Core view
In March 2022, China's official foreign exchange reserve was 318799 billion US dollars, a decrease of about 25.837 billion US dollars month on month. The data fell mainly due to valuation factors, especially the sharp rise in the yield of government bonds of major economies. On the whole, China's balance of payments maintained a basic balance. Affected by the risk aversion driven by the crisis in Ukraine and the tightening expectation of the Federal Reserve, the US dollar index rose to a new high in March, the RMB exchange rate declined against the US dollar as a whole, and the CFETS RMB exchange rate index rose first and then fell in the month. Recently, the interest rate gap between China and the United States has narrowed continuously, and it has dropped to 16bp as of April 6. The market is worried about two core issues: whether the RMB exchange rate will bear the pressure of substantial depreciation and whether it will disturb the loose rhythm of China's monetary policy. We think it will not be in the short term, but in the second quarter as a whole, the fluctuation range of the RMB exchange rate may be larger than that at present, suggesting that the balance of payments has entered the observation period in the second quarter.
The month on month decline of external reserves was mainly dragged down by valuation factors, and the balance of payments remained basically stable
In March, China's official foreign exchange reserve was 318799 billion US dollars, a decrease of about 25.837 billion US dollars month on month. Although the scale fell below 3.2 trillion US dollars, the data fell mainly due to valuation factors, especially the sharp rise in the yield of government bonds of major economies. On the whole, China's balance of payments maintained a basic balance. In March, the dollar index rose to 98.4 from 96.7 at the end of February; The pound fell 1.9% to 1.31 against the US dollar from 1.34 at the end of February, and the euro fell 1.2% to 1.1 against the US dollar from 1.12 at the end of February. The impact of exchange rate changes of non US currencies on foreign reserves in March was about - 20 billion US dollars; Affected by the Russian Ukrainian crisis, global commodity prices rose sharply in March, global inflation expectations rose, and bond yields of major economies rose significantly. In March, the yield of five-year US bonds rose by 71bp to 2.42%, the yield of five-year UK bonds rose by 14bp to 1.42%, and the yield of five-year German bonds rose by 51bp to 0.40%. The fluctuation of bond yield has an impact on foreign reserves of about - 70 billion US dollars. On the whole, The comprehensive impact of valuation factors on foreign reserves has been about US $90 billion. Therefore, if the valuation factors are excluded, the external reserves still show positive growth month on month, which is a continuation of the data characteristics since August 2021, or still reflects the positive support of China's trade surplus and capital inflow. The balance of payments data show that the foreign exchange reserves excluding the impact of valuation factors have maintained growth from the second quarter of 2020 to the fourth quarter of 2021, And the increase in 2021 has expanded, which fully verifies the above view.
In March, the RMB exchange rate depreciated, but maintained a two-way fluctuation trend
Affected by the risk aversion driven by the Ukrainian crisis and the tightening expectation of the Federal Reserve, the US dollar index rose to a new high in March. Among them, the monthly high reached 99.3 on March 7. With the normalization of the conflict, the US dollar index fell slightly in the middle of the month and fell to 98.1 on the 17th. After that, it rebounded again under the influence of the scheduled interest rate increase of the Federal Reserve's interest rate meeting and the more than expected hawkish statement, and closed at 98.4 at the end of the month. Affected by the Russian Ukrainian crisis, the rise of the US dollar and the rising uncertainty of the epidemic in China, the RMB exchange rate against the US dollar declined as a whole in March, closing at 6.34 from 6.31 at the end of February. Among them, affected by the short-term outflow of overseas funds caused by the Russian Ukrainian crisis, the RMB devalued significantly on March 14 and 15, which occurred simultaneously with the significant adjustment of Hong Kong stocks and a shares. However, since then, the capital outflow has eased and the volatility of the capital market has also decreased significantly. The CFETS RMB exchange rate index rose first and then fell in the month, reaching a historical peak of 106.8 on the 11th and closing at 104.3 at the end of the month.
The interest rate gap between China and the United States has narrowed significantly. It is expected that the RMB exchange rate will fluctuate in both directions, and the balance of payments will enter the observation period in the second quarter
In March, the yield of US bonds rose sharply, and the interest rate difference between China and the United States continued to narrow, from 95bp at the end of February to 47bp at the end of March, which also posed a certain depreciation pressure on the RMB. As of April 6, the interest rate difference had further narrowed to 16bp. The two core concerns of the market are whether the RMB exchange rate will bear the pressure of substantial depreciation and whether it will disturb the loose rhythm of China's monetary policy. We don't think it will be in the short term.
