China’s foreign exchange market and performance of CNY

1 Pre-1979: Strict central controlAll the profits or costs occurred in the foreign exchange market had to be recorded or approved by state-owned bank or the People’s Bank Of ChinaPBOC 2

China’s Foreign Exchange Market

and Performance of CNY

BY: Wang Feng

China’s Foreign Exchange Market

and Performance of CNY

(1) Pre-1979: Strict central control

All the profits or costs occurred in the foreign exchange market had to be recorded or approved by state-owned bank or the People’s Bank Of China(PBOC)

(2) 1979-1993:Foreign Exchange Retention and Swap

In 1979：liberalization of foreign exchange with an earning retention scheme designed to encourage exports

From 1981-1984：exchange rate were set differently of trade and non-trade activities

The late 1980s：the expansion of foreign exchange swap activity with the number of market participants increasing and swap exchange rates becoming more flexible

I C H I N A ’ S F X

M A R K E T

1 H I S T O R I C A L D E V E L O P M E N T

(1) Pre-1979: Strict central control

All the profits or costs occurred in the foreign exchange market had to be recorded or approved by state-owned bank or the People’s Bank Of China(PBOC)

(2) 1979-1993:Foreign Exchange Retention and Swap

In 1979：liberalization of foreign exchange with an earning retention scheme designed to encourage exports

From 1981-1984：exchange rate were set differently of trade and non-trade activities

The late 1980s：the expansion of foreign exchange swap activity with the number of market participants increasing and swap exchange rates becoming more flexible

(1) Pre-1979: Strict central control

All the profits or costs occurred in the foreign exchange market had to be recorded or approved by state-owned bank or the People’s Bank Of China(PBOC)

(2) 1979-1993:Foreign Exchange Retention and Swap

In 1979：liberalization of foreign exchange with an earning retention scheme designed to encourage exports

From 1981-1984：exchange rate were set differently of trade and non-trade activities

The late 1980s：the expansion of foreign exchange swap activity with the number of market participants increasing and swap exchange rates becoming more flexible

In 1995, China ended the circulation of foreign exchange certificates.

In 1996, Foreign Invested Enterprises could buy foreign currency freely on the bank market.

inter-In 1997, qualified Chinese companies allowed to open foreign exchange settlement accounts.

In 2001, trading in dollar-denominated B shares

In 2003, the enterprises allowed to open foreign accounts for holding 20% of their previous year's foreign exchange income

In 2005, China's FXmarket abundant with policy initiatives

(3) 1994 and post-1994 Compulsory Settlement on a Centralized Platform

In 1994, China's foreign exchange retention was replaced by a compulsory settlement system.

In 1995, China ended the circulation of foreign exchange certificates.

In 1996, Foreign Invested Enterprises could buy foreign currency freely on the bank market.

inter-In 1997, qualified Chinese companies allowed to open foreign exchange settlement accounts.

In 2001, trading in dollar-denominated B shares

In 2003, the enterprises allowed to open foreign accounts for holding 20% of their previous year's foreign exchange income

In 2005, China's FXmarket abundant with policy initiatives

(3) 1994 and post-1994 Compulsory Settlement on a Centralized Platform

In 1994, China's foreign exchange retention was replaced by a compulsory settlement system.

In 1995, China ended the circulation of foreign exchange certificates.

In 1996, Foreign Invested Enterprises could buy foreign currency freely on the bank market.

inter-In 1997, qualified Chinese companies allowed to open foreign exchange settlement accounts.

In 2001, trading in dollar-denominated B shares

In 2003, the enterprises allowed to open foreign accounts for holding 20% of their previous year's foreign exchange income

In 2005, China's FXmarket abundant with policy initiatives

2 C U R R E N T F O R E X

I N S T I T U T I O N The parties that involved in foreign exchange market:

1) China Foreign Exchange Trading System (CFETS)

trading platform, responsible for clearing the market, providing the supervisory authorities with market information

2) PBOC and Synthetic For Forward Exchange (SAFE)

who involved in foreign exchange trading

The parties that involved in foreign exchange market:

1) China Foreign Exchange Trading System (CFETS)

trading platform, responsible for clearing the market, providing the supervisory authorities with market information

2) PBOC and Synthetic For Forward Exchange (SAFE)

who involved in foreign exchange trading

The parties that involved in foreign exchange market:

1) China Foreign Exchange Trading System (CFETS)

trading platform, responsible for clearing the market, providing the supervisory authorities with market information

2) PBOC and Synthetic For Forward Exchange (SAFE)

3 C H I N A ’ S F O R E X R E S E R V E S

China’s economy, resulting in massive foreign exchange reserves.

foreign exchange reserves and holdings of U.S Securities of China These two values used to be very close until 2007, but China’s holdings of U.S Securities started to moderate as foreign exchange reserves continued goes up From this figure, we can say that China trying to diversify its foreign exchange reserves away from Treasuries.

