Market NewsThe central bank launched a heavy attack! The RMB is rising rapidly. What's the signal? The State Council also promotes important policies, how does it affect the stock market and foreign exchange market?Under the "double kill" of stock and foreign exchange, the RMB exchange rate depreciated rapidly against the US dollar, and the offshore exchange rate once fell below the 6.6 important mark, but the central bank "acted" more quickly.
On April 25, the offshore renminbi fell below the 6.6 mark against the dollar for the first time since November 2020, an intraday decline of more than 1 per cent, while the onshore renminbi fell as much as 900 points against the dollar at one point in intraday trading.
However, the central bank has also acted decisively to stabilize currency market expectations. Shortly after the offshore RMB exchange rate fell below the 6.6 barrier against the US dollar, the official website of the people's Bank of China announced that since May 15, the foreign exchange deposit reserve ratio of financial institutions will be lowered by 1 percentage point, that is, the foreign exchange deposit reserve ratio will be lowered from the current 9% to 8%.
This is the central bank's adjustment of the required reserve ratio for foreign exchange deposits after an interval of more than four months. Lowering the required reserve ratio of foreign exchange deposits is equivalent to releasing more US dollar liquidity supply to the market, which can reduce the depreciation pressure of RMB against the US dollar and help the exchange rate of RMB against the US dollar to remain basically stable at the equilibrium level. After the news, the offshore RMB exchange rate against the dollar quickly rose 200 points, breaking the 6.58 mark.
The rapid depreciation of the RMB against the US dollar on the 25th was driven by a sharp fall in the stock market on that day, but the recent sharp acceleration in the depreciation of the RMB exchange rate also reflects the increasing downward pressure on the domestic economy and the weakening of market expectations. a number of economists have recently called for some policy measures with quick results to increase support for stable growth to ensure economic growth back to more than 5% in the second quarter. Lay a solid foundation for achieving the target of economic growth for the whole year.
It is expected that a new round of measures to stabilize growth will be launched intensively in the near future. On April 25, the General Office of the State Council issued the opinions on further releasing consumption potential and promoting the sustained recovery of consumption (hereinafter referred to as "opinions"), introducing a series of measures to promote the orderly recovery of consumption.
Release about $10 billion in foreign exchange liquidity
The adjustment of the required reserve ratio of foreign exchange deposits is regarded as a reserve policy in the policy toolbox for the central bank to stabilize market exchange rate expectations. From the operation of the central bank in the past, generally speaking, when the exchange rate appreciates rapidly and sharply, the pressure of appreciation can be reduced by raising the required reserve ratio of foreign exchange deposits, and vice versa.
This is a move by the central bank to adjust the required reserve ratio for foreign exchange deposits more than four months later, against the backdrop of the rapid depreciation of the RMB against the US dollar since last week. On April 25, the offshore renminbi fell below the 6.6 mark against the dollar for the first time since November 2020, an intraday decline of more than 1 per cent, while the onshore renminbi fell as much as 900 points against the dollar at one point in intraday trading.
Wang Youxin, a senior researcher at the Bank of China Research Institute, told the Securities Times that the foreign exchange deposit reserve ratio is an important macro-prudential policy tool for cross-border capital flows. At present, when there are great changes in exchange rate prices and market sentiment, adjustment can play a good role in countercyclical, improve foreign exchange supply and demand situation, release policy signals, and stabilize exchange rate and market sentiment.
In fact, as a countercyclical control tool, the central bank raised the required reserve ratio for foreign exchange deposits twice in June and December last year, raising the required reserve ratio to 9 per cent from the previous 5 per cent. But unlike the current situation, last year's adjustment was more to control the excessive appreciation of the renminbi. At present, with the changes in the market situation, the RMB has changed from the appreciation stage to the adjustment stage, and the reduction of the required reserve ratio for foreign exchange deposits is also an integral part of the topic.
"the reduction of the required reserve ratio of foreign exchange deposits can release the previously locked foreign exchange liquidity to the market and increase the supply of foreign exchange in the market, thus controlling the appreciation of foreign exchange and alleviating the pressure of RMB depreciation." Wang Youxin, at present, the main body of China's market foreign exchange deposits are about 1 trillion US dollars, and a 1 percentage point reduction in the deposit reserve ratio will release about 10 billion US dollars in foreign exchange liquidity, compared with the previous adjustment of 2 percentage points. The signal significance of the current policy change is stronger.
RMB exchange rate will gradually return to steady fluctuation
As for the reasons for the recent rapid depreciation of the RMB against the US dollar, although it is driven by the strengthening of the US dollar index, many analysts believe that the recent depreciation of the RMB against the US dollar is greater than the rise of the US dollar index. and the RMB exchange rate against a basket of currencies has also depreciated, indicating that the recent depreciation of the RMB exchange rate is more driven by domestic factors.
A foreign exchange trader at a bank in the South told the Securities Times brokerage Chinese reporter that since last week, the guest trading volume in the foreign exchange market has been enlarged, and the current settlement and purchase of foreign exchange have been magnified. Foreign exchange settlement is mainly the continuous release of demand for high foreign exchange settlement by market entities such as export enterprises. Since March, the fundamentals of the domestic economy have been weighed down by triple pressure, coupled with the spread of the epidemic, increasing downward pressure on the economy and a decline in export growth, requiring the exchange rate to show flexibility.
