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Don't worry about a panic outflow of capital

(People's Daily Online)    13:06, January 27, 2015

Since last October, China's foreign exchange settlements and sales have been in deficit for five months in a row. At the same time, the yuan-dollar exchange rate is also going through significant fluctuations. Falling foreign exchange settlements and sales and the adjustment of the foreign exchange rate have led to some market worries about a panic outflow of capital.

According to Guan Tao, director of the Department of International Balance of Payment of State Administration of Foreign Exchange, the current pressure of capital outflow is controllable. Although there were outflow pressures in the second half year of 2014, the fundamentals, such as the oversupply of foreign exchange and the growing foreign exchange reserves, have not changed. Nor has there been any panic stockpiling of foreign currency on the part of enterprises and individuals.

Judging from the actual situation of last year, though the yuan-dollar exchange rate fell over the year, the yuan is still rather strong compared with other currencies.

While attending the 2015 World Economic Forum on January 21, 2015, Zhou Xiaochuan, Governor of the Central Bank of China, pointed out that the uncertainties of geopolitics, the falling price of staple commodities, and the contradictions between major economies' monetary policies are the main reasons behind the rising volatility of the global financial market.

Since the second half year of last year, the American economy has undergone a moderate recovery and the Fed has gradually quit QE, which has brought the US dollar index up by more than 10 percent. At the same time, Japan and Europe have begun to adopt loose monetary policies and the exchange rate of the Euro and the yen also have depreciated to some extent. The complicated international economic situation has affected China's cross-border capital flow. Since the dollar is a major settlement currency, enterprises generally are less willing to settle but more willing to hold and buy the dollar when it is strong.

Guan Tao thinks that QE in Europe and Japan will to some extent hedge the influence of the US abandonment of QE. Meanwhile, the normalization of American monetary policy may polarize expectations on the RMB exchange rate, which will favor the formation of a marketization mechanism for the yuan. As the RMB exchange rate comes to market equilibrium, the two-way flow of capital will return to normal.

According to Guan Tao, generally speaking, in spite of the contradictions between the monetary policies of major economies, the price adjustment of staple commodities, the currency turmoil of emerging economies, and geopolitical conflicts, in 2015 China will still maintain a favorable current account balance, its economic growth will still remain at a relatively high level, and the RMB exchange rate will still be higher than the exchange rates of other major currencies, so China will still be attractive to international capital, especially medium and long term capital. 

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Editor:Kong Defang,Yao Chun)

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