China Foreign Exchange Market Self-Regulatory Framework (SRF) held its eighth work conference this week. The conference adopted the China FX Code (Revised) and the Proposal on Remaining Risk Neutral on Exchange Rate, and the member institutions exchanged their views on works concerning risk neutrality. Liu Guoqiang, Chair of the China Foreign Exchange Committee (CFXC) and Deputy Governor of the People’s Bank of China (PBC), attended the conference.
The conference noted that, since the CFXC arranged for and promoted works concerning risk neutrality in December 2020, the SRF had urged banks to strengthen the publicity on the concept of risk neutrality on exchange rate and earnestly help enterprises improve exchange rate risk management. With concerted efforts made by all parties, the market entities have grown more rational towards exchange rate fluctuations and more conscious of risk aversion, and the volume and hedge ratio of foreign exchange derivatives used by enterprises to manage exchange rate risks have markedly increased.
The conference stressed that amid the complicated and ever-changing international economic and financial situations, the central banks of major economies started to adjust monetary policies. With an array of factors influencing the exchange rate, RMB would either appreciate or depreciate in the future. The two-way fluctuations are the norm. Our goal is to maintain the RMB exchange rate at an adaptive and equilibrium level. The intensity of rectification is in proportion to the degree of deviation. Only by adhering to the risk neutrality, can enterprises, financial institutions and other market entities better handle external shocks. The enterprises should thoroughly understand the connotations of being risk-neutral on exchange rate, and stick to the principle of exchange rate risk management with “value preservation” rather than “value appreciation” at the core. The financial institutions should proactively provide services for micro, small, and medium enterprises (MSMEs) to hedge their exchange rate risks, and lower their costs in concern. The intermediaries should offer supports to financial institutions through measures such as transaction fee concessions in the interbank FX market. The financial institutions should also step up the risk management of their own foreign exchange business, neither helping enterprises with “speculative foreign-exchange transactions” nor doing so themselves, consolidate the institutional basis, and join in the efforts to build a professional, well-regulated foreign exchange market. The SRF should continue to leverage its role in self-regulatory monitoring, evaluation and management, and encourage the member institutions to regulate their proprietary trading and maintain the sound operation of the foreign exchange market.
