General Trend of the Balance of Payments and Insights into Foreign Exchange...
Title: General Trend of the Balance of Payments and Insights into Foreign Exchange Hedging Services
China Forex: What are the changes and features of China’s foreign exchange market in 2021? How do you predict the foreign exchange receipts and payments in 2022?
Jia Ning: The world in 2021 was fraught with intertwined uncertainties and instabilities，such as the COVID-19 pandemic to global economic recovery，and the shift of monetary policies in major developed economies. In the intricate and ever-changing environment，China’s foreign exchange market remained generally stable: the renminbi exchange rate maintained stability and cross-border capital flows were orderly and reasonable. And the balance of payments was basically in equilibrium. It indicates three outstanding characteristics.
First，the renminbi to US dollar exchange rate fluctuated in both directions，and the expectations remained stable. In 2021，the renminbi to the US dollar exchange rate went up slightly by 2.6%，indicating the renminbi was stronger than the currencies of major developed and emerging economies. The exchange rate rose and fell in different stages. It climbed by 2.8% in the first five months，and dropped by 1.6% in June. After the fluctuation within a narrow range from July to September，it escalated slightly by 1.4% since October，and closed at around 6.37 at the end of the year. Throughout 2021，the renminbi to US dollar exchange rate to 6.35 at the highest and to 6.57 at the lowest，mainly due to the comprehensive impact of factors such as the international financial environment and domestic foreign exchange supply and demand. The indicators of foreign exchange forward and options markets showed that the renminbi exchange rate expectations，which were reasonably differentiated，maintained stability in general.
Second，real economic activities such as trade and investment drove cross-border capital inflows. In 2021，China’s import and export of goods maintained a relatively large surplus，up by 30% in US dollar over 2020，demonstrating the advantages of China’s industrial chain and supply chain in the context of the global pandemic. As a result，China’s cross-border trade in goods in 2021 had a surplus of US$3,395 billion，constituting 95% of the total surplus in cross-border receipts and payments. At the same time，according to statistics released by the Ministry of Commerce (MOFCOM)，China’s actual use of foreign capital reached US$173.5 billion in 2021，an increase of 20% over the previous year to a historical high，reflecting the attractiveness of China’s inviting economic prospects to overseas long-term capital. In addition，foreign investors increased their holdings of domestic bonds by US$166.6 billion in 2021，which suggested renminbi assets have become an important asset for foreign investment.
Third，the external assets of China’s private sector expanded remarkably. The balance of payments statement shows that China’s foreign investment，especially by the private sector，has increased against the background of the current account surplus and the overall inflow of foreign capital. In the first three quarters of 2021，outbound investment by the private sector surged by US$489 billion，of which foreign direct investment hit US$85.4 billion，and nearly US$100 billion were invested in overseas securities markets through channels such as the Hong Kong Stock Connect and Qualified Domestic Institutional Investors (QDII). Other investments exceeded US$310 billion，mainly because the abundant foreign exchange of domestic entities increased deposits and lending overseas. In general，domestic enterprises，financial institutions and other private sectors had cross-border capital flows in and out，forming a pattern of independent balance of payments.
In 2022，China’s foreign exchange market is expected to show an overall stable and more balanced trend considering the internal and external changes.
On the one hand，the gradual return of the global economy and finance to normal will make China’s cross-border capital flow more stable. Looking forward，despite the remaining uncertainties such as the pandemic，the global economic recovery is a prevailing trend. Macro-stimulus policies such as the fiscal and monetary policies will gradually withdraw and become normalized，driving international trade and investment back to normal. This will help China maintain a more stable and sustainable cross-border capital flow.
On the other hand，the long-term trend of stable and positive domestic fundamentals will not change，ensuring the stability of China’s foreign exchange market. China will coordinate the epidemic prevention and control and economic and social development，and the economic growth rate will stay within a reasonable range. The steady progress of the two-way opening of the financial market will create a favorable policy environment for the stable and balanced flow of cross-border funds. Additionally，the renminbi exchange rate will continue to serve as an automatic stabilizer for adjusting the balance of payments，bringing overall stability to the foreign exchange market.
China Forex: Please introduce the significance，challenges and methodologies of the statistical declaration of enterprises’ external financial assets，liabilities and transactions as a key work of the balance of payments statistics.
