Cross-border Capital Flows under the New Security Architecture

Since the 18th National Congress of the Communist Party of China (CPC)，China has launched a host of major initiatives，enriching the content of a holistic view of national security. The report of the 20th CPC National Congress emphasized “amplifying the interplay between domestic and international markets and resources”，“fostering a world-class business environment that is market-oriented，law-based and internationalized”，and “safeguarding China’s new pattern of development with a new security architecture”. Cross-border capital flows are important channels for connecting domestic and international markets under the new security architecture.

Regarding the long-term economic development，technological iteration，industrial upgrading，and market expansion drive the layout of global productivity，thereby promoting the cross-border extension of supply chains and the division of labor. From the standpoint of semiconductors and artificial intelligence，the development of an industry from infancy to maturity is always accompanied by global capital flows along with the extension and expansion of the supply chain.

Under a stage of specific economic operation，demand and supply shocks affect short-term fluctuations in cross-border capital flows. The comparative advantages of the labor force，taxation，and macroeconomic policy adjustments will all lead to changes in capital flows. For example，owing to low labor costs and geographical location，Southeast Asian countries have become one of the best regions for the relocation of global manufacturing industries. According to United Nations Conference on Trade and Development (UNCTAD)’s Global Investment Trends Monitoring Report，the size of foreign direct investment in Southeast Asian countries increased by 35% year on year in 2021. Notably，Vietnam’s economic performance was eye-catching. With its low cost in labor，land，and taxation，Vietnam continued attracting more foreign investment. In 2022，Samsung Electronics made additional investments in Vietnam，and Foxconn also set up a new factory there.

In addition，under inflationary pressure，developed economies have generally raised interest rates，triggering a global “interest rate hike”. Since 2021，with the rising of global inflation expectations and heightened geopolitical tensions，the global supply chain has further deteriorated，exacerbating commodity prices increase. Consequently，the inflation problem in developed economies such as Europe and the United States has become prominent. The Federal Reserve raised its interest rate aggressively，while the European Central Bank raised its interest rate sharply，and many central banks followed suit. World Bank research pointed out that global central banks were simultaneously increasing their interest rates，which had not been seen in recent 50 years，and this trend may continue in 2023. As a result，cross-border capital flows into emerging economies reversed，and many currencies experienced relatively large depreciations. According to the data from the Institute of International Finance (IIF)，from January to October 2022，the cumulative net outflow of capitals from emerging economies was US$6.2 billion，while the inflow in the same period in 2021 was US$341.9 billion. 90% of the world’s currencies depreciated in 2022，with two-thirds of them declining by more than 10%，except a few that strengthened against the US dollar，including the Russian ruble，Uruguayan peso，and Brazilian real. Six currencies depreciated by more than 20%，among which the Sri Lankan rupee by more than 40%，the Argentine peso by nearly 35%，and the Turkish lira by nearly 30%. It is also worth noting that some emerging economies face serious debt problems. In May 2022，Sri Lankan government defaulted on US$12.6 billion in sovereign debt and subsequently declared bankruptcy. This is not the only case. IMF research shows that，as financial conditions tightened and the dollar appreciated，25% of emerging economies were in or close to debt distress，and more than 60% of low-income countries were in debt distress. Once the debt crisis and the currency crisis become mutually transmitted and reinforced，it can fall into a vicious circle of self-fulfilment of the crisis.

The supply and demand of China’s foreign exchange market maintained a basic equilibrium，and cross-border capital flows were generally stable and orderly. Since 2022，China’s foreign-related economic activities have remained active，and the resilience of China’s foreign exchange market has increased significantly. Preliminary data on the balance of payments shows that，in the first three quarters of 2022，China maintained a basic equilibrium in the balance of payments，with a current account surplus of US$310.4 billion，the highest ever for the same period and an increase of 56%year-on-year . Meanwhile，direct investment showed net inflows，and cross-border capital flows were stable and orderly. Despite fluctuations in the global financial market，supported by China’s economic recovery and a stable balance of payments structure，the RMB financial assets remained attractive to global capital and had relatively independent income performance on the global scale. At present，foreign investment accounts for less than 5% in both China’s stock and bond market，and there is great potential for global capital to further increase its allocation in China’s financial assets.

Under the new security architecture，cross-border capital flow management focuses on seeking openness while maintaining security. For China’s cross-border capital flow management，foreign exchange administration departments have continuously improved the management system and mechanism. While deepening reform and opening-up in the field of foreign exchange，it improved the two-pronged “macro-prudential management plus micro regulation” framework to ensure the sound operation of the foreign exchange market and national economic and financial security. For the benefit of developing countries，China has demonstrated a sense of duty as a responsible major country，actively participating in international financial governance and advocating the coordination of international economic and financial policies. In April 2022，the IMF updated its view，recognizing the precautionary management of excessive cross-border capital inflows in advance. It further explained that managing cross-border capital flows is necessary to address the exogenous problems of capital flows in developing countries. The international community should respect the mode and degree of openness adopted by countries according to their national conditions，and pay attention to the policy spillovers of major developed economies，to foster a fairer and more just international environment for developing countries.

Financial security is an essential part of national security，and safeguarding financial security is a strategic and fundamental issue that concerns China's overall economic and social development. Based on the new security architecture，foreign exchange administration department will continue coordinating development and security，constantly optimizing and improving framework for managing cross-border capital flows，while promoting the development of the real economy with high-quality foreign exchange services. Additionally，it will maintain China's economic and financial security and the sound functioning of its foreign exchange market.

The author is Deputy Administrator of the State Administration of Foreign Exchange