Event: on December 9, Beijing time, the central bank raised the foreign exchange reserve ratio of financial institutions from 7% to 9%, and then the RMB spot exchange rate quickly depreciated from about 6.35 to about 6.38.
Core conclusion: the RMB exchange rate will remain strong in the short term. It will tend to depreciate in 2022, and the inflection point may be at the end of the first quarter.
1. The implementation mechanism, adjustment history and influence effect of foreign exchange deposit reserve ratio.
Implementation mechanism: the foreign exchange deposit reserve ratio refers to the proportion of foreign exchange deposits absorbed by financial institutions that need to be paid to the central bank as reserves, which has the same meaning as the conventional deposit reserve ratio. The central bank's increase in the foreign exchange deposit reserve ratio means that the ability of financial institutions to provide foreign exchange loans will be weakened, so as to reduce the foreign exchange supply, and finally raise the foreign exchange rate and lower the RMB exchange rate.
Adjustment history: in October 2004, August 2006 and May 2007, the central bank raised the foreign exchange deposit reserve ratio three times, from 2% to 5%, by 1 percentage point each time. Then, from 14 years to may 2021, the central bank raised the foreign exchange deposit reserve ratio again from 5% to 7%, and this time further from 7% to 9%.
Impact effect: as of November 2021, the scale of foreign exchange deposits of financial institutions was US $1.02 trillion, and the foreign exchange deposit reserve ratio was increased by 2 percentage points, which means that the foreign exchange liquidity of US $20 billion will be recovered directly. In contrast, according to bis statistics, the scale of global RMB and foreign exchange transactions reached US $285 billion in 2019, so the impact is limited. From the actual performance, after raising the foreign exchange reserve ratio for the past four times, the scale of foreign exchange deposits and loans of financial institutions has not been significantly affected, and the overall trend remains upward; After the increase in May 2021, the RMB exchange rate only depreciated slightly in the short term, and then continued to appreciate significantly. Therefore, the main purpose of this policy is to express the attitude of the central bank and guide market expectations, and its signal significance is far greater than the actual effect.
2. The recent continuous appreciation of the RMB is mainly due to the easing of Sino US relations and the deterioration of the global epidemic.
Sino US Relations: since the "811 foreign exchange reform" in 2015, the US dollar against RMB and the US dollar index have basically changed in the same direction, and there have been only two obvious deviations: the first is from early 2019 to April 2019, the US dollar index rose by 2.4% and the RMB appreciated by 2.8% against the US dollar; The second time since the beginning of October 2021, the US dollar index has risen by 3.1% and the RMB has appreciated by 1.7% against the US dollar. By analyzing the reasons behind it, it can be found that both deviations occurred against the background of the easing of Sino US Relations: at the beginning of 2019, China and the United States were once close to reaching the first stage trade agreement; In early October this year, US trade representative Dai Qi made a speech, saying that the tariff exemption procedure for China would be started.
Global epidemic: in the previous report, why is the RMB strong when the US dollar rebounds? Can it be sustained We have pointed out that the deterioration of the global epidemic will support the RMB exchange rate, which shows that the number of newly diagnosed covid-19 in the world is one month ahead of the RMB exchange rate. The logic behind it is that China's epidemic prevention and control ability is stronger, the economy is less impacted, and China's export share is expected to remain high. Since mid October, with the cold weather and the outbreak of Omicron virus, the global epidemic has worsened again, which has also promoted the appreciation of RMB to a certain extent.
3. Prospect of RMB exchange rate: it will remain strong in the short term and tend to depreciate in the whole year next year, and the inflection point may be at the end of the first quarter.
In the short term: in view of the fact that tariff exemption has not yet been implemented and Biden's 1.75 trillion "better reconstruction bill" has not been passed in the Senate, China US relations can still be optimistic in the short term. For the evolution path of the global epidemic, please refer to the performance after the outbreak of delta virus. Delta virus was first found in India in October 2020, and then the number of confirmed cases in the world increased rapidly, and did not begin to decline until mid January 2021. The infectivity of Omicron virus is significantly stronger than Delta, so it is expected that the global epidemic will worsen at least until February 2022. In addition, the recent rise of the US dollar index is too fast, significantly exceeding the fundamental performance, and there may be a correction in the short term.
Next year: in the previous report "year of reversal - Overseas macro outlook for 2022", we pointed out that the US dollar index is likely to rise in 2022, and the high point may break 100; At the same time, due to the demands of the mid-term elections, Biden is likely to take a tougher stance on China, and China US relations are more likely to tighten marginally in 2022. Considering that the global epidemic will not continue to deteriorate, China's monetary policy will remain independent and loose, and it is difficult for the RMB exchange rate to remain strong. To sum up, the RMB exchange rate is expected to remain strong in the short term, but for the whole year of 2022, the RMB exchange rate is likely to change from appreciation to depreciation. The inflection point may be at the end of the first quarter of 2022. The beginning of depreciation may have to wait for two major signals: one is that there are signs of tension between China and the United States, and the other is that the global epidemic begins to peak and fall.
Risk tip: the global epidemic eased more than expected, and China US relations evolved more than expected.
