(Yicai Global) May 3 -- China's forex regulator aims to improve the reform and opening up of China's financial market to serve the real economy while guarding against the impact of cross-border capital flow and maintaining financial stability, Pan Gongsheng, head of the State Administration of Foreign exchange, said at a report meeting yesterday.
Last month, Pan said China's current account had been operating at a surplus since the second half of 2014, but cross-border outflow has been causing forex reserves to decline and the deficit in the capital account to exceed that surplus
Cross-border capital flow saw two noteworthy changes around that time, he added. The first was that the market's main external assets saw rapid growth. Previously, China's foreign assets were mostly made up of official forex reserves, which peaked at 70 percent of total foreign assets. In recent years, China's external assets have seen structural changes and forex reserves have fallen while the total volume of assets has increased. At the end of last year, official- and private-held foreign exchange assets were at a 50-50 split.
The second change was external debt. When the Federal Reserve brought in a quantitative easing monetary policy with a low interest cost on the dollar, Chinese firms took on more foreign debt. In the past two years, the Fed withdrew the easing policy and stepped up interest rates, leading to a stronger dollar exchange rate. At the same time, China's domestic rates declined, so local companies turned to domestic financing to keep interest low, and began to accelerate dollar repayments to avoid high leverage and currency mismatches.