CNR: 

In 2018, the Fed will raise interest rates and shrink its balance sheet. The United States tax reform will also be implemented. How do you think these factors will affect China's cross-border flow of funds? And how will the State Administration of Foreign Exchange respond to it?

Wang Chunying:

We have also paid close attention to this issue. In 2017, the Federal Reserve raised interest rates three times and started downsizing its balance sheet. The Trump administration passed the tax reform act. Despite this, the situation of China's cross-border capital flows improved markedly. The supply and demand of the foreign exchange market has recently been more balanced. This shows that the development and changes in cross-border capital flows in China are actually the result of a combination of factors, both external and internal. 

The external factors have many aspects. Taken together, the current external environment for cross-border capital flows in China is relatively stable. The influence of external factors, with the normalization of the monetary policy of the US Federal Reserve, are gradually weakened. Or, we may say, the market has quickly adapted to the changes. The domestic economy has stabilized steadily. The overall stability of cross-border capital flows in China is expected to remain stable. Here I would like to share with you how we look at this issue.

First, factors such as a rate hike by the Federal Reserve and tax reform by the U.S. government have not magnified the external market volatility, and the prospect of a relatively stable external environment is expected to continue. Previously, the normalization of the Fed's currency policy had led to relatively faster appreciation of the U.S. dollar and outflow of international capital from emerging economies. However, the related influences are gradually weakened with more restrictive factors. In 2017, the Federal Reserve raised interest rates three times and started downsizing its balance sheet. In theory, this helps to increase the U.S. interest rate and the exchange rate. However, in fact, the U.S. dollar index fell by 9.9 percent in 2017. The dollar index rose slightly, supported by optimism over U.S. tax reform, but fell again recently. The short-term federal funds rate increased by 75 base points year-on-year, but the long-term interest rates did not change much. 

At the end of 2017, the yield on a U.S. 10 Year Treasury Note was basically the same as that at the end of 2016. This reflects the impact of many constraints. From the United States domestic situation, the inflation rate remained low. The Core Personal Consumption Expenditure Index (core- PCE), which is the preferred measure of the Fed, dropped from 1.9 percent in early 2017 to 1.5 percent at the end of the year. Also, judging from the long-run potential growth of the United States, Fed policymakers forecasted a rate of 1.8 percent, well below the rate during the economic boom. In addition, the U.S. government has said that it does not want the U.S. dollar to be too strong. All these factors will constrain the U.S. dollar exchange rate and interest rate increases. Judging from the external situation of the United States, we can see the economic recovery of other developed economies, especially the euro area, is relatively fast. Recently, the ECB raised its forecast for economic growth in 2018 and began to reduce the scale of its quantitative easing monetary policy. The improved political stability of Europe is also good news for the euro to gain strength while putting pressure on the dollar.

Second, the sound performance of the domestic economy played a fundamental role in ensuring steady cross-border capital flows, and I'm sure it will play a bigger role in this field in the future. 

Above all, China's economic growth is faster than many other countries'. Continuous improvement has been made in industry chains and infrastructure. The domestic labor force's skills can meet the demands of enterprises. As a result, Chinese enterprises can operate smoothly and make comparatively high profits. In the first 11 months of 2017, the profits made by industrial enterprises above the designated size rose 22 percent as compared with the same period of the previous year. 

Furthermore, individual income increased continuously, and consumer spending was further upgraded. This means the domestic market has great potential, and it's very important to investors. 

Also, China has clear overall objectives and flexible mechanisms. The financial market is running smoothly with sufficient foreign exchange reserves. We are thus capable of responding to risks. 

China is working hard to open up on all fronts. The business environment has been optimized. The domestic market is becoming more open. The market-based mechanism for setting the RMB exchange rate has been continuously improved. All these factors are a boon to stabilizing market expectations and attracting foreign investments. 

China also adopted many measures to reduce taxes and fees. Given the fact that the United States and European countries have strengthened supervision to ensure investment safety, I'm sure Chinese and overseas investors will make investments in a rational and cautious manner after considering all factors. 

Regarding how to respond to the problem you mentioned, we will keep a close eye on all exterior factors, follow all changes, and make sound analyses so as to find proper solutions. 

We will improve data collection and oversight of the cross-border capital flows, make a timely analysis, and make predictions of possible changes. We will continue to carry out reforms and fend off risks. We will improve trade and investment facilitation, promote capital account convertibility at a steady pace, and provide better services to the real economy, thus making a contribution to the new opening up campaign of the country. To safeguard the country's economic and financial safety, we will fend off risks in the cross-border capital flows, improve the macroprudential regulation system and micro-regulation system, and clamp down on law-breaking activities. 

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