SCIO press conference on forging ahead with confidence, upholding fundamental principles, breaking new ground, supporting high-quality development of real economy

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I have two questions. First, from the perspective of weakening external demand, boosting domestic demand, and a widening service trade deficit this year, the current account surplus may provide less support for exchange rates. How does the central bank view the exchange rate situation this year and how will the central bank manage the RMB exchange rate? Second, China has shown a relatively good economic performance so far this year. Does the central bank still need to consider lowering the reserve requirement ratio or interest rates to stimulate economic growth?

Yi Gang:

As many have analyzed, the overall economic situation is improving regarding the exchange rate, but imports, exports and external demand are still relatively weak and face uncertainties. Just now, you asked how to view the exchange rate in this context. In the past few years, the mechanism through which the market sets the exchange rate has become increasingly more flexible , so it has acted well as an automatic stabilizer. In the past five years, the exchange rate has fluctuated at a ratio of about 4%, similar to that of major countries in the world. In the past, the fluctuation ratio of the RMB exchange rate had been minimal. However, in recent years, the ratio has gradually increased reasonably. In the past few years, the RMB exchange rate against the U.S. dollar has surpassed the "7" threshold three times, but it quickly fell back below the threshold. As you can see, the "7" threshold is not a psychological barrier. Though the exchange rate has surpassed the "7" threshold three times and fallen below, the overall economy has remained stable, and so have people's expectations. It is convenient for companies and people to enjoy foreign exchange services. The stability of economic and social expectations matters.

We have maintained a managed floating exchange rate regime based on market demand and supply, as well as a basket of currencies. It has worked very well and allowed businesses and the public to access foreign exchange services relatively freely to meet their reasonable foreign exchange needs concerning education, tourism, and imports and exports. Our view is that these policies should continue to be upheld in such a context. If you take a longer view, the stability of exchange rates is closely related to the well-being of the people. China's GDP last year was 121 trillion yuan, or about $18 trillion, with a per capita average of 86,000 yuan, or $12,700. Therefore, our comprehensive national strength and the well-being of our people are reflected not only through the RMB but also through the hard currency converted from the RMB. This is an important aspect of our modernization drive. Over the past 20 years, the RMB, despite fluctuating, has generally appreciated 20% against the U.S. dollar over the past 20 years, or 1% annually on average. At the same time, the real effective exchange rate of RMB calculated by the Bank for International Settlements has appreciated by about 40% over the past 20 years. A 40% appreciation over two decades is equivalent to an annual appreciation of 1% to 2%, which is a relatively appropriate level.

It is very important to maintain the stability of exchange rates because we have seen some cases in the world in which some countries are not able to avoid falling into the “middle-income trap” because of the sharp depreciation of exchange rates. So, on the one hand, we will keep exchange rates stable; on the other hand, our exchange rates must have flexibility . Just now, you asked about our considerations for this year and if we will continue implementing the mechanism. Overall, the RMB exchange rate will remain stable at a reasonable and balanced level. Some small fluctuations may appear driven by the market, but such fluctuations benefit the economy, China's imports and exports, and the people's expectations. In addition, more and more of our companies have learned to use hedging and forward settlement and foreign exchange tools to secure profits.

Your second question was whether we will cut the reserve requirement ratio or interest rates. We believe that the current level of some of the main variables of our monetary policy is relatively appropriate, as is the level of real interest rates. As for the reserve requirement ratio cut, we have cut it 14 times since 2018. These 14 cuts lowered the average statutory reserve requirement ratio from nearly 15% to less than 8%, a drop of over 7 percentage points. The less than 8% statutory reserve requirement ratio after the 14 cuts in the past five years is not as high as it used to be, but considering all things, cutting the reserve requirement ratio is still a relatively effective way to provide long-term liquidity and support the real economy so that overall liquidity remains at a reasonably ample level. I would like to invite Mr. Pan to share more about the exchange rate.

Pan Gongsheng:

Thank you. Mr. Yi has already given a very good and comprehensive answer. In recent years, China's ratio of current account surplus to GDP has stayed at about 2%, and the figure for last year was 2.3%, according to preliminary estimates. This year, there are many discussions about a potential slowdown of the global economy and trade and the potential gradual recovery of international flows as China's personnel flows adjust to anti-COVID policies and how this will affect trade in goods and services under the current account. We have done much research on it, and we believe that our current account has the basis and conditions to maintain a reasonable surplus.

The factors affecting the foreign exchange market and exchange rates are very diverse, such as economic growth, monetary policy, financial market, occasional risk event, and geopolitics. I would like to talk about our perspective of observing and analyzing the problem for your reference.

First, economic growth. With an easing epidemic situation, the optimized COVID-19 containment measures, and the effectiveness of earlier government policies to support businesses, domestic and foreign institutions predict that China's economic growth will be around 5% this year. On the other hand, it is also widely believed that major developed economies such as the United States may enter an economic recession, but there is a considerable divergence in opinions on how deep the recession could be. The growth gap between major economies such as China and the United States is expected to widen. China's economic growth will rebound to 5.2% in 2023, and US growth will slow to 1.4% in 2023, according to a report recently published by the International Monetary Fund (IMF).

Second, changes in the external financial environment. The market has different views on the peak interest rate of the Fed's current rate hike cycle and how long it will remain at a high level. However, there is a relatively high degree of consensus regarding the end of this round of interest rate hikes and the weakening momentum of the continued appreciation of the dollar. Therefore, the interest rate differential between China and the United States will remain stable or tend to diminish, the Fed's tight monetary policy will tend to ease this year, and the overall spillover effect will be marginally weakened.

Third, the investment value and attractiveness of Chinese yuan assets. As the Chinese economy is on course for a robust comeback and the country further advances its financial opening-up, the investment and risk-aversion attributes of yuan assets are highlighted. At present, the valuation of the domestic stock market is relatively low, and the interest rate differential between China and the United States is stable and narrowing, so yuan assets will show good investment value.

Fourth, if journalist friends observe and analyze carefully, you will feel that in recent years, the operation of China's foreign exchange market has shown a new feature. The operation of the foreign exchange market has shown relatively strong resilience, the main players in the market have become more mature, and the trading behavior has become more rational. In addition, the PBC and the SAFE, as regulators of the foreign exchange market, have also become more composed, calm, and experienced in the face of market changes.

Therefore, we are confident and capable of maintaining the stable operation of China's foreign exchange market and the basic stability of the RMB exchange rate at a reasonable and balanced level. Thank you.

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