Q&A on Foreign Exchange Receipts and Payments Data for First Quarter of 2022

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.

The State Council Information Office (SCIO) held a press conference on April 22，2022. Ms. Wang Chunying，Deputy Administrator and Press Spokesperson of the State Administration of Foreign Exchange (SAFE)，was invited to unveil the data on foreign exchange receipts and payments for first quarter of 2022 and answer media questions. The transcript is as follows.

Wang Chunying，Deputy Administrator and Press Spokesperson of the SAFE:

Welcome to today’s press conference. First，I would like to brief you on China’s foreign exchange receipts and payments situations for the first quarter of 2022 and then I will take your questions.

In the first quarter of 2022，the COVID-19 pandemic continued to disrupt the global economy while the international political and economic environment were intertwined with uncertainties and unstable factors，and the volatility in the international financial market became intensified. However，China’s economy has continued to recover and operate within a reasonable range on the whole. China’s foreign exchange market was generally stable. The renminbi exchange rate against the US dollar went through ups and downs but remained basically stable. The cross-border capital flow ran at an overall stable and balanced level.

According to the data on foreign exchange settlement and sales by banks in the first quarter of 2022，in US dollar terms，banks settled US$660.3 billion and sold US$601.5 billion of foreign exchange，representing a surplus of US$58.7 billion. In renminbi terms，banks settled 4.2 trillion yuan and sold 3.8 trillion yuan of foreign exchange，representing a surplus of 373.1 billion yuan. For cross-border receipts and payments by non-banking sectors，in dollar terms，banks registered US$1.5767 trillion in foreign-related receipts and US$1.5145 trillion in foreign-related payments for customers，representing a surplus of US$62.2 billion; or in renminbi terms，banks handled foreign-related receipts of 10.0 trillion yuan and payments of 9.6 trillion yuan for customers，recording a surplus of 395.7 billion yuan.

China’s foreign exchange receipts and payments for the first quarter of 2022 present the following characteristics:

First，banks maintained a reasonable surplus in the foreign exchange settlement and sales by banks，as well as in the cross-border receipts and payments. In the first quarter of 2022，the foreign exchange settlement and sales by banks recorded a surplus of US$58.7 billion，while the cross-border receipts and payments by non-banking sectors recorded a surplus of US$62.2 billion. Specifically，in January，the surplus in the foreign exchange settlement and sales by banks，and the surplus in the cross-border receipts and payments by non-banking sectors remained relatively high. In February，due to seasonal factors and changes in the external environment，the surplus in the foreign exchange settlement and sales by banks was relatively small，while the cross-border receipts and payments showed a small deficit. In March，the cross-border receipts and payments restored a surplus of US$10.3 billion，while the surplus in the foreign exchange settlement and sales by banks rose to US$26.8 billion.

Second，the sales ratio and the foreign exchange financing are generally stable. In the first quarter of 2022，the sales rate，a measure of customers’ willingness to buy foreign exchange，which is the ratio of foreign exchange purchased by customers from banks to foreign-related foreign exchange payments made by customers，stood at 61.0%，basically the same as that in the same period of 2021. Meanwhile，foreign exchange financing by enterprises remained stable. At the end of March 2022，the outstanding balance of domestic foreign exchange loans of Chinese enterprises and other market players increased by US$16.2 billion compared with that at the end of 2021，and the outstanding balance of foreign currency financing for cross-border trade such as import refinancing and long-term L/C was US$123.5 billion，basically unchanged from that at the end of 2021.

Third，the settlement rate was basically stable and the foreign exchange deposits increased slightly. In the first quarter of 2022，the settlement rate，a measure of customers’ willingness to settle foreign exchange，or the ratio of foreign exchange sold by customers to banks to customers’ foreign-related foreign exchange receipts，reached 62.4%，down by 3.2% from the same period in 2021. By the end of March 2022，the balance of domestic foreign exchange deposits of enterprises and other market participants was US$727.7 billion，an increase of US$31.8 billion compared with that at the end of 2021，indicating that market participants still have abundant foreign exchange liquidity.

