China Forex Regulator: Management of Capital Flows Returns to 'Neutral'
China's foreign-exchange regulators have dialed back measures imposed to control capital leaving the country as cross-border flows have now returned to a more balanced state, Pan Gongsheng, the head of the State Administration of Foreign Exchange said.
“Macro-prudential policies adopted in the previous period have returned to a neutral position. In future, foreign exchange management will promote the balanced management of cross-border capital flows,” Pan wrote in an article titled “Promoting Balanced Foreign Exchange Management to Serve China’s New Era of All-Round Opening-Up.” “The regulator will pursue a neutral policy with regard to the foreign-exchange market.”
Pan said that improvements will be made to the macro-prudential management system governing cross-border capital flows. Monitoring will be stepped up and early-warning and response mechanisms for macro-prudential management of cross-border capital flows will be set up. The banking sector in particular will see improved supervision in cross-border capital flows, with macro-prudential management policies focusing on banks and short-term capital flows. Countercyclical adjustments will be made to avoid short-term fluctuations in the foreign exchange market to safeguard financial system security and the balance of payments, he said.
China’s foreign-exchange market has suffered from periodic “highly intensive” risks and shocks in recent years, but currently the overall market situation has stabilized after the policies adopted by the regulator, Pan said.
The authorities started taking action to stem an exodus of capital and expectations of yuan depreciation in late 2016, a year that saw the currency drop by nearly 7% against the U.S. dollar. Controls on overseas investment were tightened, there were crackdowns on underground banks and illegal money transfers, and scrutiny of foreign currency transactions was increased.
As a result, capital outflows have eased, foreign-exchange reserves have increased and the yuan has appreciated against the dollar, Pan wrote.
SAFE expects to see more balanced capital flows this year, Pan said, noting several “favorable factors” that will help reduce the risk of cross-border capital flows including stable domestic expansion and stronger growth in the global economy, improving confidence of domestic and overseas investors in China's economy and markets, and the further opening up of the country's financial sector.
However, Pan also warned of “unstable and uncertain factors” that could still threaten stability and disrupt global capital flows and markets. On the international front, he highlighted the negative spillover effects from the normalization of monetary policy in other major economies, U.S. tax reform, growing trade protectionism, and political risk and geopolitical conflicts that could trigger greater risk aversion in markets. On the domestic front, he pointed to problems that could dent market sentiment and confidence including high levels of corporate leverage, hidden local government debt, the property market, shadow banking, and internet finance.
China will continue to open up its financial markets, Pan said. The authorities will promote the opening of domestic stock and bond markets, improve the Bond Connect program that allows offshore investors to buy onshore Chinese bonds, study the feasibility of a Stock Connect between London and Shanghai, and allow more foreign participation in the domestic commodity futures market.
Measures will also be taken to deepen the foreign exchange market, expand the scope of transactions, offer more trading tools, promote market liberalization and meet the needs of different parties for hedging, Pan said.
Contact reporter Leng Cheng (firstname.lastname@example.org)
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