Q&A on Foreign Exchange Receipts and Payments Data for the First Half of 2021

The State Council Information Office (SCIO) held a press conference on July 23，2021. Wang Chunying，Deputy Administrator and Press Spokesperson of the State Administration of Foreign Exchange (SAFE)，was invited to share the data on foreign exchange receipts and payments for the first half of 2021 and answer questions from the press.

01

Q: What is your comment on the changes in China's foreign exchange market in the first half of this year? Where will the market go in the second half of this year in your opinion?

A: Since the beginning of this year，the foreign exchange market has been operating generally soundly，market sentiment has been basically stable，exchange rate expectations have been reasonably differentiated，foreign exchange transactions have been rational and orderly，and the foreign exchange market has maintained in good order. The most prominent feature was reflected in the renminbi exchange rate，which was generally stable within the balanced and reasonable range despite stronger ups and downs. I'd like to share with you about our observation and understanding from two aspects.

First，renminbi exchange rate experienced stronger two-way fluctuations. On the first trading day of the first half of the year，the spot renminbi exchange rate against the US dollar appreciated to 6.4620. The trend remained relatively stable in January-February. It depreciated by 1.5% in March，appreciated by 3.1% in April and May，and depreciated by 1.6% in June. By the end of June，it closed at 6.4612 on its last trading day，eight basis points short of 6.4620 at the start of the year. One cent is for 100 basis points，that is to say，eight basis points mean that the rate has basically returned to the original level. Therefore，in the first half of the year，the ups and downs of the renminbi exchange rate were quite obvious.

We see some implications in it. First of all，two-way fluctuations reflect the complexity and unpredictability of changes in the international market. This year，with COVID-19 still spreading around the world，the recovery of the global economy is uneven，and the trend of inflation and employment in major developed economies are not clear，which has added to the uncertainty in the international financial market. Take the US dollar index as an example. It was up 2.6% in March on rising US inflation expectations. In April and May，it dropped 3.4% as the US economic recovery fell short of market expectations. In June，everyone noticed that the signals released by the Fed's meeting on interest rates were "hawkish" and that the recovery of the US economy was gaining speed. As a result，the US dollar index turned to rise by 2.7%. Obviously，the repeatedly changing main situation of the international market also has impacts on the exchange rates of various currencies. Therefore，the stronger two-way fluctuations of renminbi do reflect the complexity and unpredictability of changes in the international market.

In addition，the two-way fluctuations of renminbi reflect the progress of the exchange rate marketization in China. In the first half of this year，according to our calculation，the historical volatility of the renminbi against the US dollar was 3.1%，closing to currencies of developed economies such as euro，sterling and yen and showing strengthening elasticity. Under the market-oriented adjustment mechanism，the two-way fluctuations of the renminbi exchange rate are quite timely and sufficient，accurately reflecting the changes in the international market and in domestic foreign exchange supply and demand. It was the first prominent feature of the renminbi exchange rate in the first half of this year.

Second，the renminbi exchange rate has remained basically stable within a reasonable and balanced range. In recent years，there has been consensus that more elasticity has been seen in renminbi，but its overall fluctuations are still lower than that of emerging economies' currencies，not to speak of some currencies with frequent sharp fluctuations. The renminbi has shown relatively good stability in value，and we also have the following comments in this aspect.

Firstly，this reflects the momentum of long-term growth of the Chinese economy. According to the recent data released by the National Bureau of Statistics，the PMI of China's manufacturing industry in June was 50.9%，which has been in the boom range for 16 consecutive months. China's GDP grew by 12.7% in the first half of the year. China's economy has recovered steadily，with an improving structure and significantly enhanced vitality. Economic fundamentals have played a very important role in stabilizing the renminbi exchange rate and boosting market confidence. Therefore，the fact that renminbi exchange rate remains basically stable within the proper range reflects this characteristics，or is supported by this.

Secondly，it shows China's basically balanced international balance of payments. In recent years，the international balance of payments has maintained a generally balanced pattern and it has been continuously consolidated. For example，the current account surplus as a percentage of GDP has remained within 2% for five consecutive years，which is both a surplus and within a reasonable range. In the first half of this year，such a trend continued. The current account was still within a reasonable range，and cross-border capital flew in and out，in balance. Therefore，foreign exchange reserves are basically stable. According to the data we have released，in the first quarter，the current account had a surplus of US$69.4 billion，and the financial account excluding reserve assets had a deficit of US$34.5 billion，so the capital flow-in-and-out was basically kept in balance. Therefore，this is also a basis in terms of market supply and demand for renminbi to remain stable.

This trend will continue in the second half of the year. As we just mentioned，the supporting factors that enable the foreign exchange market and the renminbi exchange rate to show these characteristics and trends still exist，and the Chinese economy is still improving in the long run. In addition，the reform and opening up are constantly advancing，and the balance of payments operation continues to develop steadily. These factors provide good support for the stable development of the foreign exchange market. Of course，the exchange rate will be affected by many factors at home and abroad，and some international uncertainties and unstable factors still exist. Therefore，the renminbi exchange rate will still go up and down but will be basically stable within a reasonable range.