Fourth，the hedging ratio of enterprises has steadily increased，and market participants’ awareness of exchange rate risk neutrality has enhanced. In the first quarter of 2022，the foreign exchange derivatives，such as forwards and options，used by enterprises to manage exchange rate risks totaled to over US$370 billion，a year-on-year increase of 29%. The hedging ratio of enterprises was 26%，an increase of 4.2 percentage points compared with 2021. This indicates that enterprises’ exchange rate risk-neutral business philosophy has further strengthened and their ability to adapt to renminbi exchange rate fluctuations has improved.

Fifth，the scale of foreign exchange reserves remained basically stable. As of the end of March 2022，the balance of China’s foreign exchange reserves was US$3.188 trillion，a slight decrease of 1.9% from the end of 2021，mainly due to factors such as the depreciation of non-US currencies against the US dollar and the decline of global asset prices.

The above are the main statistics on foreign exchange receipts and payments for the first quarter of 2022 that I want to share with you. Next，I will answer your questions on China’s foreign exchange receipts and payments.

01

China Media Group CCTV:

I am concerned about the recent hawkish signals from the Federal Reserve. We can see that the intensity of interest rate hikes and the reduction of the balance sheet have significantly exceeded market expectations. Against the backdrop of the Fed raising interest rates，what could you say about the trend of China’s foreign exchange receipts and payments in the future? Thank you.

Wang Chunying:

This is an issue that we have always kept an eye on. The Fed’s tightening of monetary policy is accelerating，and the domestic and foreign interest rate spreads have also changed，which caused a very wide range of attention. I would like to share some of the main conclusions of our follow-up research，in the hope of helping you understand and evaluate the foreign exchange situation in a more comprehensive way.

Historically，the Fed’s monetary policy adjustments，especially interest rate hikes，usually have spillover effect on cross-border capital flows across countries. However，it is mainly in some economies with fundamental weaknesses that have been hit hard. Since the 1980s，we have observed some cases. For example，some economies have experienced domestic recession and relatively high inflation. Their economic structures are relatively unitary and their capability to resist risk is weak. Some economies have worsening balance of payments，large current account deficit and insufficient foreign exchange reserves. There is also another situation，some economies are particularly dependent on external financing for their economic development，resulting in high foreign debts and great pressure for repayment. For these economies whose domestic fundamentals are not sound enough，even if they followed the Fed’s lead and raised their domestic interest rates significantly，it would be difficult for them to absorb more capital inflows or prevent capital outflows.

For an economy’s balance of payments and cross-border capital flows，the Fed’s interest rate hike is indeed an important external variable，but it is its own macro fundamentals and market foundation that matters the most. As for China，the resilience of its foreign exchange market has been increasing in recent years，and it has the foundation and conditions to adapt to the current round of Fed’s policy adjustments.

First，China’s economic operation has generally been maintained within a reasonable range，and the economy is relatively resilient. Since the beginning of this year，China has adhered to the general principle of seeking progress while maintaining stability. The policies to stabilize economic growth have been effective，and increased efforts have been made to support the real economy. All these have helped stabilize the fundamentals of China’s economy. At the same time，China’s economic structure also continued to optimize，showing an obvious innovation-driven trend. As a result，the fact that China’s economy remains stable with great potential and sound long-term fundamentals will not change，and thus it will continue to attract all kinds of capital to invest in the Chinese market.

Second，the basic surplus in the international balance of payments，such as the current account and direct investment，will still maintain a certain scale，which will play a role in stabilizing cross-border capital flows. Let’s start with the current account. China is the only country in the world that has all the industrial sectors recognized by the United Nations. The transformation and upgrading of its manufacturing sector have continued to advance，and positive progress has also been made in diversifying its trading partners. Therefore，trade surplus in goods has solid support. As we all know，trade in services，mainly travel spending，has also maintained only a small deficit due to the pandemic. According to our preliminary estimation，the current account surplus in the international balance of payments increased in the first quarter of this year compared to the same period last year，and the surplus pattern will remain throughout the year. Regarding direct investment，in the context of adhering to a high-level opening-up and continuous improvement of the business environment，China ranked the second largest recipient of foreign investment in the world in 2021，and the foreign capital had a relatively strong willingness to invest in China. In addition，with the steady and orderly outbound investment by domestic entities in recent years，we expect there will be a net inflow under direct investment. Therefore，the basic surplus in the balance of payments，such as the current account and direct investment，will maintain a certain scale，and will continue to play a role in stabilizing cross-border capital flows.

