The State Administration of Foreign Exchange (SAFE) has recently released data on foreign exchange settlement and sales by banks as well as cross-border receipts and payments by non-banking sectors in December and the whole year of 2022. The SAFE Deputy Administrator and Press Spokesperson Wang Chunying answered media questions on China’s foreign exchange receipts and payments of 2022.
1. Could you brief us on China’s current foreign exchange receipts and payments? What are the prominent features and new changes?
In 2022, under the firm guidance of the CPC Central Committee, with Comrade Xi Jinping as its core, China made significant efforts to coordinate epidemic prevention and control with economic and social development. This was done in response to the complex and grave international situation. With enhanced macro-control efforts and rapid responses to the impacts of unexpected factors, China has made new achievements in its high-quality development and has achieved a good start in the “14th Five-Year Plan”. The RMB exchange rate fluctuated in both directions with increased flexibility, and remained basically stable at a reasonable and balanced level. China’s cross-border capital flows were generally balanced throughout the year, the main features of which were as follows:
First, the foreign exchange settlement and sales by banks and cross-border receipts and payments by non-banking sectors both recorded a surplus throughout the year, and the supply and demand in the foreign exchange market remained basically balanced. In 2022, the surpluses registered by the foreign exchange settlement and sales by banks as well as cross-border receipts and payments by non-banking sectors were USD 107.3 billion and USD 76.3 billion, respectively. Recently, driven by both internal and external factors, China’s foreign exchange market has become more stable. In December, the foreign exchange settlement and sales by banks registered a surplus of USD 7 billion, while the foreign-related receipts and payments by non-banking sectors posted a surplus of USD 23.1 billion. Considering other supply and demand factors comprehensively, the overall supply and demand of China’s foreign exchange market maintained a basic balance in 2022.
Second, market expectations remained generally stable, and the transactions in China’s foreign exchange market were rational and orderly. Under the complex and changeable internal and external environment, the fluctuation range of relevant indicators reflecting RMB exchange rate expectations in the forward and options markets was under control, with no sustained strong unilateral trend. It showed that market players’ expectations for exchange rates were generally stable. In addition, their foreign exchange settlement and sales, as well as their foreign-related receipts and payments, were reasonable and orderly. The willingness of market players to settle foreign exchange was basically stable, and the rational trading mode of “settling foreign exchange at high prices” was generally maintained. In 2022, the foreign exchange settlement rate, the measurement of customers’ desire to settle foreign exchange, or the ratio of foreign exchange sold by customers to banks to foreign exchange received by customers, reached 67%, which was 1 percentage point higher than that of 2021. Enterprises took the initiative to use their own foreign exchange for external payments, and their willingness to hold foreign exchange was relatively stable. At the end of November 2022, the balance of domestic foreign exchange deposits of market entities such as enterprises and individuals was USD 639.6 billion, a decrease of USD 56.2 billion from the end of 2021.
Third, the net inflows of cross-border capital under trade in goods and foreign direct investment played a leading role in stabilizing cross-border capital flows. With a growth rate of 45% from 2021 to 2022, the net inflow of cross-border capital under trade in goods reached a record high in 2022, demonstrating the resilience of development in China’s foreign trade. Besides, the scale of net inflow of cross-border capital under foreign direct investment has remained relatively high, significantly higher than the level in 2019 before the epidemic. Additionally, based on statistics from the Ministry of Commerce, China’s actual use of foreign capital from January to November was USD 178.1 billion, a year-on-year increase of 12%. It indicated that China had a relatively strong appeal to the foreign capital due to its economic development prospects and a huge consumer market.
Fourth, foreign investors recently resumed investments in China’s securities market. According to the SAFE’s statistics, in December 2022, the net increase in China’s domestic bond and stock holdings by foreign investors was USD 7.3 billion and USD 8.4 billion, respectively. According to the latest data, the participation of foreign capital in China’s domestic securities market has remained active recently, and in the first half of January 2023, their net purchase of China’s domestic stocks and bonds totaled approximately USD 12.6 billion.
2. In 2022, China’s foreign exchange receipts and payments remained generally stable in the complex and severe external environment. What do you think are the main reasons?
In 2022, affected by multiple factors such as “high inflation” and “tight monetary policy” in major economies, the international financial market fluctuated violently. Global stock and bond indices fell sharply, and the US-dollar index hit a 20-year high while the Euro, Yen, Pound, and other major international currencies all hit new lows in the past two to three decades. Nonetheless, the operation of China’s foreign exchange market has generally withstood the test. The RMB exchange rate was relatively stable among the world’s major currencies, and China’s cross-border capital flows became more balanced. This is mainly due to two supporting factors, in the form of two “enhanced resilience”.