Jia Ning: Statistical declaration of enterprises’ external financial assets，liabilities and transactions is a major enterprise survey that the SAFE has been promoting in recent years. It refers to the direct reporting of foreign-related economic transactions and external assets and liabilities data on an accrual basis to the SAFE by an enterprise based on its own accounts and business records，also known as direct enterprise declaration. Looking back at the history of direct declaration of the balance of payments，the reporting entities have continued to diversify: financial institutions including domestic banks，securities companies，and insurance companies have begun to make direct declaration since 2014; all overseas listed domestic enterprises have been required to make direct declaration since 2016; some key enterprises with a considerable amount of foreign-related business began to report directly in 2020，owing to the improvement of financial business management of Chinese enterprises and the integration of system resources，which has laid a realistic foundation for enterprises to independently and responsibly make direct declaration. At present，nearly 3,000 large-scale enterprises participate in direct declaration.
Direct enterprise declaration，as an important measure to gear China's practice to the highest international standards，is a basic，long-term and systematic work determining the quality of balance of payments statistics，and encouraging the future development in this field. First，it follows the innovative development trend of future finance. At present，the SAFE collects foreign-related income and expenditure data of enterprises mainly through banks. The existing methods，which can basically reflect the foreign-related transactions of enterprises，however，may neither deal with the complex business development and settlement in the future，nor fully cover the stock of financial assets and liabilities. An enterprise is the best recorder of its own behavior，and it should also be the best provider of data when it is traced back to its source. Second，be in line with the international statistical standards. Enterprises reporting the summary records of accounting business on an accrual basis can thoroughly collect the balance of payments transactions and stock data，and promote the "debit-credit consistency" and "flow-stock matching" of foreign-related transactions and positions，which is conducive to further improving data quality. Third，strengthen the connection between the SAFE and the enterprises. The direct enterprise declaration has facilitated communication between the SAFE and the enterprises，assisting the SAFE in understanding the dynamics and operation of enterprises and formulating facilitation measures to serve market players.
Increasingly important as it is，direct enterprise declaration still faces many difficulties: the large number and huge variety of reporting enterprises，the financial and business information involved in statistical reports，and the immaturity of the product itself all pose challenges to the SAFE’s statistical work. First，the awareness of direct enterprise declaration needs to be improved. As a public product，the balance of payments statistics relies on the active participation of enterprises in the production. The insufficient awareness and recognition of some enterprises at present call for extensive and in-depth statistical publicity. Second，the ability of direct enterprise declaration needs to be strengthened. Differentiated and targeted guidance for enterprises is required considering the complex direct declaration reports that reflect various foreign-related business. Third，the allocation of resources for balance of payments statistics needs to be optimized. Large-scale foreign-related enterprises are mostly located in the eastern coastal areas. Sufficient personnel are needed to communicate with enterprises for direct declaration，placing great pressure on the grass-roots statistical departments. Therefore，it is necessary to optimize the allocation of statistical resources.
In the next step，SAFE will continue to promote the direct enterprise declaration from the aspects of publicity，guidance and capacity building. First，increase the publicity of balance of payments statistics through multiple channels. For example，we will design and launch a unified national logo for balance of payments statistics to enhance the social awareness of statistical work and enterprises' awareness of legal declaration. We will also explore to integrate declaration into foreign exchange management service enterprises，mobilizing their enthusiasm for declaration，and improving their sense of gain. Second，provide targeted training and guidance based on the actual situation of enterprises. For instance，we will make short videos，pictures and texts for direct declaration training，facilitating the financial personnel of enterprises to quickly grasp the requirements. We will also improve the working mechanism of declaration counselors，and provide “hands-on” services for enterprises to familiarize themselves with the data sources，reporting standards and logical relationships to improve their ability in this regard. Third，strengthen the capacity of statisticians. It will regularly train the system-wide statisticians to improve their professionalism and build a high-level statistical talent team. Through technology empowerment，we will explore the mechanism of branch offices in different places to connect with enterprises，and rationally allocate the statistical resources of branch offices，laying a solid foundation for further expanding the direct enterprise declaration.
China Forex: What measures will the SAFE take to vitalize the foreign exchange market and support small，medium and micro enterprises in exchange rate risk management?
Jia Ning: The Party Central Committee and the State Council have always attached great importance to the service system for medium，small and micro-sized enterprises. These enterprises are an essential part of China's market economy，contributing 80% of employment，60% of GDP and 50% of tax revenue. They are also key service targets of the SAFE. According to statistics，there were about 650,000 enterprises with foreign-related receipts and payments of less than US$1 million in 2021，making up 70% of the enterprises with such transactions.
In 2022，SAFE will constantly improve its work to expand the policy effect and comprehensively support the foreign exchange hedging for medium，small and micro-sized enterprises. More targeted policy implementation and effective services will be highlighted，especially in view of the large number of these enterprises with small-scale and scattered transactions.