China ready to face US tightening

A bank staff member counts RMB and US dollar notes in Nantong, Jiangsu Province. [Photo/Sipa]

The regulator ensures that the economy is stable and monitors “closely the external changes”

China will observe the ongoing monetary tightening in the United States and should be able to cope with any spillover effects, given the prospects of its stable economic growth and the resilience of its foreign exchange market, said officials and experts on Friday.

The remarks emerged amid fears that aggressive tightening by the US Federal Reserve could erode the financial stability of emerging economies by creating capital outflows and exchange rate fluctuations.

Wang Chunying, deputy head of the State Administration of Foreign Exchange, said the country should closely monitor the intensity and pace of the Fed’s policy adjustments and pay attention to their impact on interest rates, exchange rates and international financial markets.

“We will closely monitor external changes, assess related impacts in a timely manner, and promote the reform and opening up of the foreign exchange sector in an orderly manner, so as to prepare ourselves to effectively prevent and resolve external shocks,” he said. -she adds. said at a press conference on Friday.

The Fed has already raised interest rates by 150 basis points this year. Still, it is expected to announce another 75 basis point rate hike next week to tame inflation, experts said, after the European Central Bank raised interest rates by half a point on Thursday. percentage for the first time in 11 years.

Compared to the last round of Fed tightening in 2013, China is now more able and more confident to deal with the ripple effects on cross-border capital flows, Wang said, citing the country’s stronger economic strength. countries and healthier international payments.

The country’s foreign exchange market has become more capable of absorbing external pressures with more types of investors and a more flexible renminbi exchange rate, Wang said.

Experts said the country’s foreign exchange market weathered the effects of Fed tightening in the first half of the year, with cross-border capital flows generally balanced and a resilient renminbi exchange rate.

Fed rate hikes supported a strong dollar. As a result, as of Thursday, the euro, sterling and Japanese yen had weakened between 10% and 17% against the dollar this year. In contrast, the renminbi fell only 5.8% against the greenback over the same period.

Meanwhile, China’s cross-border receipts and payments by non-banking sectors reached $3.16 trillion and $3.0766 billion respectively in the first half, indicating a surplus of $83.4 billion, according to SAFE.

Nevertheless, official data also showed short-term fluctuations in cross-border capital flows, including in the bond market.

In June, cross-border receipts and payments recorded a deficit of $2.8 billion. As for the bond market, foreign institutions held 3.64 trillion yuan ($538.7 billion) of bonds outstanding in China at the end of June, up from 3.74 trillion yuan a month earlier, according to official data.

Despite the short-term fluctuations, foreign investors should steadily increase their holdings of long-term renminbi-denominated bonds, given the diversification benefits provided by the asset class, demand for investor allocation and economic fundamentals. China’s stables, Wang said.

A recent study by Invesco, a global investment management firm, also found that renminbi allocations fell from 1.1% of central bank foreign exchange reserves in 2016 to 2.8% by the end of 2021, most of central bankers surveyed intending to increase their renminbi positions. in the next five years.

Wang said the repatriation of profits by foreign companies has not upset the country’s balance of foreign exchange supply and demand, nor does it mean a withdrawal of investment.

Compared to other major economies, China has seen a relatively high proportion of profits from foreign companies reinvested in the country, she said.

To further facilitate the cross-border use of cash by multinationals, the People’s Bank of China and SAFE on Friday announced the launch of the second batch of pilot programs of the integrated local and foreign currency cash pool in Shanghai, Guangdong province. and in other regions.

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