Yi Gang on China's new foreign exchange philosophy

State Administration of Foreign Exchange director Yi Gang discusses five changes in China's foreign exchange management as well as the long-term value of the renminbi

What progress has been made in deepening reform, streamlining and decentralising administration, and promoting free trade investment? What are the next steps?

We have stressed five changes in our foreign exchange management philosophy that are vital for the development of our long-term administrative framework.

The move from an approval-based approach to a monitoring-based approach, the switch from pre-regulation to management in the aftermath of an issue, and also the change from behaviour-based management to subject-based supervision - whether it is a financial institution or a company, we will supervise it and it will be responsible for its conduct.

Fourthly, we switched from an assumption of ‘guilty until proven innocent' to a philosophy of ‘innocent until proven guilty' and finally from using a ‘positive' list of approved activities/parties to a ‘negative' list of restricted activities/parties.

The five transitions have been in practice for a few years and we have already seen the effects.

Firstly, trade and investment facilitation has improved. We have abandoned the system of mandatory foreign exchange settlement and sales, and comprehensively reformed the verification system for forex payments (imports) and forex receipts (exports), completely cancelling the verification and approval previously needed for each transaction.

This reform has largely benefited enterprises. Our research indicates the average time for settling a transaction used to be 20 minutes, and it is now less than 10 minutes.

Meanwhile, we have greatly simplified the foreign exchange administration for trade servicing, shortening the receipt and payment time from 20 minutes per transaction to five minutes per transaction, so enterprises have enjoyed increased convenience and lower transportation costs.

We have also made progress in capital accounts. Through streamlining administration and delegating power to lower levels, particularly simplifying foreign debt, direct investment and overseas direct investment, we have steadily promoted the convertibility of capital accounts. Thirdly, we have considerably reduced administration approvals. In the recent few years, we have cut this by about 70%, which helps improve the competitiveness of Chinese enterprises and financial institutions.

Lastly, I should emphasise that while we have streamlined approval procedures, we have still needed to strengthen supervision because of all kinds of uncertainties, including liquidity risks associated with cross-border capital flows that still exist in volatile global financial markets.

Therefore, while promoting facilitation, we must pay great attention to risks. We must strengthen supervision to prevent systemic problems. At the same time, we will continue to streamline administration and delegate power to lower levels and further increase the competitiveness of Chinese enterprises and economy.

What do you make of the recent depreciation of the renminbi?

A country's foreign exchange rate is one of the main instruments measuring the overall soundness of its economy and its finances. In 2014, the euro and yen fell by more than 10% against the US dollar, while the renminbi declined by 2%.

This means the real effective exchange rate and nominal effective exchange rate of the renminbi has increased compared with the euro, the yen and a basket of global currencies.

If the US dollar is the strongest currency, it is fair to say that the renminbi is the second-strongest one. In many developing countries, capital is flowing out and currencies are depreciating considerably.

The renminbi remains the most stable and strongest currency among all the Brics nations (Brazil, Russia, India, China and South Africa).

We should assess the trend of renminbi exchange rates comprehensively against a basket of global currencies, rather than against the dollar alone.

From the perspective of the international balance of payments, economic growth rates and the degree of renminbi globalisation, China's exchange rate absolutely has the basis of a fundamental stability and reasonable equilibrium.

What is the long-term trend for the renminbi?

Firstly, the prospects for Chinese economic growth still look good. Although the past high speed of growth is lowering and becoming medium-high, the growth speed is still relatively high compared with the majority of the world.

Secondly, the Chinese current account surplus is still big. Exports exceed imports, which is extremely important for the stability of the fundamentals of the foreign exchange market.

Thirdly, renminbi globalisation has accelerated. The world has a demand for the currency in areas such as trade, overseas investment and capital allocation.
Foreign capital management companies and individuals are willing to hold renminbi bonds, stocks and other assets.

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