China’s economy, resulting in massive foreign exchange reserves.

foreign exchange reserves and holdings of U.S Securities of China These two values used to be very close until 2007, but China’s holdings of U.S Securities started to moderate as foreign exchange reserves continued goes up From this figure, we can say that China trying to diversify its foreign exchange reserves away from Treasuries.

China’s economy, resulting in massive foreign exchange reserves.

foreign exchange reserves and holdings of U.S Securities of China These two values used to be very close until 2007, but China’s holdings of U.S Securities started to moderate as foreign exchange reserves continued goes up From this figure, we can say that China trying to diversify its foreign exchange reserves away from Treasuries.

• China has maintained a fixed exchange rate for CNY, compare with the dollar, for nearly ten years

• 8.28 yuan/dollar

• If the demand for Chinese yuan goes up, the central bank sells yuan

in exchange market, and buys yuan if it falls.

4 C H I N A ’ S F O R E X R A T E

• China has maintained a fixed exchange rate for CNY, compare with the dollar, for nearly ten years

• 8.28 yuan/dollar

• If the demand for Chinese yuan goes up, the central bank sells yuan

in exchange market, and buys yuan if it falls.

5 P R O B L E M S I N F O R E I G N

M A R K E T

• Distorted Market Supply and Demand

supply and demand do not describe the will of market participants but follow from their compliance with regulations Recent years, a pronounced excess supply has emerged in China’s foreign market The supply and demand in foreign exchange market are not all reflected in the inter-bank market on the platform of the CFETS

• Government Control

Any number events, such as an election, a nature disaster or a new five years plan will put a well-executed investment in risk

• Passive Intervention of the PBOC

The imbalances of supply and demand under the compulsory foreign exchange settlement system gives no leeway for the PBOC which must absorb the appreciation pressure

• Distorted Market Supply and Demand

supply and demand do not describe the will of market participants but follow from their compliance with regulations Recent years, a pronounced excess supply has emerged in China’s foreign market The supply and demand in foreign exchange market are not all reflected in the inter-bank market on the platform of the CFETS

• Government Control

Any number events, such as an election, a nature disaster or a new five years plan will put a well-executed investment in risk

• Passive Intervention of the PBOC

The imbalances of supply and demand under the compulsory foreign exchange settlement system gives no leeway for the PBOC which must absorb the appreciation pressure

• Distorted Market Supply and Demand

supply and demand do not describe the will of market participants but follow from their compliance with regulations Recent years, a pronounced excess supply has emerged in China’s foreign market The supply and demand in foreign exchange market are not all reflected in the inter-bank market on the platform of the CFETS

• Government Control

Any number events, such as an election, a nature disaster or a new five years plan will put a well-executed investment in risk

• Passive Intervention of the PBOC

The imbalances of supply and demand under the compulsory foreign exchange settlement system gives no leeway for the PBOC which must absorb the appreciation pressure

2 G O V E R N M E N T I N T E R V E N E S I N

F X M A R K E T

• Purchase and sale of currencies in the foreign exchange market

• Slow the yuan’s appreciation by using the USD to purchase

dollar-denominated assets

• Accumulated massive amount of U.S securities in its foreign

reserve portfolio

• However, in 2014, U.S.and Chinese leaders have agreed that

China will reduce the intervention in the currency market

• Purchase and sale of currencies in the foreign exchange market

• Slow the yuan’s appreciation by using the USD to purchase

dollar-denominated assets

• Accumulated massive amount of U.S securities in its foreign

reserve portfolio

• However, in 2014, U.S.and Chinese leaders have agreed that

China will reduce the intervention in the currency market

• Purchase and sale of currencies in the foreign exchange market

• Slow the yuan’s appreciation by using the USD to purchase

dollar-denominated assets

• Accumulated massive amount of U.S securities in its foreign

reserve portfolio

• However, in 2014, U.S.and Chinese leaders have agreed that

China will reduce the intervention in the currency market

3 L A R G E S T F O R E X

R E S E R V E STATUS

l Total foreign exchange reserves: 3.525507 U.S dollar (Oc

t)

