Foreign Exchange Policy — At a Turning Point

The final report from the 19th National Congress of the Communist Party of China is a document with special significance, pointing a turning point for the Chinese economy.  It speaks of the arrival of a new era of economic improvement but one that also entails new risks. As we assess the implications for the economy, we need to think of how that turning point affects foreign exchange policy. Is it one that will mean a slowdown in liberalizing the capital account? Perhaps that is the case.

Foreign exchange policy incorporates a “vector" management approach, looking at the general direction and magnitude when assessing cross-border capital flows as well as the exchange rate between the renminbi and foreign currencies. In the years following the 2008 financial crisis, foreign exchange policy was aimed at controlling inflows of short-term speculative capital or “hot money” in order to alleviate the pressure from sustained growth in the nation's foreign exchange reserves. Since 2015, foreign exchange policy has been aimed at preventing capital flight and relieving the dual pressures of domestic currency depreciation and a sharp decline in foreign exchange reserves. The foreign exchange market has also required the management of expectations.

In 2016 and 2017, the guiding macroeconomic principles were to achieve a balanced payments position, expand foreign exchange inflows and make greater efforts to verify transactions that underpinned foreign exchange outflows. Under conditions of more stable market expectations, reforms need to be consolidated, though the prevention of financial risk must still be given priority, particularly in areas where there are risks of in