11. We have noticed some recent media reports saying that China's foreign exchange reserves have exceeded a reasonable level.Has the USD3 trillion in foreign exchange reserves exceeded a rational scale or actual needs?

Answer: By the end of June 2011, China's foreign exchange reserves reached USD3.197491 trillion. The increase in foreign exchange reserves is an objective result of the twin surplus in the balance of payments during this stage of economic development. We are not pursuing large-scale foreign exchange reserves, nor are we pursuing a long-term surplus in the balance of payments.

There is no unified international or domestic standard for a reasonable scale of foreign exchange reserves to be held by a country.  Various factors need to be taken into consideration, including the countrys macro-economic conditions, its degree of economic openness, the capability to utilize foreign capital and international financing, and the degree of maturity of its economic and financial systems. Since China is a large developing country, maintaining sufficient foreign exchange reserves is of great significance to ensure international liquidity, enhance capability to respond to risks, and safeguard the economic and financial security of the nation.

During the 12th Five-Year Plan period, the main focus of Chinas scientific development in all economic and social fields is to accelerate the transformation of the mode of economic development. We shall take comprehensive measures, promote economic restructuring, and transform the mode of economic development, so as to fundamentally alleviate the pressures caused by the inflows of foreign exchange funds and to achieve a basic equilibrium in the balance of payments.

12. Some people believe that the current inflation in China is due primarily to the increase in foreign exchange reserves. What is the SAFE's view about this?

Answer: The current rise in price levels in China is affected by a variety of factors, including the rise in prices of major international commodities, significant growth in expectations of global inflation, and greater pressures from imported inflation. In addition, the demands for domestic investment and the growing costs of energy resources, the labor force, and land have also pushed up the price levels. As a result of the increase in foreign exchange reserves, more RMB will be placed on the market, leading to growth in the monetary base. But we also have to note that on several occasions in recent years, the PBOC has conducted sterilization operations by raising the deposit reserve ratio and issuing central bank bills to soak up the liquidity caused by outstanding funds for foreign exchange reserves. The increase in foreign exchange reserves is not an immediate nor a major cause of inflation.

13. Some people believe that the system of mandatory exchange settlement and sales has led to a continuous increase in foreign exchange reserves. Is China still enforcing such a system?

Answer: At present, the so-called system of mandatory exchange settlement and sales is already a historical concept. As for the foreign exchange proceeds from current account transactions through exports or other means, enterprises can keep them or sell them to banks depending on their own business needs.

Established in 1994, the system of mandatory foreign exchange settlement and sales was a product of the period when there was a shortage of foreign exchange. At that time, except for those enterprises approved by the state that were allowed to keep foreign exchange in foreign exchange accounts, all enterprises were required to sell the remainder of their foreign exchange proceeds from current account transactions to designated foreign exchange banks. Thereafter, the SAFE continuously relaxed the constraints on opening foreign exchange accounts under the current account and raised the ceiling on such accounts. In 2002, these constraints on opening foreign exchange accounts were eliminated, and thereafter all enterprises were authorized to conduct foreign trade or to open foreign exchange accounts under the current account with foreign exchange proceeds upon the approval of the SAFE. In 2006, prior approval to open such accounts was no longer required. In 2007, enterprises could keep the foreign exchange proceeds from current account transactions according to their own business needs. In 2008, the revised version of the Regulations on Foreign Exchange Administration specifically provided that the foreign exchange proceeds from current account transactions could be either retained by the enterprises themselves or sold to the banks. Beginning on January 1, 2011, enterprise export proceeds can be deposited overseas and do not have to be repatriated. Therefore, our country has put an end to the system of mandatory foreign exchange settlement and sales.  The increase in foreign exchange reserves has nothing to do with that system.

14. Why is specific information about the operations and management of foreign exchange reserves not allowed to be disclosed to the public? Will the SAFE further improve transparency in this regard?

Answer: Information about Chinas foreign exchange reserves is disclosed in accordance with the General Data Dissemination System (GDDS) of the International Monetary Fund (IMF), which is consistent with practices in most countries. As a responsible professional investor, the SAFE has been disclosing information about the operation and management of its foreign exchange reserves in a timely manner to international financial organizations, market regulatory bodies, and so forth through the corresponding channels and in accord with domestic and overseas common practices.