One-third held by foreign countries

Increasing by $11.4 billion than Sep

Ending five-month consecutively decline

RESERVE TREND

3 L A R G E S T F O R E X

R E S E R V E

lCurrent system of foreign exchange reserves and sources of funding

China‘s export-oriented economy： surplus

Foreign exchange system: Official currency-CNY & Direct dollar circulation is not allowed in China

Investment: Converted to CNY(not used) in Bank & Hedge

lStructure of foreign exchange reserves

Include: foreign investment funds + trade surplus

Liquidation: To meet the regular exchange needs

Gold, oil, minerals: selling in short term - push up prices & market panic & stability

lU.S Treasury bonds provide high security and profitability

US Dollar

US Debt: Economic base & 3A investment-grade & yields

lSino-US economic and trade relations

China: American Second largest trading partner & third largest export market

US: Large quantities of cheap goods Largest import country

2014: Bilateral trade $590.68 billion (deficit: $342.63 billion)

lMaintain the world’s financial stability

To stabilize investors’ confidence to the US economy - Market panic

lCurrent system of foreign exchange reserves and sources of funding

China‘s export-oriented economy： surplus

Foreign exchange system: Official currency-CNY & Direct dollar circulation is not allowed in China

Investment: Converted to CNY(not used) in Bank & Hedge

lStructure of foreign exchange reserves

Include: foreign investment funds + trade surplus

Liquidation: To meet the regular exchange needs

Gold, oil, minerals: selling in short term - push up prices & market panic & stability

lU.S Treasury bonds provide high security and profitability

US Dollar

US Debt: Economic base & 3A investment-grade & yields

lSino-US economic and trade relations

China: American Second largest trading partner & third largest export market

US: Large quantities of cheap goods Largest import country

2014: Bilateral trade $590.68 billion (deficit: $342.63 billion)

lMaintain the world’s financial stability

To stabilize investors’ confidence to the US economy - Market panic

lCurrent system of foreign exchange reserves and sources of funding

China‘s export-oriented economy： surplus

Foreign exchange system: Official currency-CNY & Direct dollar circulation is not allowed in China

Investment: Converted to CNY(not used) in Bank & Hedge

lStructure of foreign exchange reserves

Include: foreign investment funds + trade surplus

Liquidation: To meet the regular exchange needs

Gold, oil, minerals: selling in short term - push up prices & market panic & stability

lU.S Treasury bonds provide high security and profitability

US Dollar

US Debt: Economic base & 3A investment-grade & yields

lSino-US economic and trade relations

China: American Second largest trading partner & third largest export market

US: Large quantities of cheap goods Largest import country

2014: Bilateral trade $590.68 billion (deficit: $342.63 billion)

lMaintain the world’s financial stability

To stabilize investors’ confidence to the US economy - Market panic

3 L A R G E S T F O R E X

R E S E R V E POLICY STRATEGY

u Reform the foreign exchange management system

Increase of forex reserves – CNY issuance - domestic inflation

Reform mandatory exchange settlement system: businesses & Individual - Risk diversification

u Realize forex reserve diversification

Increasing the proportion of gold, oil and SDRs in China’s foreign exchange reserves

Expand overseas direct investment

u Accelerate the process of internationalization of CNY

CNY credit markets & more CNY payments

u Sino-US strong dialogue promotes consensus

To ask US government to provide credible assurances of US Treasuries

Hook its bonds yield with inflation-indexed against the risk of inflation

u Reform the foreign exchange management system

Increase of forex reserves – CNY issuance - domestic inflation

Reform mandatory exchange settlement system: businesses & Individual - Risk diversification

u Realize forex reserve diversification

Increasing the proportion of gold, oil and SDRs in China’s foreign exchange reserves

Expand overseas direct investment

u Accelerate the process of internationalization of CNY

CNY credit markets & more CNY payments

u Sino-US strong dialogue promotes consensus

To ask US government to provide credible assurances of US Treasuries

Hook its bonds yield with inflation-indexed against the risk of inflation

u Reform the foreign exchange management system

Increase of forex reserves – CNY issuance - domestic inflation

Reform mandatory exchange settlement system: businesses & Individual - Risk diversification

u Realize forex reserve diversification

Increasing the proportion of gold, oil and SDRs in China’s foreign exchange reserves

Expand overseas direct investment

u Accelerate the process of internationalization of CNY

CNY credit markets & more CNY payments

u Sino-US strong dialogue promotes consensus

To ask US government to provide credible assurances of US Treasuries

Hook its bonds yield with inflation-indexed against the risk of inflation