Minutes of AMRO-IMI Economic Consultation

2017-09-04 IMI

August 30, 2017, Beijing Topic 1: Measures and challenges of capital flow management -We should be confident about the policy as Pan Gongsheng, Deputy Governor of the People's Bank of China (PBoC) and Administrator-in-Bureau of the State Administration of Foreign Exchange (SAFE), has great advantages with knowledge of banking industry and financial market. -The exchange rate in the fundamental matter, is determined by the performance of the economy. Moreover, the exchange rate and capital flow is affected by the market more than expected. Negative expectation will lead to depreciation. To stop the cycle, economic agencies in China such as the PBoC and SAFE should work hard to lift the expectation, not only be propaganda, but also by polices measures that drive the economy. -“Once the window is open, it really cannot be closed”. There is no way for China to go back to the old system with strict control and administration. The Chinese government will continue applying the opening and reforming policy, which shows strong signal to the market. -The illegal capital flows, as a challenge for capital flow management, need to be stopped. The banks are not under strict regulations. Nowadays it is required that, in addition to show the ID card, one should state the reasons for foreign exchanges. With such improved measures, it is less likely for illegal cross-border money to outflow. -The real economy need to be provided with enough foreign exchange. Although the procedure takes longer time than before, SAFE is trying to guarantee the support for real economy. -Chinese economic agencies especially the PBoC and SAFE are tightening their measures temporarily, in order to save the wealth. RMB is not afraid of depreciation, because China is the largest exporter in the world. -Considering the aging society, China will experience a long-term deflation. We should have confidence in the future of RMB exchange rate. We should encourage going outwards to invest or buy technologies and valuable assets. However, buying foreign bubble assets can be risky. Topic 2: Impact of the introduction of counter-cyclical factors in the quoting RMB exchange rate against the US dollar -Formulation of RMB exchange rate will be really based on market in the long term. However, it is a graduate process for the RMB exchange rate to form a flowing system. The foreign reserves declined too fast during 2015 and 2016, the Chinese authorities have to take some measures to stop the rapid decline and change the market expectation. -“Once the market is ready, we will continue to move forward”. Once the conditions are mature enough, China will develop a truly liberalized flowing system. The next steps for PBoC to consider regarding the RMB exchange rate can be: 1.Continue to expand the room for the exchange rate to flout; 2.Follow the “8·11”reform in 2015 and use the previous closing price of RMB as the opening price of daily market. -It is reasonable to introduce the counter-cyclical factors to avoid the hot money and really make money serve the right purpose. Topic 3: China’s capital market opening and RMB internationalization -The inclusion of A share index into MSCI is an objective reflection that Chinese capital market plays an important role in the global market. Passive fund will reallocate the fund after the inclusion, which will help the Chinese A share market to further develop. The portion of the inclusion is believed to enlarge in the near future. -Although the current market system has flaws, as the second large market in terms of whole value and transaction, the Chinese capital market will become more mature and valuable assets for international capital markets. -China has been tightening the control of capital flow since the end of last year. The policy makers will continue to stabilize the market .RMB will keep its value in the future. Topic 4: Impact of the Fed’s rate hike and balance sheet reduction on China’s monetary policy and financial markets -PBoC has been expanding the basket currency and decreasing the weight of US dollar in foreign reserves since 2017. Furthermore, after the introduction of counter-cyclical factors in the quoting RMB exchange rate against the US dollar, the government have much more power to influence the rate. Both measures will reduce the impact technically. Topic 5: Macro-prudential management and systemic risk prevention -It depends much on the new office of PBoC. The market is waiting for the new successor of PBoC and will react according to the officer’s background.

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Minutes of AMRO-IMI Economic Consultation

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