Because of the large-scale and strong market influence, investors and speculators in international financial markets have been keeping a close eye on Chinas foreign exchange reserves and trends in their investment and operations in the hopes of discovering and exploiting profit-making opportunities. Participants in international financial markets are all playing the same game of trying to obtain  maximum information about their competitors and at the same time refraining from exposing as much as possible. To safeguard the security and interests of Chinas foreign exchange reserves, we shall adopt a serious and cautious attitude in terms of information disclosure and gradually improve transparency in an active and steady manner.

Over the past few years, as society has been paying more attention to the operation and management of foreign exchange reserves, we have actively disclosed information to the public about basic conditions in the operation and management of our foreign exchange reserves and we have provided answers to hot issues of public concern in various ways, including press conferences, media briefings, forums of experts, and the SAFE portal. We will continue to do a good job in maintaining interaction and communications with the public and we welcome suggestions and opinions from all members of society..

15. There are only several hundred members on the SAFE management team for foreign exchange reserves, so is there a problem that the scale of asset management per capita is too large? How do you control operational risks of the foreign exchange reserves?

Answer: Talent is a basic guarantee for fulfilling various tasks. The SAFE has always attached great importance to building a team to be responsible for the operation and management of our foreign exchange reserves, and has recruited and cultivated talented investment personnel from China and abroad. Aimed at standardization, specialization and internationalization, the SAFE has established an operation and management team with a reasonable age structure and knowledge and a balanced mix of professional and management work. Meanwhile, the SAFE has constructed a complete global platform for reserve operations. During different stages of the economic cycle, the team has achieved the goal of ensuring security and liquidity, and maintaining and increasing the value of the foreign exchange reserve assets. Considering the different personnel requirements of various investment products, in the future the SAFE will make orderly adjustments to the structure and scale of foreign exchange reserve personnel to better adapt to the needs of large-scale operations.

Under the current economic and financial situations both at home and abroad, in order to control risks in reserve operations, we shall, first, continue with diversified asset allocation and constantly optimize asset allocation based on market conditions in compliance with the principle of security, liquidity, and increasing value; second, we shall reasonably define the currency, assets, terms as well as the structure and proportion of product distribution, and strengthen risk management and internal control; third, we shall continue to improve the multilevel investment decision-making system, and ensure the objective, scientific, and professional level of the various investment decisions; and fourth, we shall constantly improve the platform for basic operations and expand and improve the channels for global operations.

16. Since developed countries are currently implementing quantitative easing monetary policies, there have been large net inflows of foreign exchange funds and a relatively rapid increase in foreign exchange reserves, and investments and operations have become increasingly difficult. What comprehensive countermeasures can be taken to deal with these problems?

Answer: It is a systematic project to cope with the quantitative easing monetary policies of the developed countries and to promote Chinas basic equilibrium in the balance of payments, which requires the joint efforts of domestic macro-economic policies. In particular, in the current complex economic situations both at home and abroad, it is imperative to implement a policy package of expanding domestic demand, making structural adjustments, reducing the surplus, and promoting a balance.  Expansion of domestic demand means that we shall especially expand consumption demand and fully exploit its huge potential. Making structural adjustments means that we shall promote the transition of the economic growth pattern to make it driven by consumption, investments, and exports. Reducing the surplus means that we shall attach equal importance to imports and exports, and give full play to the critical role of imports in the macro-economic equilibrium and structural adjustments. Promoting a balance means that we shall, within the framework of balanced management, fully utilize economic levers and market-based means to strengthen the management of capital inflows, open up channels for capital outflows, and promote the convertibility of the capital account in a steady and orderly manner. Only in this way will we be able to effectively cope with the quantitative easing monetary policies of the developed countries, comprehensively tackle the problems of a disequilibrium in the balance of payments and of a rapid increase in foreign exchange reserves, and implement the requirement of maintaining a basic equilibrium in the balance of paymentsas stipulated in implementation of the Scientific Outlook on Development of the 12th Five-Year Plan.