On the one hand, China’s domestic economy, especially the foreign-related economy, has become more resilient, and the stable operation of the balance of payments has been effectively guaranteed. First, the balance of payments surplus in the current account and direct investment, has played a leading role in stabilizing cross-border capital flows. In the first three quarters of 2022, China’s current account surplus recorded USD 310.7 billion, marking the highest value ever, and its ratio to Gross Domestic Product (GDP) reached 2.4%, which was within a reasonable and balanced range. At the same time, foreign direct investment maintained a net inflow, which was a result of China’s advantages in the industrial chain, supply chain, and the unified national market, as well as positive effect of policy measures such as stabilizing foreign trade and foreign investment. Second, the external debt structure was generally optimized, and risks were generally controllable. In recent years, the external debt type structures, currency structures, and maturity structures have been optimized. The adjustment of traditional external financing, such as deposits and loans, has been relatively stable.
On the other hand, the resilience of the foreign exchange market has been enhanced, and its ability to adapt to changes in the external environment has been greatly enhanced. First, the continuous improvement of the RMB exchange rate formation mechanism and the gradual increase in the flexibility of the exchange rate helped release external pressure in a timely manner, and the RMB exchange rate’s role of automatic stabilizers in adjusting the balance of payments also became more obvious. Second, the increasing proportion of RMB in cross-border usage was conducive to reducing the risks of currency mismatch in cross-border transactions. In 2022, RMB payments accounted for nearly 50% of China’s cross-border payments, an increase of more than 20 percentage points from 2016. Third, market entities took the initiative to manage exchange rate risks and carry out more hedging operations, significantly enhancing their adaptability to exchange rate fluctuations. In 2022, the foreign exchange hedging ratio of enterprises reached 24%, an increase of 11 percentage points from 2016. In addition, the two-pronged “macro-prudential management and micro regulation” framework for managing the foreign exchange market has been continuously improved, providing a benign and healthy market environment for the smooth flow of cross-border funds and rational transactions in the foreign exchange market.
3. What are your expectations for China’s foreign exchange receipts and payments in 2023?
While the outside world’s outlook remains uncertain, China’s domestic economy is anticipated to improve overall in 2023. China’s foreign exchange market has the foundation and conditions to maintain stable operation, and the cross-border capital flows will be more stable.
China’s domestic economic fundamentals are the decisive factors in stabilizing cross-border capital flows. China maintained strong resilience, great potential, and vitality in the economy with its sound long-term economic fundamentals unchanged. As the effects of various policies, such as optimizing epidemic prevention and control and stabilizing economic growth, continue to emerge, China’s economic operation is expected to rebound in general in 2023. The latest forecast data from major international organizations and institutions show that China may become the only major economy showing a rebound in economic growth in the context of slowing global economic growth. Meanwhile, China insists on promoting high-level opening up to the outside world, continuously improving the level of cross-border trade and investment and financing facilitation, and increasing efforts to attract foreign investment. Moreover, it will also continue to create a favorable policy environment for cross-border capital flows. In addition, the inflation data of major developed economies have recently fallen, and the downward pressure on the economy has increased. We might see a slowdown in the tightening of monetary policy, and a consequential marginal weakening of the spillover effects.
In 2023, the main influence channels of China’s cross-border capital flows are expected to become more stable. On the one hand, the current account will maintain a surplus at a reasonable scale and remain within the equilibrium range. Under the item of trade in goods, as China’s overall planning for epidemic prevention and control with economic and social development have shown results, the stable foundation of the industrial chain and supply chain will be more consolidated. At the same time, the transformation and upgrading of the manufacturing industry and the continuous promotion of regional trade cooperation will also help to improve the competitiveness of trade products, promote the diversification of export markets, and develop new cross-border trade forms. As a result, China’s trade in goods is expected to maintain a relatively high-scale surplus. Under the item of service trade, in recent years, China’s manufacturing and service industries have experienced integrated development. Notably, the rapid development of productive services trade, especially emerging services such as computer information and business services, will drive the growth of related service trade exports. On the other hand, cross-border capital flows under the capital account are expected to be more stable. Foreign direct investment in China has maintained steady development while China’s outward direct investment continues to be reasonable and orderly, which helps direct investment continue the overall surplus pattern. China’s external debt structure has been optimized recently, and the volatility of cross-border company financing has diminished. This trend appears to be stable going forward. Moreover, as China’s economic growth continues to firm up, the attractiveness of RMB assets will be strengthened, and the risk-averse nature of RMB assets will be enhanced. With the support of these factors, foreign capital will continue to invest in China’s securities market steadily.