From historical experience, 80-90bp is generally regarded as the acceptable level of interest rate spread between China and the United States. For example, in April 2018, when the interest rate gap between China and the United States dropped to 80-90bp, the RMB exchange rate began to face some depreciation pressure. However, we believe that the desirable range of interest rate gap between China and the United States also varies according to the macroeconomic situation, which is not applicable at present. In the short term, supported by strong expectations of stable growth of China's policies, large space for countercyclical regulation, trade surplus and capital inflow, the RMB exchange rate is expected to show resilience, The probability of two-way fluctuation is high.
For monetary policy, the Federal Reserve officially started raising interest rates in March. At present, the market expectation of continuous interest rate hikes is still strong, but it is expected that the short term will have little impact on the easing rhythm of China's monetary policy. At present, there is still great pressure on China to stabilize growth and maintain employment. The overall policy tone is clear. At this time, the monetary policy will still take steady growth as the primary goal and maintain steady and slightly loose, mainly reflected in the wide credit, even if the exchange rate depreciates periodically, It can also play the role of internal and external automatic balancer and leave room for China's loose policy. The impact of the Fed's interest rate hike on China's monetary policy lies in the choice of tools. Considering the phased pressure on the interest rate difference between China and the United States, the Central Bank of China will probably not cut interest rates, and the impact of the epidemic on China's economic fundamentals is still uncertain. We believe that the monetary policy tools are biased towards the reduction of reserve requirements in the second quarter. In addition to the constraints of overseas factors, the focus of RRR reduction is to broaden credit, and the focus of interest rate reduction is to reduce costs. The latter is not the current core demand, but also the reason why the central bank will not cut interest rates.
In the second quarter as a whole, the fluctuation range of RMB exchange rate is expected to increase compared with the current one. We suggest that the balance of payments will enter the observation period in the second quarter.
In 2022, the probability of US dollar is high before and low after. It is expected that the RMB exchange rate will appreciate to 6.1 in the second half of the year
For the trend of the US dollar, there is still upward space driven by tightening sentiment in the short term, and the peak may exceed US $100. In the second half of the year, the interest rate hike was not as strong as expected and the downward pressure on the US economy resonated (the European replenishment will also lag behind the start of the US). The US dollar index is expected to return to the downward channel and return below 95. For the RMB exchange rate, China's fundamental and counter cyclical policies have strong support, and it is expected to maintain two-way fluctuations at a reasonable and balanced level. For the whole year of 2022, with the U.S. dollar turning downward and China's economic fundamentals relatively strong, the RMB exchange rate is expected to appreciate to 6.1 in the second half of the year. In the medium and long term, we insist that the RMB will gradually appreciate against the US dollar. In the medium and long term, the long-term trend of RMB against the US dollar is closely related to the US dollar cycle. The US dollar cycle depends on the comparison of production factors in the United States and emerging markets. China's labor factors have a slight advantage over the technology and capital factors of the United States, which determines that the medium and long-term RMB is a gradual appreciation trend against the US dollar. It is expected that the RMB will continue to appreciate against the US dollar for about 8 years.
Gold reserves remained flat and remained bullish for a long time
In March, the gold reserve was 62.64 million ounces, which remained unchanged from the previous value. In the short term, the Ukrainian crisis boosted the demand for gold hedging, and the gold price rose sharply. On March 7, it has surged above US $2000 / ounce. However, since then, the gold price has adjusted downward due to the high volatility of the US dollar and the rise of real interest rates. The short-term play of the hedging property of gold price and the sharp rise of gold price are in line with our early judgment; After the conflict is gradually normalized, it is expected to pull back from the current high level. However, we are still optimistic about gold throughout the year, especially the decline of the second half of the US dollar will drive the gold price higher. Throughout the year, we believe that the London gold price will exceed US $2000. In the long run, the long-term downward trend of interest rates and the long-term weakening trend of the US dollar will still benefit the gold price.
Risk tip: the uncertainty of China's epidemic continues to rise, the economic fundamentals are under significant pressure, the interest rate gap between China and the United States is narrowed, and the depreciation of RMB exchange rate and capital outflow strengthen each other, resulting in the risk of balance of payments imbalance.
