Following the Path of Financial Development with Chinese Characteristics...
Title:Following the Path of Financial Development with Chinese Characteristics Promoting High-Quality Development in China’s Balance of Payments
China Forex: How has China's balance of payments performed in the face of a complex and severe external environment in 2023? What has been done to maintain a healthy balance of payments and serve the development of the real economy?
JIA Ning: In 2023, the external environment was complex and intertwined, with a weak global economic recovery and ongoing geopolitical conflicts. Major developed economies continued to implement tight monetary policies, and exchange rates and interest rates of the US remained high. These factors have had spillover effects on international financial markets, leading to a general decline in cross-border investment and financing activities. Under the strong leadership of the CPC Central Committee with Comrade Xi Jinping at its core, China has comprehensively deepened its reform and opening up, intensifying macroeconomic regulation, overcoming internal and external challenges, and promoting a positive economic recovery. All this has allowed China's balance of payments to remain essentially stable, with the foreign exchange market operating in a steady manner.
The current account maintained a relatively high surplus, playing a stabilizing role in the balance of payments. Preliminary statistics show that in 2023, the current account surplus amounted to US$264.2 billion, with a ratio to the Gross Domestic Product (GDP) of 1.5%, which is within a reasonable and balanced range. The surplus under trade in goods exceeded US$600 billion, the second highest level in the same period in history, demonstrating strong stability and resilience in China's foreign trade. The deficit under trade in service expanded to US$229.4 billion, mainly due to the orderly recovery of cross-border travel spending by residents, which exceeded 80% of the pre-pandemic level in 2019. Revenue from telecommunications, computer and information services, and other commercial services grew rapidly, with a cumulative surplus of US$57.2 billion, relatively high when measured in recent years, and 1.1 times higher than the value recorded in 2019.
Cross-border investment activities under the capital account were also carried out in an orderly manner, showing an overall stable and healthy trend. In terms of main channels, foreign direct investment maintained a net inflow, with a significant rebound in net inflows in the fourth quarter. China's outward direct investment of an equity nature continued to grow steadily. Securities investment gradually recovered with net inflows, with overseas investors increasing their holdings of domestic bonds by over US$62 billion in the fourth quarter. Overall, other investments such as deposits and loans remained stable, with a slowdown in the deleveraging of traditional financing-type external debt, and the external debt balance stabilizing and rebounding in the fourth quarter. By the end of 2023, China's foreign exchange reserve balance was US$3.238 trillion, an increase of US$110.3 billion from the end of the previous year, mainly affected by factors such as exchange rate conversion and changes in asset prices.
The balance of payments work followed a bottom-line approach, coordinating development and security to effectively maintain the balance of payments, and helping to ensure the smooth operation of foreign-related economic activities.
Firstly, continuous efforts have been made to strengthen monitoring, analysis, and early warnings in the foreign exchange market, actively guarding against external shocks. We have improved the two-pronged management structure of "macro-prudential management with micro regulation" in the foreign exchange market, and implemented counter-cyclical and market-oriented adjustments to balance the supply and demand of foreign exchange. This helped ensure that the RMB exchange rate remained basically stable at a reasonable and balanced level. Secondly, efforts have been made to solidify the foundation of balance of payments statistics, and provide solid statistical support for the safe and stable development of the economy. Thirdly, services for enterprise exchange rate risk management were improved, enhancing the resilience of the foreign exchange market. Fourthly, efforts have been made to deepen the construction of the foreign exchange market and accelerate its high-quality development. We extended trading hours for interbank foreign currency pairs and foreign currency markets, diversified options trading methods, added trading for Macau pataca, and enhanced the service capabilities of the foreign exchange market. We formulated evaluation plans for financial institutions to implement the Guidelines on Code of Conduct for the Foreign Exchange Market, which serve to strengthen self-regulatory management in the foreign exchange market and guide the foreign exchange self-regulatory mechanism to regulate banks' foreign exchange settlement and sales with customers.
China Forex: What trends do you see in China's balance of payments this year? What ideas and measures are there for maintaining stability in the foreign exchange market and serving the real economy?
JIA Ning: With the improvement of both the internal and external environment, China's balance of payments is facing much better condition and a stronger foundation for smooth operation. Firstly, external financial conditions are becoming less challenging. It is widely expected that major developed economies will enter a cycle of interest rate cuts in 2024, and interest rates and exchange rates of the US are expected to fall, reducing spillover effects on international financial markets. Secondly, China's domestic economic foundation is much more solid. With the continued effectiveness of various macroeconomic policies, the resilience of China's economy is expected to be further enhanced, which will help solidify the fundamentals for the smooth operation of the foreign exchange market. A third expected trend is that the foreign exchange market will operate with greater resilience. Awareness of exchange rate risk neutrality is expected to continue to increase. Enterprises and other entities will more effectively utilize exchange rate risk management tools and increase their use of RMB for cross-border receipt and payment, which will enable them to better adapt to changes in the external environment and contribute to market expectation stability and rational trading.
It is expected that the current account will maintain a reasonable surplus. China's industrial system is complete, and it is still undergoing continuous industrial upgrades, making production and manufacturing internationally competitive. At the same time, the structure of foreign trade is becoming more diversified, and the effects of stabilizing foreign trade and regional cooperation policies are gradually emerging. New export growth points are emerging, helping maintain a relatively high surplus in goods trade. In recent years, trade in productive services, deeply integrated with trade in goods, has developed well, with steady growth in exports of computer and information services, business services, etc., contributing to a more balanced trade in services.
Foreign capital inflows under the capital account will become more active, and cross-border funds are expected to flow more evenly. Firstly, foreign direct investmen