MANAGE FX RESERVES SCIENTIFICALLY, MAINTAIN MACROECONOMIC STABILITY

---Interview of SAFE spokesman on FX management

The fluctuations in global and domestic FX markets recently have attracted wide attention and discussion. The spokesman of the State Administration of Foreign Exchange (SAFE) was interviewed on this issue.

Betting on RMB appreciation is banned

In his respondence to media reports saying that up to US$1 trillion of hot money has been used to speculate on RMB appreciation, the SAFE spokesman seriously warned all speculators engaged in illegal speculative activities that the SAFE would not ignore any activities and evidence of misdeeds that play havoc with the order of the FX market. Hot money is a term used in financial circles for funds that flow across different markets for quick speculative profits. The RMB is not fully convertible, which makes it very difficult for speculative funds to enter and leave China. So it's not possible for such activities to have a large impact. China's financial system has loopholes that can be used by international speculators, but the costs of such speculative activities are high. SAFE has spotted abnormal phenomena such as cheating in import and export price reporting, excessive borrowing of funds, and soaring prices in the real estate market, etc. These behaviors, to a large extent, have characteristics of speculative arbitrage. SAFE will not tolerate any illegal speculation. SAFE will monitor capital flow more carefully and mend loopholes in FX administration in a timely manner, and closely work with law enforcement departments in its fight against wrongdoings in the FX market. At the same time, SAFE will continue to boost the convenience of investment and trade, encourage medium and long-term capital flow, accelerate the strategy of "go abroad", and improve the level of opening-up.

The FX reserves holding is managed scientifically

SAFE also refuted rumors that it had been dumping US dollar-denominated assets from its massive foreign exchange reserves. Those reports were utterly groundless, according to the SAFE spokesman. The currency allocation of China's FX reserves is based on factors such as the needs of its economic growth, foreign trade payments, foreign debt structure as well as capital market conditions. China pays a lot of attention to the tendencies of the international foreign exchange market, but will not adjust our currency mix to follow short-term market fluctuations. China is a highly responsible investor in the international market. China has always been protective of the security and stability of the international market on a voluntary basis, and will never participate in exchange rate speculative trading.

The dollar's depreciation has also prompted worries that it had subsequently resulted in huge losses to China's FX reserves. SAFE pointed out that just like other financial assets held by corporates and individuals, FX reserves held by the state will also have risk. The key is to scientifically manage, prevent and dissolve the risk. China has developed a relatively mature mechanism to manage its FX reserves under the principles of "safety, liquidity and profitability," and exchange rate changes will not result in any real gains or losses until currency conversion occurs. The Chinese government has fully considered its external payment needs when deciding the currency mix of its FX reserves. So there is no possibility of China converting US dollars into other currencies due to a lack of real payment means, and therefore incurring conversion losses. The ultimate goal of holding FX reserves is to safeguard a nation's macroeconomic stability, maintain the credibility of the government and its enterprises, as well as boost international confidence in the Chinese economy and currency.