China’s foreign exchange market and performance of CNY

China’s Foreign Exchange Market and Performance of CNY BY: Wang Feng I C H I N A ’ S F X M A R K E T 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 H I S T O R I C A L D E V E L O P M E N T (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 interbank market 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 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) regulatory authorities 3) Designated foreign exchange banks and non-bank financial institutions and non-financial enterprises authorized by SAFE to work for the foreign exchange market 4) Enterprises have earn and spend in foreign exchange market 5) Individuals who involved in foreign exchange trading C H I N A ’ S F O R E X R E S E R V E S l China’s central bank to purchase U.S dollars conduct in China’s economy, resulting in massive foreign exchange reserves l This figure shows us the relationship between China’s 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 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 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 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 I I C H I N A ’ S F X P O L I C Y F A C T O R S D E T E R M I N E P O L I C Y F X • Stay stable Maintain China’s foreign exchange market, protect the CNY from being inflation or deflation • Economic growth The GDP, interest rate • International economy Economic depression, deep influence in the world market • Intervention How China’s government want to adjust or control, established targets, intervene at times to reduce its currency’s exchange rate volatility L A R G E S T F O R E X R E SSTATUS E R V E 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.LARGEST FOREX RESERVE REASON SECURITY REGULATION SYSTEM SINO-US RELATIONS STRUCTURE STABILITY L A R G E S T F O R E X REASON 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 L A R G E S T F O R E X RPOLICY E S STRATEGY E R V E 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 I I I C U R R E N C Y C N Y C N Y D E V A L U A T I O N WHAT HAPPENED On 12th August: PBOC depreciates CNY by 1.6% against USD Increasing the ‘USDCNY fix’ to 6.2298 Biggest devaluation since the effort to liberalize exchange rate movement on the currency C N Y D E V A L U A T I O N REASON OVERVALUED EXPORT OBOR DOLLAR C N Y D E V A L U A T I O N REASON pDownward Pressure of Chinese Economy Increases and CNY is Overvalued 2015: continues economic downward pressure: lower indicators (6.9%) PBOC: sell its forex reserves buy CNY to prop up CNY price - Overvalued (not from a position of acute weakness but from a position of relative strength) Asia: devaluing trend pExport Competition Weakened Exports to Europe: $1.1 trillion, 45% Quantitative easing policy: China‘s exports countries devalued by 20% pOverseas pImpact Investment of ‘One Belt One Road’ of Strong Dollar CNY hooked to the dollar partly C N Y D E V A L U A T I O N INFLUENCE • Impact on China’s Import and Export • IMF’s SDR Inclusion To make the CNY more market-based (PBOC) Devaluation: more countries to hold CNY as forex reserves & stable value SDR: Reduce borrowing costs for Chinese exporters • Limited Impact on the US Economy Per 1% annual China‘s GDP growth falling one basis point, only 0.06% falling of US Industrial enterprises • Possibility to Force Other Currencies Devaluation Australian dollar, ringgit and Korean won fell after 15%: Asian currencies 5-7% • Impact on Global Markets Not too further (Financial Hurdles) Economic growth & easing policies C N Y I N T E R N A T I O N A L STATUS In July 2009 CNY settlement of cross-border trade in Shanghai, Guangzhou, Shenzhen ² Goods and services trade: ranked in top World’s largest goods trading country World’s Third largest services trading country ² "Freely usable”: World’s second-largest trade financing currency World’s fourth-largest payment currency World’s sixth-largest forex transaction currency World’s sixth-largest international interbank loans currency World’s seventh-largest international reserve currency Enterprises from 189 countries, regions: use CNY as international settlement and investment currency C N Y I N T E R N A T I O N A L PERFORMANCE INTERNATIONALIZATION SWIFT: SURPASS YEN WORLD RESERVE CURRENCY: SDR CIPS: INTERNATIONAL PAYMENT SYSTEM DIRECT CNY PAYMENT SYSTEM GOLD ACQUISITION C N Y I N T E R N A T I O N A L PERFORMANCE ² World Reserve Currency: RMB to be included in IMF Special Drawing Rights (SDR) JOIN: on Nov 30 & Come into effect on October 2016 (free to use) Dollar(41.73%), euro(30.93%), yuan(10.92%), yen(8.33%), pound(8.09%) ² Major western nations set up direct RMB payment system with China