Policy Talking Points: Q&A on the Currency
The renminbi has been under pressure of late amid an outflow of foreign exchange. In order to assess the prospects for the currency in the coming year and examine key foreign exchange market factors,including the recent US presidential election,Debra Lodge,Managing Director Global Markets,Head of RMB Business Development North America interviewed Mu Zhiqian a former consultant to the State Administration of Foreign Exchange. The following is her interview of Mr. Mu.
Q: Donald Trump surprised many observers with his election as president. What influence will his election have on the global economy as well the Chinese economy and its financial system?
A: This was a decision of the American voters and this needs to be respected. Mr. Trump is pragmatic. I believe he will work to revitalize the U.S economy. The US has a very developed financial sector with a wide variety of financial products and huge trading volume. As a result of this advantage,the US economy plays the leading role in the global economy. However,what we see from its financial system at times is profit without the creation of material wealth. Many of the sophisticated hedging tools and other products are used to make profits but they ignore the real economy. China's financial sector is still in the developing stage. Even though the renminbi is now one of several global reserve currencies,the nation's financial sector is still a long way from becoming a mature one. China's leaders have repeatedly said that the objective of developing the nation's financial system is to contribute to the real economy. It seems that Mr. Trump may have similar views.
Q:The renminbi has been under substantial pressure. However,both the People's Bank of China and government policymakers have long stated that there was no possibility of the renminbi experiencing a prolonged depreciation. How would you describe this continued decline of the currency in the face of government statements?
A: Granted,the renminbi has been in a depreciating pattern after breaking a series of support levels. In the foreign exchange market,there is such a thing called "triangular balance," namely,the relations among the foreign exchange rate,foreign exchange reserves and cross-border capital flows. To illustrate this,the foreign exchange rate reflects supply and demand on the market as well as market expectations. Foreign exchange reserves are needed to ensure stable imports,repay foreign debt in a timely fashion and support the purchases of foreign exchange by foreign investors who wish to repatriate profits. Cross-border capital flows are largely influenced by the domestic economy and the global economy,as well as the actions of the US Federal Reserve. When I say "influence," I mean the direction of fund flows and the volume of those flows. If you have a clear understanding of this "triangular balance," the issue of short-term fluctuations will be easily grasped. What I'm trying to say is that the foreign exchange rate is an indicator of a country's economic conditions. As China's economic restructuring program progresses,I think there will be more confidence in the renminbi over the long term.
Q:Are there any new regulations or policies being considered in the foreign exchange area in 2017? Many market entities,especially some multinational corporations,complain about difficulties in moving funds offshore. Additionally,Chinese enterprises,especially private ones,say they have trouble obtaining foreign exchange for overseas investment despite the government's policy of encouraging offshore investments.
A: First of all,there is no doubt that enterprises adopt measures aimed at optimizing the use of their assets. The key hedge against adversity for an economy is the level of foreign exchange reserves. As I mentioned earlier,foreign exchange reserves are an important component in the "triangular balance." Only when China's economy is operating smoothly can the nation's enterprises enjoy stable and long-term benefits. There is an old Chinese saying that "joint efforts are needed to carry