China's Foreign Exchange Policies

Uncertainties stemming from trade disputes have put downward pressure on the global economy. Against this background, how will China's foreign exchange market react? What measures will be taken by regulatory authorities? In an effort to examine these issues, China Forex excerpted statements on foreign exchange policies by senior government official in response to questions. The officials were Pan Gongsheng, Vice Governor of the People's Bank of China (PBOC) and Administrator of China's State Administration of Foreign Exchange (SAFE), Lu Lei, SAFE Deputy Administrator and Wang Chunying, SAFE's Chief Economist.

01

The renminbi exchange rate has experienced volatility recently. On August 5, it weakened beyond seven to the US dollar. What is your assessment of this movement by the currency?

Pan Gongsheng:It was a spontaneous reaction of the financial market to the unexpected US announcement of new tariffs on imports of Chinese goods. The US provoked the Sino-US trade dispute in April 2018 and steadily escalated the friction thereafter. This has been a key factor behind the recent shortterm movement in the renminbi exchange rate. To be specific, on June 16, 2018 the US suddenly announced new tariffs on US$50 billion worth of imports from China, despite the fact that negotiations had made some progress. Three days later, the US threatened punitive tariffs on another US$200 billion worth of Chinese goods. The renminbi exchange rate fluctuated significantly on the news, losing 3.4% in June 2018 alone. In December of the same year, the presidents of the US and China reached a truce at the G20 summit. Afterwards, the renminbi appreciated. Yet, in May 2019, the US made the surprise move of imposing new tariffs. As a result, the onshore spot renminbi rate against the US dollar lost 2.4% that same month. On August 2, 2019, the US threatened to impose tariffs on imports of another US$300 billion of goods from China. There was a sharp fluctuation in the renminbi rate on the back of the fresh tariff threat. Both onshore and offshore rates broke through seven against the US dollar on August 5. The spot exchange rates of the renminbi against the US dollar fell by about 1.9% on August 2 and 5. The ups and downs in the short run are normal market responses to a changing external environment.

02

The US Treasury designated China as a currency manipulator. What is your response to this action?

Pan Gongsheng:The US decision to designate China as a so-called currency manipulator is nothing more than a political maneuver against a background of protectionism and unilateralism. It is also a ridiculous accusation that will go down in international financial history. The US Treasury's decision completely ignored the adjustments in the international financial markets resulting from the protectionist, unilateral tariff increases by the US. Moreover, it contradicts the conclusion reached in the Treasury's own Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States in May 2019. The move is part of Washington's game plan to increase the level of economic and trade friction with China. It demonstrates that US policy assessments are opaque and arbitrary. In the future it is possible that any price adjustments in the international market that are not welcomed by the US administration could be branded as “government interventions.”

The International Monetary Fund (IMF), after concluding the annual Article IV consultations for its review of the Chinese economy, reaffirmed in its newly released report that the renminbi exchange rate is broadly in line with economic fundamentals. The conclusion, which is the same as the IMF's judgment in 2015, demonstrates that the US designation of China as a currency manipulator is groundless.

03

What does this action mean for China? If the US takes further punitive measures, what kind of effects might we see?

Lu Lei:The charge of being a currency manipulator does not mean we will see a collapse of the economy or even a recession. History has demonstrated this. In the past, Japan and Korea were accused of manipulating their exchange rate as was China in 1992 and 1994. This did not lead to economic collapse or recession. This time, SAFE will take steps to guide and stabilize shortterm expectations of a blow to China's foreign exchange market. The efforts will also focus on the real economy, which is fundamental to China's development.

In terms of the Sino-US trade disputes, China is still keeping the door open to consultation and dialogue. The relationship between China and the US is clearly a case of “united we stand, divided we fall.” The global production chain, built upon round after round of technical innovation, cannot be reshaped by short-term trade policies. Over the centuries, the industrial production chain has been formed by breakthroughs from the iron and steel revolution to the electric power revolution, from radio to integrated circuits and chips. It will by no means be changed by temporary trade friction. China is confident and will prioritize its own development.

04

Is China going to make any changes in its exchange rate policies? What do you see in store for the renminbi exchange rate?

Pan Gongsheng:China will continue its managed floating exchange rate system which is based on supply and demand and adjusted with a reference to a basket of currencies. It will push ahead with market-oriented exchange rate reforms, improve the exchange rate formation mechanism, and maintain basic stability of the renminbi at an appropriate and balanced level. China is a responsible major country. We acted responsibly during the time of the Asian financial crisis and the global financial crisis. We made significant contributions to the gradual recovery of the global economy. We will adhere to the G20 summit commitments, conduct no competitive devaluations, and not use the exchange rate as a tool in dealing with international trade disputes.

The resilience and potential of the Chinese economy also provides a solid foundation for the stability of the renminbi exchange rate. Although the currency will be affected by external shocks such as trade friction, there will be no disorderly depreciation.

The resilience and potential of the Chinese economy also provide a solid foundation for the stability of the renminbi exchange rate.

05

What changes have taken place in China's foreign exchange balance since August 2019?

Wang Chunying:China's foreign exchange market has been orderly since August. In early August, the US unexpectedly announced fresh tariff measures against China, which led to violent swings on global financial markets. The renminbi exchange rate also showed some short-term adjustments. In terms of foreign transactions of Chinese enterprises, individuals and other market entities, banks have seen a small surplus in the settlements and sales of foreign exchange since August, while crossborder payments remained largely in balance. This proves that domestic economic fundamentals can support our foreign exchange market. It also suggests that China's foreign exchange market is more mature and rational, and can better absorb and adapt to changes in the external environment.

06

Faced with uncertainties in trade disputes and the downward pressure on the global economy, will China change its foreign exchange management policies and its overall plan to open the financial market?

Pan Gongsheng:Foreign exchange management departments will continue to maintain policy continuity and stability. SAFE departments will play their role in implementing the guiding policy of achieving a comprehensive opening of the economy. We will remain firmly committed to China's pledges on reform to ensure that we can meet demand for foreign exchange from companies and individuals. Foreign exchange authorities will continue to provide support to importers and exporters, and ensure sufficient foreign currency is available for the distribution of corporate profits, as well as for cross-border investments and other corporate operations. Additionally, we need to meet the practical needs of individuals related to travel and foreign study. Transactions on the current account by Chinese citizens will not be affected.

We will speed up efforts to promote the liberalization and facilitation of cross-border trade and investment, and further expand pilot reforms to better serve the real economy.

We are convinced that China's foreign exchange management will conform to the more open environment. The opening of the capital account, a two-way opening of the financial markets and the internationalization of the renminbi will be moved forward in a coordinated manner. The liberalization of cross-border trade and investment will also be given further impetus.

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