On December 9, 2021, the people's Bank of China announced to increase the foreign exchange reserve ratio of financial institutions by 2 percentage points. Its intention is very obvious, which is to curb the continuous appreciation of RMB. However, why is the RMB so strong this year?
There are two major deviations from the RMB exchange rate: (1) the deviation between the US dollar index and the RMB exchange rate. The strength of the US dollar index generally corresponds to the weakness of the RMB, and this time it is the strength of both; (2) the deviation between the relatively weak economy and the strong RMB exchange rate. The weak economy generally corresponds to the weakness of the exchange rate, and this trend is intuitively inexplicable.
The deviation between the US dollar and RMB exchange rate is caused by many reasons. First of all, the expectation of interest rate increase in the United States has increased significantly, resulting in a significant devaluation of the currencies of developed countries; Secondly, the more serious epidemic in Europe makes the euro weaker in the currencies of developed countries, and the euro has a great weight in the dollar index; In addition, China's trade surplus rose significantly after September, making the RMB exchange rate significantly stronger than other emerging market currencies.
The main reason for the deviation between the relatively weak economy and the strong RMB exchange rate is the combination of China's strict capital control and China's exceptionally strong export. On the one hand, China's strong export naturally leads to the strength of RMB; On the other hand, the weakness of China's economy will lead to the weakness of RMB. However, due to China's strict capital control in 2017, even if the economic weakness led to the depreciation pressure, the depreciation pressure could not be released normally to form a hedge. As a result, the strong appreciation caused by the current account covers the weak depreciation caused by the capital account.
Looking back, the RMB exchange rate highly depends on the changes of the global epidemic. If the global epidemic does not change greatly, China's exports will remain relatively strong and the RMB will remain strong. The increase in the foreign exchange reserve ratio will make the bottom line of the central bank explicit. As the central bank has absolute control over the RMB exchange rate, it is quite difficult for the RMB exchange rate to break through 6.3. If the global epidemic improves and China's exports fall, the RMB will depreciate naturally.
Risk tip: the global economic recovery is less than expected