China: CNY overseas clearing banks (interfaces to connect the main pool of offshore CNY funds) CCB London, BOC Frankfurt, BOC Paris, ICBC Luxembourg Europe: City of London: "CNY Business Center Plan”(2012) Develop CNY business to promote itself and its enterprises German Hesse government: CNY offshore center (2013) Focus on goods trade and financial settlement Paris Europlace & Luxembourg Financial Promotion Unit: Related CNY settlement projects C N Y I N T E R N A T I O N A L PERFORMANCE _ Extend ² CNY surpassed Japanese Yen in Society of Worldwide Interbank Financial Telecom (SWIFT) Become the world‘s top four currency payments : yuan(2.79%) 100 countries Singapore ² dollar(44.8%), euro(27.2%), pounds(8.5%), Independently established China International Payment System (CIPS) Started: in 2012 Connect the direct inside and outside participants Process CNY cross-border payment and settlement business The first phase: Operate on October 8, 2015 ² China’s gold acquisition and the rising roll of Shanghai Gold Exchange World‘s largest gold producer(8 years):451.8 tons(2014) World’s seventh gold reserves OBOR: Establish the gold cooperation and development mechanisms “Shanghai and Shanghai tong”：Open, Cooperate Shanghai & Hong Kong Gold Market(2015.7.1) Introduce innovative offshore clearing bank clearing arrangements of offshore clearing bank effectively achieve the interoperability TNANKS FOR YOUR ATTENTION! Please ask any question you have in mind [...]... Market panic 3 L A R G E S T F O R E X RPOLICY E S STRATEGY E R V E 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... 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... RMB payment system with China China: CNY overseas clearing banks (interfaces to connect the main pool of offshore CNY funds) CCB London, BOC Frankfurt, BOC Paris, ICBC Luxembourg Europe: City of London: "CNY Business Center Plan”(2012) Develop CNY business to promote itself and its enterprises German Hesse government: CNY offshore center (2013) Focus on goods trade and financial settlement Paris Europlace... 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 SSTATUS E R V E l Total foreign. .. 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 I I I C U R R E N C Y C N Y 1 C N Y D E V A L U A T I O N WHAT HAPPENED On 12th August: PBOC depreciates CNY by 1.6% against... Connect the direct inside and outside participants Process CNY cross-border payment and settlement business The first phase: Operate on October 8, 2015 ² China’s gold acquisition and the rising roll of Shanghai Gold Exchange World‘s largest gold producer(8 years):451.8 tons(2014) World’s seventh gold reserves OBOR: Establish the gold cooperation and development mechanisms “Shanghai and Shanghai tong”：Open,... 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.LARGEST FOREX RESERVE REASON SECURITY REGULATION SYSTEM SINO-US RELATIONS STRUCTURE STABILITY 3 L A R G E S T F O R E X REASON R E S E R V E lCurrent system of foreign exchange reserves and sources of funding China‘s... A L U A T I O N INFLUENCE • Impact on China’s Import and Export • IMF’s SDR Inclusion To make the CNY more market- based (PBOC) Devaluation: more countries to hold CNY as forex reserves & stable value SDR: Reduce borrowing costs for Chinese exporters • Limited Impact on the US Economy Per 1% annual China‘s GDP growth falling one basis point, only 0.06% falling of US Industrial enterprises • Possibility... the ‘USDCNY fix’ to 6.2298 Biggest devaluation since the effort to liberalize exchange rate movement on the currency 1 C N Y D E V A L U A T I O N REASON OVERVALUED EXPORT OBOR DOLLAR 1 C N Y D E V A L U A T I O N REASON pDownward Pressure of Chinese Economy Increases and CNY is Overvalued 2015: continues economic downward pressure: lower indicators (6.9%) PBOC: sell its forex reserves buy CNY to... forex reserves buy CNY to prop up CNY price - Overvalued (not from a position of acute weakness but from a position of relative strength) Asia: devaluing trend pExport Competition Weakened Exports to Europe: $1.1 trillion, 45% Quantitative easing policy: China‘s exports countries devalued by 20% pOverseas pImpact Investment of ‘One Belt One Road’ of Strong Dollar CNY hooked to the dollar partly 1 ... the foreign exchange market 4) Enterprises have earn and spend in foreign exchange market 5) Individuals who involved in foreign exchange trading 3 C H I N A ’ S F O R E X R E S E R V E S l China’s. .. 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... conduct in China’s economy, resulting in massive foreign exchange reserves l This figure shows us the relationship between China’s foreign exchange reserves and holdings of U.S Securities of China