The first three quarters of foreign exchange balance showed five major characteristics, the Fed to reduce QE will not change the basic balance of China's balance of payments pattern

21st Century Business Herald reporter Chen Zhi reported from Shanghai

As China's economic fundamentals continue to improve, foreign exchange receipts and payments showed a good development trend in the first three quarters of this year.

On October 22, SAFE released the latest data showing that in the first three quarters of this year, banks settled foreign exchange of 1,859.8 billion US dollars, sold foreign exchange of 1,679.8 billion US dollars, and banks achieved a surplus of 180 billion US dollars in foreign exchange settlement and sales; at the same time, banks achieved a surplus of 4,403.4 billion US dollars in foreign-related income on behalf of customers, 4,168.6 billion US dollars in external payments, and banks achieved a surplus of 234.8 billion US dollars in foreign-related receipts and payments on behalf of customers.

Wang Chunying, deputy director of the State Administration of Foreign Exchange, said that in the first three quarters of this year, China's foreign exchange balance and expenditure as a whole showed five major characteristics:

First, banks' settlement and sale of foreign exchange and foreign-related receipts and expenditures on behalf of customers showed a double surplus, indicating that the supporting role of China's stable recovery on the foreign exchange market is continuing to appear.

For example, in the first three quarters, the sales exchange rate (the ratio of foreign exchange bought by customers from banks to customers' foreign-related foreign exchange expenditures) reached 63.8%, which was basically flat compared with the same period in 2020.

Third, the settlement exchange rate has risen slightly, and the balance of foreign exchange deposits has been basically stable recently. For example, in the first three quarters, the settlement exchange rate (the ratio of the scale of foreign exchange sold to banks after the enterprise obtains foreign exchange and the foreign-related foreign exchange income of customers) reached 66.9%, up slightly by 2 percentage points over the same period last year.

Fourth, the scale of foreign exchange derivatives transactions has maintained growth, and the awareness of exchange rate risk management of enterprises has gradually strengthened. In the first three quarters of this year, the scale of exchange rate risk management by enterprises using foreign exchange derivatives such as forwards and options reached 80% year-on-year, higher than the growth rate of foreign exchange settlement and sales of banks in the same period by 56 percentage points, and promoted the hedging rate of enterprises to rise by 7.9 percentage points year-on-year to 22.1%.

Fifth, the scale of foreign exchange reserves is basically stable. As of the end of September this year, China's foreign exchange reserves were $3,200.6 billion, down slightly by 0.5% from the end of last year.

In the face of the hot discussion in the market about whether the Federal Reserve will shrink QE will trigger the tide of cross-border outflows of Chinese capital, Wang Chunying responded that the current anti-risk ability of China's foreign exchange market is significantly stronger than in the past, and the Fed's monetary policy adjustment will not change the pattern of China's basic balance of payments, nor will it change the basic stability of the RMB exchange rate.

"The reason is that the market has fully expected the Fed to reduce QE, and the risk of causing turbulence in the international market in the short term is relatively controllable; second, the soundness of emerging market countries themselves has also been improved, and the adaptability to the Fed's monetary policy adjustment has been enhanced; third, China's macroeconomic fundamentals are stable, the foreign exchange market is becoming more and more mature, the external debt structure is continuously optimized, and the ability to resist external shocks has been significantly enhanced." She noted.

In addition, in response to the recent reason why China's holding of US bonds has hit the lowest value since 2010, Wang Chunying said that in the data on us treasury holdings of US bonds released by the US Treasury Department, there is no distinction between official and unofficial, including foreign exchange reserve investment, but also financial institutions, enterprises and other investment entities. Therefore, in view of the changes in investment purposes or asset allocation principles, different market entities will adopt different US treasury holding strategies, which may bring fluctuations in the data of US treasury holdings by different countries. As far as the operation and management of foreign exchange reserves is concerned, SAFE has always adhered to the allocation goals of safety, liquidity, value preservation and appreciation, and as a responsible long-term investor, it conducts professional investment management according to market conditions and investment needs in accordance with the principle of marketization.

<h4>Multi-pronged solution to the problem of exchange rate hedging operations for small and medium-sized enterprises</h4>

In the view of many bankers, in the first three quarters of this year, the reason why banks received and paid on behalf of customers and their own settlement and sale of foreign exchange both showed a surplus, to a large extent, benefited from the continuation of China's foreign trade boom.

"Since the beginning of this year, due to the repeated epidemics in other countries around the world, the supply chain has been intermittent, and a large number of global orders have poured into China, resulting in a significant increase in the foreign currency positions in the hands of foreign trade enterprises, driving an increase in demand for foreign exchange settlement, and increasing the surplus between banks' foreign-related receipts and expenditures on behalf of customers and their own settlement and sale of foreign exchange." A head of the financial market department of a joint-stock bank analyzed to reporters.

However, how to manage the exchange rate risk of foreign currency positions is becoming a headache for many small and micro export enterprises. For example, since this week, the exchange rate of the renminbi against the US dollar has suddenly jumped through the 6.4 integer mark, making many small and micro export enterprises eager to settle foreign exchange and stop losses.

