Market News International:

The RMB depreciated against the U.S. dollar in 2023. How does the central bank view the outlook for the RMB exchange rate this year? And what factors might affect the exchange rate? Thank you.

Pan Gongsheng:

Thank you for your question. The questions we addressed earlier are somewhat related to the points you just raised.

Last year, the onshore RMB exchange rate against the U.S. dollar fell by 2%, while the offshore rate declined by 2.5%. The currency index of emerging market countries dropped by 3.8%. In our neighboring countries, Japan experienced a 7.3% decline in the yen, and the South Korean won depreciated by 2.7%. Combining these factors provides a more comprehensive view of the changes in the RMB exchange rate last year. Short-term factors influencing exchange rates are diverse, including economic growth, monetary policy, financial markets, geopolitical factors, and risk events. However, the medium- to long-term trends fundamentally depend on economic fundamentals. Therefore, our assessment indicates that in 2024, the RMB exchange rate will continue to maintain basic stability at a reasonable and balanced level.

The factors supporting the stability of the RMB exchange rate can be summarized as follows:

First, the domestic economy is performing steadily and robustly. China's economy exhibits a solid fundamental base, maintaining a long-term positive trend. This forms a crucial foundation for the overall stability of the RMB exchange rate.

Second, there have been some changes in the external international financial environment. As I mentioned earlier, recent market shifts regarding the U.S. Federal Reserve's monetary policy and the diminishing momentum of the U.S. dollar appreciation are widely recognized, in my opinion. The anticipated improvement in the alignment of monetary policy cycles between China and the U.S. is expected to contribute to the alleviation of interest rate differentials, fostering greater stability and balance in the RMB exchange rate and cross-border financial flows.

Third, RMB assets possess appealing investment and hedging value. The continuous opening up of China's financial markets has made RMB bonds, as one of the few globally stable financial markets, highly attractive to overseas investors. Since September of last year, China's RMB bond market has witnessed four consecutive months of net inflows, with overseas investors holding nearly 500 billion yuan of domestic bonds.

Fourth, the microeconomic foundation for exchange rate stability becomes more solid. A basic balance in international payments, with the ratio of the current account balance to GDP staying within a reasonable range, standing at 1.6% in the first three quarters of 2023. Cross-border trade and investment facilitation continue to improve, ensuring balanced bidirectional cross-border financial flows. The foreign exchange market has enhanced resilience, and the participants have become more mature. I have been serving as the administrator of the SAFE since 2015, and comparing the current situation with that time over the past eight years, I believe the maturity of China's foreign exchange market has significantly improved. Moreover, there is a more extensive use of exchange rate hedging tools, and the RMB's internationalization level has rapidly increased. Business entities are now better equipped to cope with external shocks and exchange rate fluctuations.

The Central Economic Work Conference and the Central Financial Work Conference emphasized the need to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. Historical practices have repeatedly demonstrated that the PBC and the SAFE, as regulators of the foreign exchange market, possess the experience, capability, and confidence to address various shocks and challenges, ensuring the stable operation of China's foreign exchange market.

In the next phase, the PBC and the SAFE will adhere to the decisions and deployments of the CPC Central Committee and the State Council, maintain the market-driven determination of the exchange rate, ensure the resilience of the RMB exchange rate, and leverage the exchange rate as a macroeconomic and automatic stabilizer for international balance. Simultaneously, considerations on worst-case scenarios will be maintained, with the enrichment of response tools to prevent the risk of excessive exchange rate adjustments and the formation of unilateral consensus expectations and self-reinforcing expectations.

As we discuss financial market operations, including the foreign exchange, bond, and stock markets, I would like to share some insights into my views on the trends and changes in the foreign exchange market for this year and beyond.

The CPC Central Committee and the State Council attach great importance to the stable and sound development of the capital market. On Jan. 22, the State Council held an executive meeting to conduct targeted research and make arrangements. At present, China's macro-economy has sustained the momentum of recovery. There is ample room for macro policies and for maneuver, and the capital market has a solid foundation for stable and healthy growth. The PBC will faithfully implement the guiding principles of the State Council executive meeting and strengthen counter-cyclical and cross-cyclical adjustments of the monetary policy. With a focus on stabilizing the market and strengthening confidence, we aim to consolidate and enhance the momentum of economic recovery, and create a sound monetary and financial environment for the operation of financial markets, including the capital market.

Thank you.