On October 22nd, the State Administration of Foreign Exchange released relevant data on the balance of payments for the first three quarters of 2024 and held a press conference at the State Council Information Office. The data shows that, thanks to the continued net inflow of goods trade and the gradual improvement of foreign investment in China, cross-border capital in our country has recovered to net inflow in the first three quarters of this year.
At present, major global economies are facing adjustments in monetary policy, and there is still market divergence over the pace and path of future interest rate cuts by the Federal Reserve. The impact on China's foreign exchange market is highly anticipated.
Xie Yaxuan, Deputy Director of the Research and Development Center of China Merchants Securities, told reporters from Yicai that in the fourth quarter, China faces the pressure of a phased outflow of cross-border capital. However, with the implementation of multiple policies such as "924" and "926", domestic economic expectations have significantly improved. Looking at a longer period, as the fundamentals of China's economy are repaired, the renminbi exchange rate will rise steadily, which is very important for improving the situation of international capital flows.
Zhao Qingming, Deputy Dean of the Research Institute of Exchange Control Information Technology, told reporters from Yicai that from the perspective of the international foreign exchange market, the US dollar index is still relatively overvalued at present and will return to the equilibrium exchange rate range in the future. Coupled with the improvement of China's economic fundamentals, the renminbi exchange rate will be stable and strong in the future.
Li Hongyan, Deputy Director of the State Administration of Foreign Exchange, said at the press conference that the foreign exchange management department will continue to monitor and assess the international economic and financial situation and the policy trends of major developed economies. They will continuously accumulate and summarize experience in response, enrich the policy toolbox, carry out counter-cyclical macro-prudential regulation in a timely manner, and effectively maintain the stable operation of the foreign exchange market.
Cross-border capital recovers net inflow
One of the most notable characteristics of China's foreign exchange income and expenditure in the first three quarters of 2024 is the recovery of net inflow of cross-border capital. The data shows that in the first three quarters, in US dollar terms, the bank's foreign-related receipts and payments on behalf of customers had a surplus of $2.8 billion, with a small surplus in the first quarter, a reversal to a deficit in the second quarter, and a recovery to a surplus in the third quarter. Mainly, goods trade continued to have net inflow, foreign investment in China gradually improved, and domestic entities' foreign investment was generally orderly.
Looking at the bank's settlement and sale of foreign exchange data, the balance has basically recovered. In the first three quarters, the overall settlement and sale showed a deficit, mainly due to the expansion of the deficit in the second quarter; in the third quarter, it returned to a balanced level, among which September recovered to a surplus, with the rise in settlement and the basic stability of sales.
Xie Yaxuan told reporters from Yicai that an important factor affecting cross-border capital flows is the narrowing of the China-US interest rate difference, especially in the third quarter of this year, when the Federal Reserve unexpectedly cut interest rates by 50BP, and there is a further expectation of interest rate cuts, some cross-border capital that is more sensitive to the interest rate difference has returned. On the other hand, after the Federal Reserve cut interest rates, the US dollar index fell back, and the appreciation expectation of the renminbi made some receivables return, contributing to the capital return.
Zhao Qingming told reporters from Yicai that the main reasons for the expansion of the surplus in the third quarter are, first, the renminbi exchange rate has changed from depreciation to appreciation, which has driven an increase in corporate settlements; second, foreign financial institutions have increased their allocation of renminbi bonds, and the inflow of foreign funds under the stock connection at the end of September has increased.Data indicates that recently, the exchange rate has been rising in an orderly manner while the sales exchange rate has remained stable with a slight decrease, and corporate willingness to exchange currency has remained rational. In the first three quarters, the foreign exchange income exchange rate, which measures the willingness to exchange currency, was 62.1%, and the foreign exchange expenditure exchange rate, which measures the willingness to purchase currency, was 68.9%.
At the same time, over the past period, foreign investment in RMB assets has shown a generally positive trend. As of now, the total amount of RMB bonds held by foreign investors within the country exceeds 640 billion US dollars, which is at a historical high. In addition, driven by the rise in the domestic stock market, since late September, foreign net purchases of domestic stocks have generally increased, further strengthening the willingness of foreign investment to allocate RMB assets.
At the same time, China's foreign exchange reserves have remained basically stable. As of the end of September, the balance of foreign exchange reserves was 3,316.4 billion US dollars, an increase of 78.4 billion US dollars compared to the end of 2023.
The RMB is expected to be stable with a slight rise.
At present, China's policy interest rates are also being lowered, and market interest rates, represented by the ten-year government bond rate, have entered a period of fluctuation; in the fourth quarter, the Federal Reserve's interest rate cuts have slowed down, and the level of US Treasury interest rates has rebounded somewhat, with the trend of the China-US interest rate spread further widening. What impact does this have on the trend of cross-border capital flows?
"On the surface, the factors affecting cross-border capital flows are the China-US interest rate spread represented by the ten-year government bonds of China and the United States, as well as the expectations of the RMB exchange rate, but behind it reflects the differences in the fundamentals of the economies of China and the United States," Xie Yaxuan said to the reporter.