02

Q: In recent years，the balance of China's external debt has continued to grow. What is the main driving force behind it? How do you view the future development trend of external debt?

A: Thank you for your question. In recent years，China's external debt has steadily increased，and this trend is continuing. China's outstanding foreign debt stood at US$2.5 trillion at the end of March，up 5% from the end of last year. The quarterly growth rate was about the same as the growth rate of each quarter in the past few years. Therefore，the scale of China's external debt is steadily increasing.

You just asked what is the driving force? Let's look at the composition of the increase in external debt. First，the recent increase in China's external debt is mainly because foreign investors hold more China's bonds. Since 2020，foreign purchasers of domestic bonds have accounted for about half of the overall increase in external debt. This is mainly because China's economy is the first to recover，its bond market continues to open，and renminbi assets yield good returns and have a stronger safe haven status. In this category of foreign debt investors，more than half are foreign central banks and institutions like sovereign wealth funds. The investment targets are mainly bonds issued by government departments，which are relatively stable. We have observed changes in related long-term capital remittances. Since 2019，the foreign exchange market has bornepressures sometimes from supply side and sometimes from demand side，thus the US dollar index sometimes rose and sometimes fell，and so did the renminbi. No matter what the situation is，there has always been an inflow of investment funds since 2019，and there has been a net inflow for 30 consecutive months. Thus，it mainly reflects the choices and needs of foreign investors in diversifying assets allocation and seeking stable income.

What's next? The factors as I just mentioned to attract these investors remain. As a result，foreign investors will continue to invest in our bonds，and the future growth of external debt will be dominated by such funds. In October of this year，China's treasury bonds will be officially included in the FTSE World Government Bond Index，so that all major international related indexes will include renminbi bonds. At the end of June，foreign investment accounted for 3.1% of the amount of domestic bonds under custody，and there is a large room for future improvement. But at the same time，it will not grow rapidly，because the global economy will recover and external liquidity and interest rates will return to normal. Therefore，the pace of foreign investment in domestic bonds will be more stable，focusing on long-term investment and diversified asset allocation.

Second，since last year，the growth of non-resident deposits has accounted for about 30% of the total increase in external debt. Non-resident deposits are mainly attributed to the increase in bank deposits of overseas Chinese-funded enterprises. Many enterprises have listed and issued bonds in Hong Kong and then deposited the raised funds back in domestic commercial banks. For domestic commercial banks，these deposits are passive liabilities rather than those arising from active financing. Under the circumstances of sufficient liquidity in domestic foreign exchanges，commercial banks are more inclined to use this part of the funds abroad，which is generally reflected as "coming from and going to abroad". Another feature is that，in general，non-resident foreign exchange deposits，except for QFII funds，are not allowed to be settled，and the withdrawal of such deposits will not involve the purchase of foreign exchanges. Therefore，"coming from and going to abroad" does not involve the settlement or purchase of foreign exchanges，and hence has nearly no impact on the net cross-border capital flows and the supply and demand in the foreign exchange market.

Third，traditional external debt arising from financing，such as loans and trade credits，are generally stable. By the end of March，the balance of this type of external debt remained the same as at the end of 2020，and was lower than the historical high at the end of 2014. It shows that，despite relatively abundant external liquidity，Chinese enterprises have relatively stable expectations. Their cross-border financing is rational and orderly，without any obvious large-scale leveraging up.

Fourth，some have asked whether an external debt of US$2.5 trillion is too large and posing too high risks. Some macro indicators show that China has better currency and maturity structures in its external debt and a generally strong ability of repayment. By the end of March，of the total outstanding external debt，renminbi external debt accounted for 43%，an increase of 1.3% from the end of last year，and the mid- and long-term external debt accounted for 45%，maintaining at a relatively high level. In terms of the safety index of external debt，as of the end of last year，debt-to-GDP ratio，debt service ratio and external debt to exports ratio were all within the international safety line，and were lower than the overall level of developed countries and emerging markets. Sometimes people say that there are too many special terms in the field of foreign exchange，so I would like to explain them to you. The debt-to-GDP ratio is the ratio of the outstanding external debt at the end of the year to the GDP of the year. The external debt to exports ratio is the ratio of the outstanding external debt at the end of the year to the income from exports of goods and services of the year. The debt service ratio is the ratio of the amount of interest and principal payments of the year to the income from exports of goods and services of the year. Therefore，regardless of the three types of structures just analyzed，or in general，the external debt risk is controllable. We will continue to monitor and pay attention to，especially the changes in currency and structure. We will also focus on guiding market participants to pay attention to risks，strengthen risk awareness，and rationally arrange their own asset-liability structure.

The original text is available on SAFE's official website