event:
Central bank: from December 15, 2021, the foreign exchange deposit reserve ratio of financial institutions will be increased by 2 percentage points, that is, the foreign exchange deposit reserve ratio will be increased from the current 7% to 9%.
comment:
The central bank raised the foreign exchange deposit reserve – its attitude towards the exchange rate changed from neutral to easing the pressure of unilateral appreciation. The foreign exchange reserve is the reserve that commercial banks pay in US dollars or denominated in Hong Kong dollars to the foreign currency reserve account of Bank Of China Limited(601988) (non people’s Bank of China) according to the scale of foreign currency deposits on the liability side. The purpose of raising the foreign exchange deposit reserve is to limit the foreign currency expansion capacity of financial institutions. The higher the reserve ratio, the less foreign currencies can be circulated in the market as a whole, and the foreign exchange rate is relatively stronger, so as to alleviate the pressure and expectation of unilateral appreciation of the RMB exchange rate in the near future.
The last round of increase in foreign exchange deposit reserve was a turning point at the monthly level, but the RMB remained strong throughout the year. On May 31, 2021, the central bank announced that the foreign exchange reserve ratio of financial institutions would be increased by 2 percentage points to 7% from June 15. From the performance at that time, the RMB exchange rate depreciated by about 2% in a month. In addition to the attitude of the Central Bank of China, there were also factors such as the sharp decline in the number of new diagnoses in the United States, the strengthening of the US dollar and the narrowing of the Sino US trade deficit. Further, after the devaluation of RMB in June 2021, combined with the offshore onshore RMB exchange rate difference, the central bank did not release more signals and willingness to regulate the exchange rate.
From the analysis of influencing factors, the RMB will enter the shock stage from now to the first quarter of 2022. From the perspective of fundamentals, the RMB is still strong: first, the impact of China US interest rate spread on the RMB is neutral. The United States is expected to announce the resolution to accelerate taper at the interest rate meeting on December 16. However, at present, the market has priced two interest rate increases in 2022, so it is difficult for the nominal US bond interest rate to have an obvious upward trend. China’s interest rate still maintains a range shock after the central bank’s RRR reduction. 2、 The economic expectation gap is slightly favorable for the RMB. With the approaching of the central economic work conference, China’s stable growth expectation is heating up, while the loan balance of financial institutions and the stock of social financing scale in November are basically flat, and the credit has not been significantly strengthened. 3、 Net exports are good for RMB. Under the background of the rebound in the number of new diagnoses in overseas covid-19 and the strong performance of foreign demand, China’s exports are expected to remain resilient in the short term. The recent high-frequency freight rate data of various routes in Shanghai and port container throughput also point to the conclusion that exports remain strong. However, it is expected that the recent statement of the government will offset the room for further appreciation of the RMB. The statement of the Central Bank of China is very important to the trend of the RMB exchange rate. Although the signal significance of the increase in the foreign exchange reserve is greater than the actual effect, if the RMB further appreciates, the central bank will also have counter cyclical adjustment factors, government window guidance and other policy tools, Therefore, we believe that the current round of RMB appreciation will come to an end.
The short-term RMB does not have the basis for substantial depreciation. Subsequent Chinese exports and official statements determine the short-term trend of RMB. On the one hand, factors such as overseas epidemic and strong external demand will still support China’s exports until at least the first quarter of 2022; On the other hand, it is expected that the government will not strongly intervene in exchange rate fluctuations. Referring to the experience of the previous round, as long as the appreciation trend of RMB exchange rate stops, the central bank will not adopt further regulatory policies. Therefore, we judge that the RMB will continue the shock trend until the first quarter of next year. On the premise that we have not seen the peak decline of overseas economy and the overseas epidemic is clearly under control, we do not rule out the possibility of a new high in the stage of RMB exchange rate adjustment. Looking forward to 2022, we believe that the inflection point of the RMB exchange rate appreciation trend needs to see several major signals: first, the trend of China’s exports has fallen (expected after March 2022); second, the US bond interest rate has further increased (expected in July 2022 or even later).