Wang Chunying pointed out that at present, the relevant departments of SAFE are actively increasing their support for exchange rate hedging for small and medium-sized enterprises, and actively expanding exchange rate hedging channels for small and medium-sized enterprises. For example, some small banks lack the qualification to handle foreign exchange derivatives services, but they have a considerable number of small and micro foreign trade enterprise users, so SAFE supports these small banks to cooperate with large banks in terms of policies, and meets the exchange rate hedging needs of small and micro foreign trade enterprises through large banks, which will help small banks to serve local small and micro foreign trade enterprises to implement exchange rate hedging Second, SAFE is actively promoting various departments to reduce the operating costs of exchange rate hedging for small and medium-sized enterprises, such as guiding the foreign exchange trading center to reduce the handling fee for banks to serve small and medium-sized micro and medium-sized enterprises to carry out exchange rate hedging derivatives transactions, and the current handling fee reduction rate has reached 50%; third, some banks are studying the special credit line for foreign exchange derivatives that give qualified small and micro enterprises a certain limit, so that small and micro enterprises do not need to pay the corresponding foreign exchange derivatives transaction deposit. Carry out hedging of foreign exchange derivatives within the scope of the credit line, and the corresponding exchange rate hedging cost will be reduced a lot.

In her view, the reason why the yuan's exchange rate against the DOLLAR has suddenly risen above 6.4 in disregard of the Fed's reduction of QE is mainly due to market forces. On the one hand, the dollar index soared and fell, on the other hand, China's foreign trade surplus in goods in September was still high, and the phenomenon of enterprise settlement after the National Day was more obvious.

"In the future, the RMB exchange rate will still depend on factors such as the economic situation at home and abroad, the balance of payments situation and changes in the international foreign exchange market, and the exchange rate will neither continue to appreciate nor continue to depreciate, and will continue to maintain basic stability at a reasonable and balanced level." She pointed out that in the face of the rise and fall of the RMB exchange rate and the continuous two-way fluctuations, enterprises must establish the concept of neutral exchange rate risk, base themselves on the main business, rationally treat the rise and fall of the exchange rate, and identify the exchange rate risks that may be faced. Second, according to their own foreign exchange risk exposure, combined with their own production and operation conditions to develop a suitable foreign exchange hedging strategy, including the choice of foreign exchange derivatives such as forwards, swaps or options that are compatible with their own risk tolerance and foreign exchange hedging needs; the third is to establish a sound scientific assessment mechanism, should not be hedged profit and loss on the hero, can not simply use the forward exchange rate and the spot exchange rate to evaluate the profit and loss of the hedging strategy, but follow the principle of "period" (future) and "present" (present) combination of scientific evaluation. The comprehensive evaluation of the profit and loss of exposure and the profit and loss of foreign exchange derivative instruments guides the company's financial personnel to have the courage to lock in foreign exchange risk exposure.

<h4>The basic balance of China's balance of payments is difficult to shake</h4>

It is worth noting that the impact of the upcoming reduction of QE by the Federal Reserve on emerging market capital outflows is being increasingly highly concerned by financial markets.

Wang Chunying pointed out that on the whole, the anti-risk ability of China's foreign exchange market has been significantly enhanced compared with the past, and the adjustment of the Fed's monetary policy will not change the pattern of China's basic balance of payments, nor will it change the basic stability of the RMB exchange rate.

The reason is that the market has full expectations for the Fed to reduce QE, and the risk of causing turbulence in the international market in the short term is controllable. Specifically, since the second half of this year, the Fed has repeatedly communicated with the market on the reduction of QE, and its monetary policy adjustment rhythm and strength are basically in line with market expectations, and the market generally expects that the process of normalization of the Fed's monetary policy is gradual, and the impact on the international financial market and the Chinese foreign exchange market will gradually decrease.

Second, the emerging economies' own soundness has been improved, and their adaptability to the Fed's monetary policy adjustment has been enhanced. For example, during the Fed's quantitative easing monetary policy, there was not much money flowing directly to emerging markets. According to the International Finance Association, from April last year to September this year, the average monthly inflow of overseas funds into the financial markets of emerging market countries other than China was significantly lower than that of 2009-2013 (the Fed implemented quantitative easing monetary policy in the last round), in addition, in recent years, emerging markets themselves have significantly improved their economic fundamentals, such as the current account deficit as a proportion of GDP has narrowed significantly, the growth of external debt has slowed down and foreign exchange reserves have increased, and the ability to combat external risks has been enhanced.

Third, China's macroeconomic fundamentals are stable, the foreign exchange market is becoming more and more mature, the structure of foreign debt is constantly optimized, and the ability to resist external shocks has been significantly enhanced. At the macro level, the resilience of China's economic development continues to appear, the main macroeconomic indicators are stable in a reasonable range, the current account surplus is also in the equilibrium range, the internal and external economic balance is solid, at the same time, the two-way opening of the financial market is steadily advancing, and the two-way balanced flow of cross-border funds is steadily advancing; the flexibility of the RMB exchange rate continues to increase, which is conducive to releasing the pressure of depreciation; at the micro level, the external debt structure continues to be optimized, and during the period when the Fed adopts quantitative easing monetary policy, China's foreign currency external debt growth rate is less than half of the period from 2009 to 2013, and the growth of local currency foreign debt is mainly caused by foreign investors investing in bonds in China, of which there are more long-term bonds and higher stability. At the same time, the share of financing external debt fell from 79% at the end of 2014 to 55% at the end of June 2021, and a significant proportion of financing external debt is trade-related (i.e. trade credit), making such risks relatively low. Overall, in recent years, the stability of China's external debt has been relatively high, and indicators such as debt ratio, debt service ratio and debt ratio are within the international safety line.

Wang Chunying said bluntly that although the Fed or the policy adjustment will not change the pattern of China's basic balance of payments and the basic stability of the RMB exchange rate. However, SAFE will remain highly concerned about whether US inflation will continue to hover high in the future and its impact on the Fed's accelerated pace of interest rate hikes. In the future, SAFE will maintain the determination of policies, adhere to bottom-line thinking, coordinate security and development, promote reform and opening up in the foreign exchange field, continue to maintain the flexibility of the RMB exchange rate, and continuously improve the two-in-one management framework of "macro-prudential + micro-supervision" in the foreign exchange market.

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