With the continuous devaluation of the renminbi, the central bank makes a decisive move. What signals are released?

According to the evening news of the central bank website on April 25, in order to improve the ability of financial institutions to use foreign exchange funds, the People's Bank of China has decided to reduce the foreign exchange deposit reserve ratio of financial institutions by 1 percentage point from May 15, 2022, that is, the foreign exchange deposit reserve. The rate was lowered to 8% from the current 9%.

Previously, the central bank adjusted the foreign exchange deposit reserve ratio twice, on June 15 and December 15, respectively, with an increase of 2 percentage points each time. After the adjustment on December 15, the foreign exchange deposit reserve ratio increased from 7%. increased to 9%.

After the news was announced, the offshore RMB against the US dollar rose by 300 points in a short-term.

Helps stabilize the RMB exchange rate

The chief economist of CITIC Securities clearly stated that the RMB exchange rate has fluctuated a lot recently. By reducing the foreign exchange deposit reserve ratio, it will help to increase the supply of foreign exchange in the market and achieve a balance between supply and demand of foreign exchange, which will help stabilize market expectations and help stabilize market expectations. Stabilizing the RMB exchange rate will play a positive role in the stability of the entire financial market.

Yang Delong, chief economist of Qianhai Open Source Fund, pointed out that this move has increased the amount of foreign exchange invested by financial institutions, which is conducive to boosting the trend of the RMB exchange rate, with a view to reversing the sharp depreciation of the RMB exchange rate for many days.

Yang Delong said that the reason for this round of RMB depreciation is that the monetary policy deviation between China and the United States is relatively large, the Federal Reserve has released a hawkish signal of raising interest rates, and the US dollar index continues to strengthen and break through the 100 mark. This led to different declines in non-US currencies, including a huge decline in the yen, which hit its lowest value against the US dollar in 20 years and approached the 130 mark last week. Since the beginning of March, the yen has depreciated by 10% against the dollar.

Relatively speaking, the RMB exchange rate trend is relatively strong. This is mainly because the resilience of my country's long-term economic growth is still strong, the long-term positive trend has not fundamentally changed, and RMB assets have long-term investment value. These fundamental factors are called support. A basis for the RMB exchange rate.

Back to the "6.5 Era"

On April 25, the exchange rate of the offshore RMB against the US dollar fell below the 6.53, 6.54, 6.55, 6.56, 6.57, 6.58, 6.59 and 6.6 thresholds.

On the same day, the spot exchange rate of RMB against the US dollar closed at 6.5544 during the day, down 669 basis points from the previous trading day. The central parity of the RMB against the US dollar was lowered by 313 basis points from the previous trading day to 6.4909.

Regarding the continuous devaluation of the RMB, Zhong Zhengsheng, chief economist of Ping An Securities, pointed out that there are four main reasons:

First, there are more signs that the export boom has dropped from a high speed to a medium speed;

Second, the downward pressure on China's economy has gradually increased and affected the inflow of foreign capital. Since March, there have been external shocks such as the outbreak of the Russian-Ukrainian conflict, the supervision of Chinese stocks, and the Federal Reserve's initiation of rapid interest rate hikes, coupled with the factors of the epidemic;

The third is that the US dollar index "breaks 100", which puts pressure on the RMB exchange rate;

Fourth, the exchange rate plays a more regulating role in the differentiation of the monetary policies of China and the United States. China's monetary policy should and can be "mainly based on me". The key is to let the RMB exchange rate play a more role in regulating internal and external balance.

How to see the future RMB exchange rate

Wang Chunying, deputy director of the State Administration of Foreign Exchange and spokesperson, said at a press conference last Friday that, from historical experience, the Fed's monetary policy adjustments, especially interest rate hikes, usually have spillover effects on cross-border capital flows across countries. However, it is mainly some economies with fundamental weaknesses and weaknesses that have been hit hard. As far as China is concerned, the resilience of China's foreign exchange market has been increasing in recent years, and it has the foundation and conditions to adapt to the current round of Fed policy adjustments.

"Our view on the future RMB exchange rate. We believe that there will still be two-way fluctuations, and it will remain basically stable at a reasonable and balanced level. China's economy is relatively resilient, the long-term positive development trend has not changed, the balance of payments structure is stable, and the current account is stable. Maintaining a reasonable size surplus, RMB assets still have long-term investment value, these will provide fundamental support for the basic stability of the RMB exchange rate." Wang Chunying said.

The Industrial Research Research Report pointed out that the current foreign exchange settlement is in a wait-and-see situation, and the foreign exchange purchase has dominated the RMB exchange rate change. Until the relative fundamentals and cross-border funds are fundamentally reversed, the trend of USD/RMB appreciation will continue, but the rate may change. Considering that this round of the bull market for the US dollar index is nearing its end and the demand for unsettled foreign exchange is still large, the pressure on RMB adjustment is less than in the previous two rounds.

Pacific Securities believes that the short-term (second quarter) depreciation pressure still exists, and the depreciation to around 6.6 can stabilize. However, in the medium and long term (the second half of the year), the RMB may appreciate against the US dollar again, and the situation of two-way fluctuations will be eliminated throughout the year.

Zhou Maohua, a macro researcher at the Financial Market Department of China Everbright Bank, believes that the short-term fluctuation of the RMB exchange rate will not change the stable operation pattern, and the RMB is expected to fluctuate strongly in both directions near the equilibrium level. In the medium and long term, my country's financial services market has huge potential, and the trend of attracting foreign capital inflows with RMB assets remains unchanged.

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