Q&A on Trade Disputes And the Renminbi

Q:

The Sino-US trade dispute was a key issue in 2018. What impact has it had on China's balance of payments? Have financial authorities felt much pressure from this?

A :

An impact of the Sino-US dispute on China's balance of payments was unavoidable. The question has been how much of an impact would there be? Similarly，financial authorities have been tested by the dispute. How much pressure and how authorities respond are the key issues.

In 2018 China saw a shift from higher inflows of foreign exchange to a basic equilibrium in the balance of payments. The trend has three key features.

First，the two-way flow of foreign exchange has finally reached a relative balance after a period of intense inflows and then a gradual easing of inflows.

Second，the data on foreign exchange services of banks showed narrowed deficits in receipts and payments as well as settlements and sales of foreign exchange.

Third，the deficit in forward settlements and sales of foreign exchange declined. At times there were surpluses.

These features reflect the general trend in China's balance of payments over the year. Specifically，the inflows on the current account and capital inflows from foreign investment grew at a rate of 6% or more，basically in line with China's economic growth rate. It can therefore be said that the impact of the Sino-US dispute on the balance of payments over the year was tolerable.

Q: Does this modest impact actually reflect tighter controls on movements of foreign exchange? It seems that enterprises，especially foreign-funded ones，have been reporting a considerable degree of inconvenience in moving funds out of China. They contend that procedures are unnecessarily complicated. For example，they note that there are requests for details on the purpose of remittances as well as requirements of support documentation such as contracts and invoices.

A :

The degree of regulatory oversight changes as circumstances change. For instance，China became a more attractive destination for hot money after the global financial crisis in 2008. At that time，foreign exchange regulators focused on stemming inflows of short-term speculative capital. In the second half of 2015 there were heavy outflows of capital and China's regulators shifted their focus to halting capital flight. To a certain extent it can be said that foreign exchange regulation changes with the shift in exchange flows.

The reach of the nation's regulators is long. The priorities are large sums of money or sums that involve questionable sources. Whether or not this degree of regulation is required for all transactions is another matter. Nevertheless，the principle that fund movements should be based on real underlying transactions must be observed.

Q:

China is promoting the use of renminbi in overseas direct investment (ODI) in countries covered by the "Belt and Road" initiative (a major program for boosting trade and infrastructure development). Does that mean China wants the renminbi to replace the use of US dollars and euros in order to ease downward pressure on the nation's foreign exchange reserves?

A :

This issue is not that complicated. In fact，most of the investment along the "Belt and Road" program is in infrastructure construction. Over the course of construction on these projects there will be many related transactions between China and the investment destination. Using renminbi for these investments is more convenient. Why use other currencies when there is a more convenient one at hand?

Of course，using renminbi for outbound investment related to the Belt and Road initiative will mean there is also less of a reduction in our foreign exchange reserves as well. At the same time，using the renminbi for investments will promote the international role of our currency.

Q:The reference to foreign exchange reserves brings us to a sensitive question. Is the US$3 trillion level of foreign exchange reserves a red line that cannot be crossed? Is this the level of reserves required to cushion any impact from a worsening of the Sino-US trade dispute or other emergencies?

A :Three trillion dollars is a static point in a dynamic process. It is not reasonable to set a particular number because this changes according to conditions，阅读全部文章，请登录数字版阅读账户。 没有账户？ 立即购买数字版杂志