Prudent Regulation and Maintaining Stability

At the Central Economic Work Conference in mid-December,the nation's economic planners set a policy known as "striving for progress while maintaining stability."  This took into account the global and domestic uncertainties,and was seen as an important principle in managing state affairs and carrying out all economic tasks. To effectively implement this overall strategy,it is necessary to embrace this in monetary policy as well. Moreover,as the exchange rate is an important part of monetary policy,foreign exchange management needs to be guided by prudent regulation.

Compared with past years,2017 will have more than its share of challenges and uncertainties. A nation's foreign exchange situation and its exchange rate are subject to numerous factors,among them global trade,investment and the international economic order. In 2017 there will be many uncertainties in the global economy,and they will result in new challenges to China's foreign exchange management.

Since the global financial crisis in 2008,protectionism has been gaining ground in the US and Europe. In order to protect their own interests,the US and some European countries have used various pretexts to introduce protectionist measures,and even restrained the exports of China and other developing countries. US President Trump has stated that he wants to rewrite trade agreements and has called for tough action against "unfair" trade practices.

European countries have also turned to more protectionist policies to safeguard their national and regional economic interests. In December 2016,for example,the European Union launched an anti-dumping investigation into steel imports from China,India and other developing countries. China protested but the dispute continues.

According to Article 15 of the protocol on China's accession to the World Trade Organization,China should have been recognized as a market economy as of December 11,2016. The US,the EU,Japan and some other countries should no longer use third country price levels as a way of determining fair prices in anti-dumping investigations against China. Although China has filed a complaint with the WTO,a decision could take up to two years. That means China's foreign trade will be subject to this kind of unfair treatment in 2017. Foreign trade is a major factor affecting the exchange rate and foreign exchange reserves. In 2017,the US,EU,Japan and other countries may launch other trade actions against China. More trade friction could affect the renminbi's exchange rate and the level of China's foreign exchange reserves.

The Trans-Pacific Partnership,negotiated under former US president Obama,would have created a trading and investment bloc of 12 countries that would have been detrimental to China and other developing nations. Although President Trump announced he was withdrawing from the TPP,his tendencies towards protectionism and isolationism make the international investment environment even more uncertain. This will not only seriously affect the flows of global capital to developing countries,it could spur capital flows from developing countries and some developed countries to the US. It is not difficult to see that in 2017,China will be in a more uncertain international environment both in attracting foreign investment and in making its own investments around the world.

From the start of the election campaign Trump frequently accused China of intentionally depressing the value of the renminbi to boost exports,leading to the loss of millions of jobs in the US. He stressed that once he was elected he would take tough measures to deal with China on trade. At the same time,the US economy has continued its gradual recovery,and the Federal Reserve has been able to withdraw from its quantitative easing monetary policies. In December of 2016,the Fed raised the federal funds rate to 0.75%,and indicated that in 2017 it would likely raise interest rates three more times. A direct result of this is that the US dollar will strengthen. This means there will be pressure on the euro,yen and the renminbi. US dollar prices of commodities will be affected.

While he was still president-elect,Trump publicly questioned the "One China" principle. In a later telephone chat with Communist Party General Secretary Xi Jinping he then backtracked on this,pledging not to change this policy. Still,it is clear that Trump believes that sometimes it is useful to challenge the established international order. Additionally,the Brexit process will enter the critical stage in March of this year and the impact on the EU and the international order is uncertain. Meanwhile,fighting in Syria,Iraq and Yemen continues,and Ukraine is still locked in armed conflict. How US relations with Russia develop will also have a significant impact on world order.

In 2017,the global economy will be making significant re-adjustments,but peaceful development is still the general trend. Many uncertainties lie ahead and these will affect China's economy in a number of ways. This will complicate China's foreign exchange management and the movement of the renminbi on foreign exchange markets. It is important for China to tend to its own business and keep policy on a firm footing. It should avoid making errors in times of chaos.

Maintaining Stability

Under the "new normal" economy,China has actively promoted supply-side structural reform,and there have been a number of important achievements. China's GDP growth in 2016 was 6.7% and more than 10 million new jobs were created. Prices were basically stable,industrial output rose 6.2%,and retail sales increased 10.4%. At the same time,the quality and efficiency of the economy also increased. China dealt with overcapacity problems,scrapping 46.3 million tons of iron capacity and 97.5 million tons of steel capacity. Plans to scrap 250 million tons of coal capacity were reached ahead of schedule. Factory prices as measured by the producer price index reversed their negative growth trend of 54 consecutive months and climbed 5.5% in December. Corporate profits turned from negative growth in 2015 to positive growth,and the 13th Five-Year Plan got off to a good start.

However,the task of eliminating surplus capacity and excess inventories is still a difficult one. Prices of coal,steel,cement and other key raw materials rose in 2016,reversing a prolonged decline. On September 3,2016,Communist Party chief Xi pointed out in his address to the G20 Industrial and Commercial Summit that China has been vigorously promoting supply-side structural reforms. It aims to reduce crude steel production capacity by 100 million to 150 million tons over five years. It also is seeking to reduce coal production capacity by 500 million tons in three to five years. China has made significant strides in eliminating capacity,but it's clear that there is still a long way to go.

Leverage and Financial Risk

Eliminating leverage is another key target. In October the State Council promulgated its "Suggestions on Reducing Corporate Leverage Rate in an Active and Prudent Manner,"