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26 Jan, 2014

China confident of weathering QE exit shocks


BEIJING, Jan. 24 -(Xinhua)- China is capable and confident of withstanding possible shocks from the U.S. exit from quantitative easing (QE), said an official of China’s foreign exchange regulator on Friday.

The remarks were made by Guan Tao, head of the Balance of Payments Department of the State Administration of Foreign Exchange, at a press conference.

In response to a question about how the U.S. Federal Reserve’s recent reduction in bond purchases would affect China’s trans-border capital flows, Guan said there had been no obvious impact yet and China was confident and capable of resisting future possible shocks.

The confidence and capabilities first of all are derived from the country’s stable and healthy economic fundamentals, fiscal and financial conditions and current account, he said.

Chinese banks’ foreign exchange settlement increased by 15 percent in 2013 to 11.66 trillion yuan (about 1.88 trillion U.S. dollars), and their foreign exchange sales rose by four percent to 9.99 trillion yuan, according to the official.

This resulted in a settlement-sales surplus of 1.68 trillion yuan, up by 210 percent from the previous year, highlighting higher pressure on trans-border capital inflows to China, he said.

Trans-border capital flows saw an uneven pattern in 2013. From January to April, the settlement-sales surplus was 32.1 billion U.S. dollars each month, while the monthly surplus decreased to 2.9 billion U.S. dollars from May to August before rising to 32.6 billion U.S. dollars from September to December.

The sharp fall in China’s foreign exchange settlement-sales surplus from May to August coincided with news about the Federal Reserve’s possible QE exit in mid-2013, raising concerns about future shocks.

However, Guan said the discussion about and the official announcement of the exit had imposed no fundamental impact on China’s trans-border capital flows, even though some emerging economies did experience capital outflows in large amounts and sharp depreciation of their currencies.

Guan attributed the fall in the settlement-sales surplus in the four months mainly to a policy initiated by the central government in April which demanded banks strengthen their foreign exchange position to rein in foreign exchange loans, leading to the increase of foreign exchange sales.

Chinese banks’ foreign exchange settlement-sales surplus actually increased to 31 billion U.S. dollars in December even as the Federal Reserve decided to start cutting bond purchases from Jan. 1, 2014.

Guan said that although the U.S. QE policies may have some impact on China’s trans-border capital flows, the overall trend of inflows had not been changed, as the Chinese currency, the renminbi, had appreciated by 3.1 percent in 2013.

The official saw the QE exit as not necessarily a bad thing, as it indicated the improving economic conditions in the United States, which in turn would improve China’s overseas demand.

However, Guan warned that China should remain on guard against possible future challenges, as the exit would bring about an uncertain and unstable factor in the international financial market.

On the renminbi exchange rate’s future moves, Guan refused to make a judgement, as “the rate should be judged by the market.”

However, as demand and supply in the market will become a more and more deciding factor in the rate as a result of the central government’s reform, two-way fluctuations are likely to become a new norm.

“This means companies, including banks, should be well equipped for moves in the exchange rate in the other direction, not just appreciation,” the official added.