Editor’s note: The State Administration of Foreign Exchange (SAFE) recently conscientiously studied and implemented the spirit of the National Financial Work Conference, comprehensively summarized the practice of reform and development of foreign exchange administration during the past five years, and set forth the tasks for foreign exchange administration during the next period. During the last five years, the SAFE, under the strong leadership of the CPC Central Committee and the State Council, adhered to the theme of scientific development, the main line of accelerating the transformation of the pattern of economic development, and the essential financial requirements serving the real economy, closely focusing on the central task of promoting a basic equilibrium in the balance of payments, unswervingly carrying forward the reform of the foreign exchange administration system, energetically promoting the facilitation of trade and investment, sticking to the risk limits, establishing a system and mechanism for protection against the risks of cross-border capital flows, successfully dealing with the impact of the international financial crisis, effectively guarding against economic and financial risks, and effectively promoting the steady and rapid development of the national economy.

In order to better implement the spirit of the National Financial Work Conference and to facilitate learning among various social circles about the progress in the reform and development of foreign exchange administrations, we will provide a detailed description of relevant information related to several special topics.

Special Topic I

An Interview with a Relevant Official of the State Administration of Foreign Exchange on Issues Concerning the Balance-of-Payments Situation

Question 1: One of the current main targets of macro-control in China is to promote a basic equilibrium in the balance of payments. How much progress has been achieved in reaching this target?

Answer: The CPC Central Committee and the State Council place high priority on the development of an internal and external equilibrium in the economy, treat the promotion of an equilibrium in the balance of payments as an important task to maintain macro-economic stabilization, and is actively “expanding domestic demand, adjusting the structure, reducing the surplus, and promoting a balance of payments.” In recent years, this work has gradually achieved results, and the balance of payments is approaching a basic equilibrium. In 2007, the proportion of the surplus in China ’s current account to GDP reached a historic high of 10.1 percent; in 2008, the proportion fell to about 9 percent; and in 2009 and 2010, the proportion fell to about 5 percent. In 2011 the proportion of China ’s current account surplus to GDP is expected to be about 3 percent, which is well within the internationally accepted reasonable range.

Question 2: What is the main reason for the continuous improvement in China ’s balance-of-payments situation?

Answer: There are internal reasons as well as external reasons, structural factors as well as cyclical factors, and the effect of the market as well as the influence of policy.

First, accelerating the transformation of the pattern of economic development and adjusting the economic structure to substantially promote an improvement in the balance-of-payments situation. In recent years, the harmony and endogeneity of China ’s economic development have been further improved, and the growth of three major demands, investment, consumption, and exports, has become more balanced. In 2011, the contribution rate of domestic demand to China ’s economic growth was 106 percent, of which the contribution rate of final consumption increased from 37 percent in 2010 to 52 percent in 2011.

Second, accelerating policy adjustments for the foreign economy, gradually eliminating the structural and institutional obstacles that affect the balance of payments equilibrium. In terms of trade policy, China has given full play to the role of imports in the macro-economic equilibrium and structural adjustment. Beginning from 2008, the import growth rate has exceeded the export growth rate. In 2011 the trade surplus decreased by 48 percent compared with 2008. In terms of foreign investment policy, China continuously accelerated implementation of the development strategy of “Going Out.” During the Eleventh Five-Year Plan period, the annual net outflow of China ’s overseas direct investments has been USD 39.1 billion, 8.7 times the figure during the Tenth Five-Year Plan period. In terms of foreign exchange administration policy, on the one hand, China strengthened monitoring of cross-border capital flows and intensified efforts to crack down on hot money inflows; on the other hand, China actively promoted facilitation of trade and investment and encouraged institutions and individuals to hold and use foreign exchange.

Third, changes and developments in  international economic and financial situations promoted an improvement in China ’s balance-of-payments situation. Beginning from 2008, world economic growth has been slowing down, the international financial turmoil has been becoming worse, and there has been a continuous trend of global deleveraging. On the one hand, this placed constraints on  the growth of foreign demand and resulted in the narrowing of the surplus of trade in goods; on the other hand, this stimulated periodic outflows of arbitrage capital from China and intensified fluctuations in cross-border capital flows.