In his view, in the fourth quarter, China will face the pressure of periodic outflows of cross-border capital, but at the same time, with the implementation of several policies such as "924" and "926", the domestic economic expectations have significantly improved. Both domestic asset prices and expectations for further bottoming out of the economy in the future have rebounded, which will offset the impact of the further widening of the China-US interest rate spread. Looking at a longer period, as the fundamentals of China's economy recover, the RMB exchange rate will be stable with a slight rise, which is very important for improving the situation of international capital flows.
"Objectively speaking, with the opening of the capital and financial accounts, the impact of cross-border capital flows on the RMB exchange rate and the resulting fluctuations have increased, but the exchange rate is still largely determined by the economic fundamentals. Based on the judgment of the stable and positive domestic economy and the judgment that the United States has entered a cycle of interest rate cuts, the long-term decline of the US dollar index will be a trend, and the RMB will be stable with a slight rise against the US dollar in the medium term," Xie Yaxuan said to the First Financial reporter.
Looking at the changes in the exchange rate, since the beginning of this year, the spot exchange rate of the RMB against the US dollar within the country has generally depreciated by about 0.3%, and the RMB exchange rate has remained basically stable in two-way fluctuations.
In addition to the factors of economic fundamentals, Zhao Qingming believes that from the perspective of the international foreign exchange market, the US dollar index is currently at 103, 104, and from the history of the past 20 years, it is still in a relatively overvalued state, and it will return to the equilibrium exchange rate range in the future, and non-US currencies should strengthen. Coupled with the improvement of China's economic fundamentals, the RMB exchange rate should be stable and somewhat stronger in the future.At the press conference held by the State Council Information Office on October 22, Li Hongyan stated that the exchange rate of the renminbi is primarily determined by the market. Under the market-based formation mechanism, it is normal for the renminbi to appreciate and depreciate, exhibiting two-way fluctuations.
The proportion of foreign debt in renminbi and long-term foreign debt increases
A noteworthy piece of data is the overall growth in China's foreign debt scale in the first half of the year. As of the end of June, the foreign debt balance was $2.54 trillion, an increase of $97.1 billion compared to the end of 2023, a rise of 4%.
Jia Ning, Director of the Balance of Payments Department of the State Administration of Foreign Exchange, said at the press conference that China's foreign debt is divided into two categories. The first category is the external debt formed by enterprises, banks, and other departments financing from abroad, which is the objective result of fully utilizing both domestic and international markets and resources, and is directly related to the development of cross-border trade and investment. The second category is the external debt formed by foreign capital purchasing domestic bonds, reflecting the global investors' demand for the allocation of renminbi assets. In recent years, with the increasing attractiveness of the renminbi to foreign investors, the second category has become the main channel for the growth of China's foreign debt.
"As the cross-border operations of enterprises continue to increase, the number of orders and projects from overseas has significantly risen. From the perspective of matching projects and funds, the increase in foreign financing is inevitable," Zhao Qingming explained to the First Financial Daily reporter.
"Obviously, the less debt, the better is not the case. Utilizing foreign capital can bring advanced markets, technology, and experience to our country. Of course, more debt is not necessarily better either," Xie Yaxuan told the reporter, adding that measuring the risk of foreign debt usually involves comparing the scale of foreign debt with a series of indicators that reflect the state of the real economy, such as GDP and foreign exchange reserves. As China's GDP is expected to achieve certain growth annually, theoretically, the scale of foreign debt should also maintain a certain growth. However, it is necessary to guard against a rapid increase in foreign debt that deviates from the fundamentals of the economy or a rapid rise in short-term foreign debt.
"The risk of foreign debt is controllable. The most important indicator is that the scale of foreign debt maturing within one year, compared to foreign exchange reserves, is far within the safety line," Zhao Qingming said to the reporter.
Jia Ning stated that in recent years, despite facing the significant easing and tightening of the Federal Reserve's monetary policy and changes in external financial conditions, China's foreign debt scale has remained generally stable, with the ratio to Gross Domestic Product fluctuating slightly within the 14% to 16% range. Cross-border financing by enterprises has effectively supported the development of the real economy. Secondly, the debt ratio, debt service ratio, debt ratio, and the ratio of short-term foreign debt to foreign exchange reserves are all within the internationally recognized safety line. In addition, the structure of China's foreign debt continues to optimize, which is reflected in the significant increase in the proportion of foreign debt in renminbi and long-term foreign debt. The risks of maturity mismatch and currency mismatch in foreign debt are controllable and have been significantly reduced.
Looking ahead, China's foreign debt is expected to maintain a stable development trend. As China's economy recovers and improves, and the financial market continues to open up steadily, the allocation function of renminbi assets will continue to emerge, and foreign investment in renminbi bonds will maintain growth. At the same time, the potential for China's foreign trade and investment will continue to be released, coupled with the reduction in external financing costs driven by interest rate cuts in developed economies such as the United States and Europe, the demand for foreign debt by enterprises and other departments will gradually rise.