Events
In order to improve the ability of financial institutions to use foreign exchange funds, the people's Bank of China has 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 will be reduced from the current 9% to 8%. (people's Bank of China)
Comments
Improve foreign exchange liquidity in the market and hedge the pressure of RMB exchange rate depreciation. In March, the Federal Reserve raised interest rates, and according to the minutes of the Federal Reserve's interest rate meeting in March, in order to curb high inflation, the Federal Reserve will also accelerate the pace of tightening monetary policy and speed up the contraction and increase of interest rates. Due to the tightening of the Fed's monetary policy, the interest rate gap between China and the United States narrowed, and China's monetary policy space was also limited to some extent. The tightening of the monetary policy of the Federal Reserve and the conflict between Russia and Ukraine have led to a significant outflow of foreign capital from China in the short term, which has brought pressure on the devaluation of the RMB. With the weakening of export toughness, the appreciation of the RMB is also unsustainable.
The central bank's reduction of the foreign exchange reserve ratio of financial institutions this time can not only increase the foreign exchange supply in the market, but also hedge the depreciation pressure of the RMB exchange rate. When the expectation of RMB devaluation is strong, the central bank will often raise the foreign exchange risk reserve ratio to convey to the market the policy intention of the central bank that it does not want the RMB to depreciate further. When the exchange rate fluctuates greatly, the people's Bank of China will reduce the foreign exchange deposit reserve ratio of financial institutions, which will release a strong signal of stability to the foreign exchange market. After that, the RMB is expected to return to the basic stability at a reasonable equilibrium level.
Although China's economy is being impacted by many uncertain events outside China and the economy is facing great downward pressure, the good momentum of China's economy remains unchanged. First of all, China's consumption still has great potential. At present, it is mainly disturbed and weakened by the epidemic. With the improvement of the epidemic situation, driven by the consumption policy, China's consumption still maintains a gradual recovery trend. Secondly, China's macro policy will also focus on steady growth. It is expected that the pace of special debt will accelerate, infrastructure investment will also accelerate, and the real estate regulation will continue to relax under the urban implementation policy. China's economic growth shows a trend of low before high. At present, China's exports are still resilient, and the foreign exchange inflow brought by the trade surplus has hedged the depreciation of the RMB to a certain extent. In the medium and long term, there is no basis for substantial depreciation of the RMB exchange rate, and the flexibility of the RMB exchange rate is expected to further increase.
Risk tips: the overseas epidemic fluctuates more than expected, the downstream demand is less than expected, and the monetary policy changes.