Third，the structure of China’s foreign assets and liabilities has been optimized，and the risk of external debt repayment is relatively low. By the end of last year，the ratio of China’s total external debt to GDP was 16%，which was lower than that of major developed countries and emerging economies in the world，indicating that China’s external debt is not at a high level. Moreover，the structure of external debt has also been constantly optimized. As of the end of last year，the proportion of external debt arising from financing，such as deposits，loans，and trade financing，dropped by 13 percentage points from the end of 2016，when the last round of external debt deleveraging was carried out intensively. In recent years，the increase of China’s external debt mainly came from the investment of more foreign capital in Chinese bonds. Meanwhile，China has maintained its external net assets for a long time. As you can see from the statistics we released，China’s external net assets were close to US$2 trillion at the end of last year，which was at a relatively high level. Besides，China’s foreign exchange reserve assets rank first in the world，and the scale of private sector assets is also increasing. These enable a good adaptability to changes in external liquidity.

Fourth，the exchange rate plays the role of an automatic stabilizer to adjust the balance of payments，and the foreign exchange market becomes increasingly mature. In recent years，the renminbi exchange rate has become more flexible，relieving external pressure in a timely and effective manner. The market expectations remained stable，and transactions in the foreign exchange market were conducted in a rational and orderly manner. At present，foreign exchange deposits of domestic entities exceed US$700 billion，which is also a record high. Enterprises usually choose to settle foreign exchange at the right time. The rational transaction behavior of “settling foreign exchange when renminbi exchange rate is high，and buying foreign exchange when the rate is low” can effectively suppress some of the exchange rate adjustment，which contributes to the overall stability of renminbi exchange rate and the smooth operation of foreign exchange market.

In general，despite the complex and changeable factors of the Fed’s monetary policy adjustment in the future，under the support of the above-mentioned basic，stable，and fundamental factors，China’s foreign exchange market is expected to maintain a steady operation，and cross-border capital flows will show a reasonable and balanced development pattern. Of course，the foreign exchange administration departments will also adhere to the bottom-line thinking，closely monitor the progress of Fed’s monetary policy adjustment and its spillover effects. The SAFE will evaluate the operation of China’s foreign exchange market in real time，and effectively maintain the stability of the foreign exchange market.

02

Market News International:

Currently，the interest rate spreads between China and the United States are narrowing rapidly and even inverted. Recently，foreign investors have continuously reduced their holdings of renminbi assets. Will this increase the pressure on renminbi depreciation and capital outflow? How will the SAFE respond?

Wang Chunying:

Thanks for your question. Portfolio investment，such as stocks and bonds，is an important channel for cross-border capital flows and an important area for the opening of capital markets. Recently，the relevant capital flows have received close attention. I would like to take this opportunity to share with you the latest situation and relevant estimation that we have monitored.

Short-term volatility in cross-border portfolio investment is a common feature of global markets. Compared with long-term stable investments，such as direct investment，securities investment has such a feature that it is more sensitive to the market，easy to trade，and strong in liquidity，and thus it is prone to the occurrence of increase in inflows and outflows. This is normal for an increasingly open financial market. Internationally，for example，affected by the turmoil in the global financial market，foreign investors sold US$38.2 billion of US bonds in May last year. Net foreign selling of Japanese securities reached US$62.2 billion in March last year. A similar pattern often occurs with cross-border flows under portfolio investment in many emerging markets. Therefore，we say that the short-term volatility of securities investment is a common phenom