matter:
In order to strengthen the management of foreign exchange liquidity of financial institutions, the people's Bank of China has decided to increase the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points from December 15, 2021, that is, the foreign exchange deposit reserve ratio will be increased from the current 7% to 9%.
Ping An View:
During the year, the people's Bank of China raised the foreign exchange reserve ratio for the second time in order to stabilize the expectation of unilateral appreciation of the RMB and slow down the inflow of short-term capital. Under the condition that the overall balance of payments pattern is still relatively stable, the RMB will not depreciate significantly, and the two-way fluctuation of RMB in the short term will increase.
Why raise the foreign exchange reserve ratio at this time? Since the second half of the year, the performance of RMB has remained strong against the background of the sharp appreciation of the US dollar, and the RMB CFETS exchange rate has appreciated significantly by 4.8%. At the end of the year, with the arrival of the peak demand for foreign exchange settlement, there was a strong demand for RMB in the foreign exchange market. In the past two days, the RMB spot exchange rate rose above 6.35, reaching a new high since May 2018. Meanwhile, the northward capital inflow in the stock market is significant. On December 9, the northward capital inflow into A-Shares exceeded 20 billion, further boosting the appreciation of RMB. At present, there is a strong expectation of unilateral appreciation of RMB in the market. This is similar to the background of raising the foreign exchange deposit reserve for the first time in the year at the end of May.
The foreign exchange reserve ratio is one of the means for the central bank to deal with the rapid appreciation of the RMB. Raising the foreign exchange deposit reserve ratio will help to recover the foreign exchange liquidity of the banking system, and financial institutions will reserve more foreign currency liquidity for surrender, so as to curb the ability of banks to lend foreign currency loans. When there is an expectation of continuous appreciation of RMB, the demand for foreign currency credit of enterprises will increase, the demand for us dollar will increase, the US dollar credit will be reduced, and the domestic foreign currency interest rate will rise, which can inhibit the trading behavior of long RMB to a certain extent. After the news came out, the offshore RMB fell 200bp against the US dollar in the short term, and the RMB exchange rate depreciated rapidly.
The adjustment of the foreign exchange deposit reserve ratio has also sent the following signals to the market: first, the obvious overshoot of the exchange rate is not allowed, and the rapid appreciation and depreciation of the RMB are not the policy hope. Second, it strengthens the authenticity of expectation management. The third quarter monetary policy implementation report issued by the central bank and the eighth working meeting of the national foreign exchange market self-discipline mechanism stressed the need to strengthen the management of foreign exchange expectations; Third, compared with the adjustment of the median price model and other tools, the adjustment of the foreign exchange deposit reserve ratio has a relatively small impact on the trading behavior of the foreign exchange market, which shows that on the one hand, the central bank still tends to use more market-oriented control tools for management, on the other hand, the central bank does not want to completely reverse the current appreciation expectation into depreciation expectation, The two-way fluctuation of exchange rate is the normal change of RMB in the future.
Why is the RMB strong? After the epidemic, China's economic recovery showed a typical "asymmetry". Since the second half of the year, the downward pressure on China's economy has gradually become prominent, but it mainly comes from investment and consumption of domestic demand. The foreign sector has maintained a high boom, which is reflected in the rising surplus of trade in goods, the narrowing deficit of trade in services, and the high surplus of FDI and securities investment, which is the reason why the RMB exchange rate has been relatively strong
