When the exchange rate depreciated rapidly, the central bank took the initiative to stabilize the exchange rate. The central bank decided to reduce the foreign exchange reserve ratio of financial institutions by 1 percentage point from May 15, releasing an obvious signal of stabilizing the exchange rate. The mechanism is that reducing the foreign exchange reserve ratio will release some foreign exchange liquidity, increase the supply of US dollars in the foreign exchange market, and improve the willingness and ability of financial institutions to sell foreign exchange, so as to alleviate the pressure of RMB devaluation. This adjustment will release foreign exchange liquidity of about US $10 billion.
The current round of RMB exchange rate depreciation is the result of a series of factors reversed at the same time. First, the US monetary policy is significantly tighter than that of China, and the interest rate gap between China and the United States has been reversed; Second, since 2022, the pressure of capital outflow has increased and the direction of capital flow has been reversed; Third, the export growth rate in 2022 may be high before and low after, and the export support will be reversed; Fourth, China's leading comparative advantage in epidemic prevention and control was broken in 2022, and the fundamentals were reversed.
The central bank has many tools to stabilize the exchange rate, and it is difficult for the exchange rate depreciation to get out of control. The sharp depreciation and continuous depreciation of the RMB exchange rate is not the desired result, and the high RMB exchange rate is not the desired result. A small and slow depreciation seems to be the most friendly result for all aspects, which is conducive to promoting exports without causing relevant financial risks. Considering that the long-term advantages of China's economy have not changed and the strong regulation ability of the central bank, we have reason to believe that the situation of uncontrolled exchange rate depreciation is difficult to appear.
Risk factors: the epidemic situation worsened again, and the policy promotion was not as expected.
