks reached 40.9 billion U.S. dollars, representing a year-on-year growth of 67 percent; and deficit of foreign related receipts and payments of banks recorded 25.2 billion U.S. dollars, down by 78 percent from a year earlier.
The ratio of foreign exchange purchases and sales, which measures enterprises’ motivation of purchasing foreign exchange, registered 68 percent in the first quarter, down by 12 percentage points when compared with that in the same period of last year. Wang pointed out that this meant enterprises are more rational in purchasing foreign exchange and there are fewer enterprises buying foreign exchange to repay foreign exchange financing.
“The statistics show China’s cross-border capital outflow has eased significantly and supply and demand of foreign exchange tend to be basically balanced since the beginning of this year, indicating that China’s cross-border capital outflow will be gradually balanced in the future.” said Wang.
Foreign exchange reserve data released by the People’s Bank of China (PBOC) also proved this trend. Balance of foreign exchange reserve pickup by 6.9 billon U.S. dollars and 4 billion U.S. dollars in February and March respectively.
In the opinion of Wang, the improvement in China’s cross-border capital flow trend in the first quarter is closely related with change in market environment. On one hand, the stability of domestic economy recently boosted market confidence, showing basic function of economic fundamentals. On the other hand, foreign environment particularly exchange rate of U.S. dollar is relatively stable. Although the U.S. Federal Reserve raised interest rate in March again, the U.S. dollar index fell by 1.8 percent in the first quarter. International financial market also saw stable operation.
The influence of interest rate hike by the U.S. Fed on global capital liquidity is always concerned by the market. Wang stated that the SAFE is monitoring and assessing the influence of U.S. interest rate hike. In terms of China’s cross-border capital flow, the influence of the three interest rate hike by the U.S. is gradually weakened, which fully manifests that China’s problem-solving ability and adaptability have seen remarkable improvement.
Wang further warned that China should treat and analyze adjustment of policies like the U.S. interest rate hike comprehensively. There are conditions for stable interest rate hike based on current economic performance of the U.S., but there are also some uncertainties as well.
SAFE doesn’t go backward on foreign exchange management
Although the trend of cross-border capital flow turns better, some market participants view that foreign exchange reserve recovering to the stable range is resulted from China’s regulation on foreign exchange outflow.
As for this, Wang remarked that the SAFE didn’t take any new measure on exchange and cross-border receipt and payment since China’s cross-border capital flew out, but it required banks to abide by rules of foreign exchange management and rules of business development.
Wang stressed that when formulating and carrying out regulatory policies on foreign exchange, the SAFE always adheres to two basic principles. First, to persist in the reform and opening up, support and promote mutual openness of the financial market, further improve cross-border trading and trading facilitation and serve the real economy. Second, to consistently prevent liquidity risks in cross-border capital, prevent disorder flow of cross-border capital from impacting the macro-economic and financial stability, maintain the stability in the foreign exchange market, create a favorable market environment for the reform and opening up.
Wang reiterated that “the open window” will not close again in the future. China will not backtrack in the course of foreign exchange management. It will never back to the old path of capital control. In 1996, China made all current accounts convertible; and the capital account convertibility has gradually improved since the beginning of this century.
Meanwhile, China will promote the opening of capital account in a prudent and orderly manner. “The progress of capital account opening should be consistent with China’s economic development, the conditions of the financial market and its financial stability. China should take full consideration of both internal and external factors at different times to accurately find the focus, pace and steps in the opening of capital account,” Wang said.
Wang indicated that since the latter half of 2014, most of the capital outflowing from China has been increasing foreign capital from private sector. The ratio between outbound investment and debt repayment was 3.2:1. This is also a good illustration that Chinese enterprises can carry out outbound investment and foreign-related business normally.
Translated by Vanessa and Coral