However, although the depreciation of the RMB exchange rate has accelerated since last week, even at the current level, the RMB exchange rate still looks strong. The CFETS renminbi exchange rate index, which reflects the exchange rate of the renminbi against a basket of currencies, remained at around 104 as of April 22, up about 1.7 per cent from the start of the year.
Looking forward to the trend of RMB exchange rate after this year, many analysts point out that in the cycle of rapid appreciation of the US dollar, it is difficult for RMB to be left alone, and there is still some room for RMB exchange rate depreciation, but there is no basis for substantial devaluation. it is difficult to form a sustained unilateral depreciation trend.
Wang Chunying, deputy director of the State Administration of Foreign Exchange and spokesman, also said recently that in recent years, the RMB exchange rate has been increasingly flexible, releasing external pressure in a timely and effective manner, market expectations remain stable, and foreign exchange market transactions are rational and orderly. At present, the main body of domestic foreign exchange deposits are more than 700 billion US dollars, which is also an all-time high. Enterprises usually choose the opportunity to settle foreign exchange, and the rational trading behavior of "settling foreign exchange at high prices and buying foreign exchange at low prices" can effectively stabilize part of the exchange rate adjustment and contribute to the overall stability of the RMB exchange rate and the smooth operation of the foreign exchange market. In addition, from the current RMB to foreign exchange forwards and options and other derivatives related indicators, there is no obvious implicit appreciation or depreciation expectations.
Wang Youxin also said that the current market expectations and mood changes are important variables affecting the financial market. Judging from the pace and effect of policy adjustment in the past, the introduction of policies will play an important role in stabilizing market expectations. In addition to the foreign exchange deposit reserve ratio, China also has macro-prudential adjustment tools such as the foreign exchange risk reserve ratio for forward foreign exchange sales, macro-prudential adjustment parameters for overseas lending by enterprises, and cross-border financing leverage ratio. it is expected that the sharp depreciation of the RMB exchange rate will be controlled, and the RMB exchange rate will gradually return to orderly and stable fluctuations.
No matter how intensive the policy of stabilizing growth is, the State Council will also step in.
In the long run, changes in exchange rates reflect changes in economic fundamentals. The recent marked acceleration in the devaluation of the RMB exchange rate also reflects the increasing downward pressure on the domestic economy and the weakening of market expectations, and a number of economists have recently called for some policy measures with quick results.
Wang Yiming, member of the Monetary Policy Committee of the people's Bank of China and former deputy director of the Development Research Center of the State Council, said that it is urgent to stabilize the macroeconomic market. At present, the epidemic can be effectively controlled, especially in early May. And implement stronger macro policies to hedge the impact of the epidemic, so that economic growth can return to more than 5% in the second quarter. It is particularly important to lay the foundation for achieving the expected economic growth target of 5.5% for the whole year. In order to actively and effectively expand domestic demand, the next step in expanding consumption can consider providing more direct subsidies to low-income groups, especially families in need.
According to the State refers to the report, Yang Weimin, member of the standing Committee of the CPPCC National Committee and vice chairman of the Economic Committee, also said that at present, some policies and measures with quick results should be more focused and targeted to increase support for stable growth, such as more scientific and accurate epidemic prevention, financial support to low-income groups to expand consumption, and so on.
Analyst Wu can said that in the short term, the reduction in the required reserve ratio for foreign exchange deposits has increased foreign exchange liquidity and helped to ease the pressure on the devaluation of the RMB. In the medium to long term, maintaining China's stable economic growth is a key factor in the stability of the exchange rate. Whether we can effectively control the epidemic, change the expectation of weakening as soon as possible, promote consumption and increase supply are the core factors to change the expectation of RMB exchange rate.
It is expected that a new round of measures to stabilize growth will be launched intensively in the near future. On April 25, the General Office of the State Council issued opinions on further releasing consumption potential and promoting sustainable recovery of consumption (hereinafter referred to as "opinions"), introducing a series of measures to promote the orderly recovery of consumption.
- The "opinions" set out to promote the recovery of consumption from many aspects, such as promoting the orderly recovery and development of consumption, making efforts to stabilize the basic market of consumption, improving the support system, and continuously deepening reform and strengthening safeguard measures.
- The "opinion" points out that efforts should be made to stabilize the basic market of consumption. We will actively promote the upgrading and upgrading of physical consumption, strengthen efforts to promote the consumption of services such as healthy old-age care and care, continue to expand cultural and tourism consumption, vigorously develop green consumption, and fully tap the consumption potential of counties and townships. Scientific planning and construction of a number of suburban Dacang bases with warehousing, sorting, processing, packaging and other functions in large and medium-sized cities.
- Focusing on cars and household appliances, we will guide enterprises to carry out sales promotion in rural areas, encourage areas with conditions to carry out new energy vehicles and green smart home appliances to the countryside, and promote the construction of supporting facilities such as charging piles (stations). We will steadily increase the consumption of automobiles and other bulk consumption, and no new restrictions on the purchase of cars shall be allowed in all regions. in areas where restrictions have been implemented, the number of incremental indicators of cars will be gradually increased, and the restrictions on the qualifications of car buyers will be relaxed.
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