SAFE: China's foreign exchange market is running smoothly

According to data released by the State Administration of Foreign Exchange (SAFE) on April 23, in the first quarter of 2021, banks sold $501.6 billion in foreign exchange and sold $590.2 billion in foreign exchange, leaving a surplus of $88.5 billion. Wang Chunying, deputy director and spokesperson of the State Administration of Foreign Exchange, said that since the beginning of this year, the global economic recovery has been uneven and the international financial market has been volatile. In a significantly changing external environment, China's foreign exchange market has operated smoothly, cross-border capital flows have remained stable on the whole, and international payments have maintained a basic balance. Looking ahead, the foundation for the smooth operation of China's foreign exchange market remains firm.

The RMB exchange rate fluctuates in a narrow two-way range

Speaking about the current foreign exchange situation, Wang Chunying mentioned three key words: resilience, rationality and balance at a press conference held by the State Information Office on April 23.

The RMB exchange rate is generally stable and fluctuates in a narrow and two-way range. On the first day of trading this year, the yuan jumped 1.2 percent to 6.46. Since then, it maintained a relatively stable situation, fluctuating in a narrow range between 6.46-6.55. Compared with major international currencies, the RMB exchange rate is relatively stable, showing strong resilience.

Market trading is rational and orderly, and exchange rate expectations are relatively stable. During the yuan's appreciation in January and February this year, the purchase rate increased by 1.6 percentage points compared with December last year. During the devaluation of the RMB in March, the exchange rate rose by 3.1 percentage points from January to February. It can be seen that market players have maintained a rational trading pattern of foreign exchange settlement at high prices and purchase at low prices. From the perspective of the foreign exchange transactions of enterprises, it is mainly to meet the actual demand. In the first quarter, enterprises' export and foreign exchange settlement under trade items increased by 39% and 38%, respectively, and import and foreign exchange purchase under trade items increased by 19% and 23%, respectively. Both of them maintained the same direction and the increase was similar.

The balance of payments was basically balanced, and cross-border two-way investment was on the whole balanced. In the first quarter, trade in goods maintained a relatively high surplus and trade deficit in services remained at a low level. The current account is expected to continue to run a small surplus and remain within the range of basic balance. At the same time, cross-border two-way investment was stable and balanced, with long-term operational cross-border investment in direct investment remaining active and a small net inflow in securities investment.

Foreign investors continued to increase their holdings of domestic bonds

So far this year, foreign investors have shown strong willingness to invest in Chinese bonds. Foreign investors increased their holdings of domestic bonds by a net $63.3bn in the first quarter, up 11 per cent from the previous quarter, SAFE data showed.

"At present, the general trend of foreign investment will continue." Wang Chunying said that this judgment is mainly based on four factors.

First, domestic fundamentals provide fundamental support for foreign investors to increase their holdings of domestic bonds. Since the opening up of China's bond market in 2016, foreign investors' related investment in China's bond market has maintained an average annual growth rate of double digits, which reflects the long-term and stable nature of foreign investment in domestic bonds.

Second, from the bond market itself, there is room for increase. By the end of last year, foreign ownership of domestic bonds accounted for 3% of the total bond market custody, and there is still room for greater growth in the future. At the end of March, FTSE Russell announced that Chinese government bonds would be included in the FTSE World Government Bond Index in stages starting from October. Some market agencies predict that China's bond market will see more than $130 billion of capital inflows.

Third, the asset yield of Chinese bonds is relatively advantageous. At present, under the global negative interest rate environment, the relatively high yield of RMB bonds provides foreign investors with very good returns and diversified portfolio choices.

Fourth, RMB assets show a certain attribute of hedging assets. When the external environment is relatively volatile, RMB assets perform well. For example, in March last year, when international financial markets were in turmoil, there was a net outflow of foreign capital from the bond markets of emerging economies, and a net inflow from China.

Wang Chunying pointed out that, in general, the current periodic changes and adjustments in the external environment will not change the overall development of China's bond market opening to the outside world, nor will it change the long-term investment willingness of foreign investors in Chinese bonds.

We will increase policy supply in the foreign exchange market

Regarding the future foreign exchange situation, Wang Chunying said that in the medium and long term, the foundation for China's foreign exchange market to maintain stable operation is still solid. However, we should also pay attention to some risks, such as the spread of the global epidemic, geopolitics and other factors will have a certain impact on China's foreign economy and international balance of payments.

In the face of many uncertainties in the external environment, how can enterprises avoid risks? Wang Chunying pointed out that it is important to establish the concept of risk neutrality. In many cases, some enterprises, especially the management, do not have a sound understanding of the exchange rate risk. Enterprises should base on their main business, rationally face the fluctuation of exchange rate, and prudently arrange the monetary structure of assets and liabilities. At the same time, exchange rate risks should be properly managed in order to maintain financial soundness and sustainability, instead of focusing on the profit and loss of hedging.

"In recent years, the SAFE has taken many measures, including deepening market construction and strengthening publicity and training, to effectively help enterprises avoid and manage exchange rate risks. This year, we will continue to step up efforts to support enterprises to better adapt to the two-way fluctuations of the RMB exchange rate." Wang Chunying said that in the next step, we will continue to improve the level of foreign exchange services, strengthen the construction of foreign exchange derivatives and foreign exchange market professional capacity of the branch offices of the SAFE, and better provide answers and services on foreign exchange risk management policies for enterprises and banks. At the same time, we will urge banks to strengthen the capacity building of foreign exchange services at the grass-roots level, and guide banks to conduct on-site training and counseling for enterprises with weak exchange rate risk management, especially small and medium-sized enterprises.

In terms of policies, Wang Chunying pointed out that the foreign exchange market policy supply will be increased, trading tools will be constantly enriched, trading mechanisms will be improved, the transparency of the foreign exchange market will be enhanced, and trading convenience will be enhanced to better meet the needs of market participants in risk management.