Question 3: Specifically, in terms of promoting a basic equilibrium in the balance of payments, what measures are being taken by the foreign exchange authorities?

Answer: In recent years, the foreign exchange authorities have been treating scientific development as the theme, and the acceleration of the transformation in the pattern of economic development as the main line, and have actively cooperated with the macro-control by the state and have taken measures in different areas to control inflows, promote outflows, reduce the surplus, and promote the balance of payments. First, strengthening the monitoring and early warning system for the bidirectional flow of cross-border capital and the balanced management of outflows and inflows of cross-border capital; second, continuously enriching the tools for managing cross-border capital flows, improving the emergency response plan, and effectively guarding against the risks of massive cross-border capital flows; third, intensifying management of unusual capital inflows, emphasizing priorities, and rigorously cracking down on illegal and irregular capital inflows; fourth, promoting reform in key areas and key links of foreign exchange administration, expanding the channel for the utilization of foreign exchange funds, developing the foreign exchange market, and continuously improving the market mechanism and management system for the adjustment of the balance of payments. The above measures have achieved initial results. In 2011 the cross-border receipt and payment surplus and the foreign exchange settlement and sales surplus of the non-bank sector decreased by 9 percent and 8 percent respectively from the last year, and the increment in foreign exchange reserves (setting aside the changes in the exchange rate and asset prices) decreased 18 percent; a unilateral appreciation of the RMB was expected to fail, and there was an initial bidirectional fluctuating pattern in the RMB exchange rate.

Question 4: In 2012, how will China ’s balance-of-payments situation develop and change?

Answer: At the end of 2011, under the combined influence of domestic and foreign factors, market and policy factors, as well as other factors, fluctuations in China ’s cross-border capital flows intensified and pressures of capital outflows suddenly increased. It is expected that in 2012 China’s balance of payments will still maintain a surplus; however, the surplus will decrease amidst more fluctuations, and the balance of payments will further approach an equilibrium. The main reasons are as follows: First, due to the effects of the European sovereign debt crisis, the recovery of the world economy is very slow, and this will adversely affect China’s export growth; however, China’s structural problem whereby there are more savings than investments will be difficult to resolve in the short term; therefore, China’s current account, including trade in goods, will hopefully continue to maintain a surplus. Second, China accelerated the transformation of the pattern of economic development and actively implemented policies and measures to enlarge domestic consumption demand and promote imports; foreign trade development has become more balanced, and the receipts and payments under the current account are further approaching an equilibrium. Third, external impacts will not change the long-term trend whereby China ’s economy will maintain steady and rapid development, and international capital, in particular long-term capital, will continue to flow into China . Fourth, it will be difficult to resolve the structural problems of the developed countries in the short term, various contradictions will be intertwined with one another, and international economic and financial turmoil will continue; therefore, China may face the risk of frequent flows of cross-border capital, even periodic outflows of arbitrage capital.

Question 5: In terms of promoting a basic equilibrium in the balance of payments, what measures will be taken by China in the future?

Answer: Despite the fact that at the end of 2011, China ’s foreign exchange reserve growth had slowed down with the emergence of the pressure of capital outflows, the increment for the whole year was still significant. Furthermore, many fundamental factors that resulted in the balance of payments surplus have still not changed, and the external environment will continue to be subject to uncertainties; therefore, efforts to promote a basic equilibrium in the balance of payments cannot be reduced. The Twelfth Five-Year Plan has already established that one of the main targets of economic and social development for the next five years will be that “the balance of payments will approach a basic equilibrium.” From a macro perspective, through structural adjustments China will further enlarge domestic demand, in particular consumption demand, transform the economic growth mode from one mainly depending on investment and exports to one that is driven by consumption, investments, and exports; China will promote more balanced foreign trade, accelerate implementation of the “Going Out” strategy, and take various measures to promote a basic equilibrium in the balance of payments. Meanwhile, the foreign exchange authorities will further strengthen monitoring of unusual cross-border capital flows, establish a system and mechanism for guarding against the impact of bidirectional flows of cross-border capital, deepen the reform in key areas, steadily promote convertibility under the capital account, and cultivate and develop the foreign exchange market.