Matters:
On the evening of April 25, in order to improve the utilization capacity of foreign exchange funds of financial institutions, the people's Bank of China decided to reduce the foreign exchange deposit reserve ratio of financial institutions by 1 percentage point from May 15, 2022, that is, the foreign exchange deposit reserve ratio from the current 9% to 8%.
Ping An View:
The reduction of the foreign exchange reserve ratio aims to stabilize the depreciation expectation of the RMB. It is a signal that the central bank may transmit the irrational fluctuation of the RMB to the outside world. This is similar to the people's Bank of China managing the unilateral appreciation expectation of the RMB by raising the foreign exchange reserve ratio in May and December 2021, which will help the RMB return to rational fluctuation and reduce the mutual contagion of the stock market and foreign exchange market.
Why reduce the foreign exchange reserve ratio at this time? Since April 18, the RMB exchange rate against the US dollar has continued to depreciate for five consecutive trading days, falling below the important levels of 6.4 and 6.5 to 6.56 from 6.37, with a depreciation range of 2.8%. The depreciation range in the offshore market is even greater. There have been continuous capital outflows in the stock market and bond market, and there have been continuous significant adjustments in the stock market. There is a strong contagion effect in the foreign exchange market and the stock market. Guiding the exchange rate to return to rational fluctuations will also help the smooth operation of the capital market.
Foreign exchange reserve ratio is one of the means for the central bank to deal with the irrational fluctuation of RMB. When the strong unilateral appreciation expectation of RMB appeared in May and December 2021, the people's Bank of China raised the foreign exchange reserve fund rate twice. The reduction of the foreign exchange reserve ratio also sends 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, compared with tools such as adjusting the middle price model, adjusting the foreign exchange deposit reserve ratio has a relatively small impact on the trading behavior of the foreign exchange market, which shows that the central bank still tends to use more market-oriented regulation tools for management. Third, the adjustment range is only 1 percentage point, which is lower than the previous increase, and the signal significance is heavier.
So why has the RMB weakened rapidly against the US dollar since April 18? We believe that the factors for the rapid weakening of the RMB in this round are more complex. The rapid adjustment of the capital market is the direct trigger for the devaluation of the RMB exchange rate. The rapid decline in the capital market triggered investors' concerns about China's economic and financial risks. The superposition of the US dollar index continued to reach a new high, increasing the pressure on the devaluation of the RMB. From past experience, the sharp adjustment of the capital market often leads to the sharp fluctuation of the RMB exchange rate, and the stock market and foreign exchange market have a strong contagion effect.
In addition, there are deeper fundamental factors that trigger the depreciation of the RMB exchange rate. The factors supporting the RMB exchange rate to remain strong in the past year and a half are gradually turning around.
