From April 19 to 22, the RMB exchange rate was only 6.37, rapidly falling below 6.5, the largest weekly decline since 2018. On the 25th, the exchange rate continued to depreciate sharply, while the Shanghai index fell below 3000 points, down more than 5%. That night, the central bank lowered the foreign exchange reserve ratio of financial institutions by 1 percentage point. On the 26th, the exchange rate stopped falling and rebounded, but the Shanghai Composite Index fell further below 2900 points.
I. three characteristics of the current round of RMB exchange rate depreciation
1. The depreciation began in early March and has accelerated significantly since April 19. On March 2, the RMB exchange rate rose to 6.31 of this round's high, and then began to depreciate. It fell to 6.37 on April 18, and then accelerated its depreciation, falling below 6.5 on April 22.
2. This round of depreciation is driven by offshore and onshore. Since March, the US dollar index has continued to strengthen, the interest rate gap between China and the United States has narrowed rapidly, and the pressure of RMB exchange rate depreciation has increased significantly. The offshore market is less regulated, the depreciation pressure is released more fully, the exchange rate difference in the offshore non onshore market continues to expand, and drives the depreciation of the onshore RMB exchange rate.
3. Whether the exchange rate is the result or the cause of the decline of both stocks and bonds. During the week from April 18 to 22, the Shanghai Composite Index and gem index fell by 3.87% and 6.66% respectively, the yield of 10-year Treasury bonds rose by 8.3 BP, and the RMB exchange rate depreciated by 1.83%. The rapid depreciation of the RMB exchange rate in this round is more due to the rebound of China's epidemic, which has impacted the logistics and supply chain. The weakening of market expectations has led to the decline of China's asset prices, and the depreciation of the exchange rate caused by short-term cross-border capital outflow.
Why did the RMB exchange rate accelerate its depreciation at this time point?
1. The rebound of China's epidemic has impacted exports, and the supporting role of exports on the exchange rate has weakened. Since March, the epidemic situation in China has rebounded and the prevention and control has become stricter, which has had a serious impact on logistics and supply chain, and then affected the production and export of enterprises. In March, the manufacturing PMI new export order index was 47.2%, down 1.8 percentage points from the previous value; In mid April, the foreign trade container throughput of the eight hub ports decreased by 4.1%.
2. Short term cross-border capital outflow and increase the pressure of exchange rate depreciation. China's overseas bond holdings decreased by US $16.6-2 billion for two consecutive months this year. From March to April (as of the 25th), the total net sale of A-Shares by northbound capital was 48 billion yuan (about 7.5 billion US dollars).
3. Market confidence is low, and the upside down interest rate spread between China and the United States may become the fuse. Under the background of weakening export settlement and increasing capital outflow, the RMB exchange rate is in a weak balance. A slight fluctuation in the market may lead to rapid depreciation. The superimposed epidemic has had a serious impact on the economy and people's livelihood, the performance of the capital market is weak, and the market expectation is weaker, which will further amplify the market volatility. From April 18 to 22, there was no obvious impact of external information. The upside down of interest rate difference between China and the United States may be the trigger for the further decline of market confidence and the simultaneous decline of stocks and bonds.
III. The current round of RMB exchange rate may be reduced to 6.8-7.0
In terms of the ratio between the US dollar and the RMB exchange rate and the US dollar index, it has basically remained in the range of 6.7% - 7.3% in history. As the exchange rate deviated sharply from the historical range of 3.6%, the exchange rate continued to rise sharply.
As the Federal Reserve accelerates the tightening of monetary policy, the dislocation of monetary policies in the United States, Europe, the United States and Japan intensifies, and the dollar index may further rise to 102105. Assuming that the ratio of the US dollar to the RMB index returns to 6.7% at the lower edge of the range, the RMB exchange rate will be reduced to 6.8-7.0, which does not rule out the possibility of breaking 7.
IV. the advantages of moderate depreciation of exchange rate outweigh the disadvantages, but we should prevent the risks caused by excessive depreciation
1. The market's concerns about the devaluation of RMB exchange rate mainly lie in: first, it may exacerbate capital outflow and lead to further decline in China's asset prices; The first thing is that the import cost is rising, increasing the pressure of imported inflation; Third, it restricts China's monetary policy and limits the space for policy relaxation; Fourth, increase the pressure on foreign debt repayment and trigger foreign debt risk.
2. Moderate exchange rate depreciation will effectively alleviate the current downward pressure on the economy: first, it is conducive to promoting exports. At present, the exchange rate of RMB against a basket of currencies is at a high level and the export competitiveness is weakened; It is beneficial to increase the profits of export enterprises. After the devaluation of the RMB exchange rate, the same amount of foreign exchange can get more RMB when settling foreign exchange; Third, it is conducive to relaxing China's monetary environment. On the premise that depreciation does not lead to capital outflow and monetary policy is forced to tighten, on the one hand, enterprises will directly generate more money by settling foreign exchange with commercial banks; On the other hand, the settlement of foreign exchange by commercial banks to the central bank will produce more base money, which will improve the credit supply capacity of commercial banks.
3. The central bank took action to prevent the rapid depreciation of the exchange rate, and the policy toolbox is still sufficient.
On April 25, the people's Bank of China announced that from May 15, 2022, it would reduce the foreign exchange reserve ratio of financial institutions by 1 percentage point.
What the central bank intervenes in is not the specific point of RMB exchange rate depreciation, but to prevent the risk caused by its rapid depreciation. The central bank is worried that the exchange rate will not form a downward spiral in China's asset prices, causing financial risks. In terms of policy, the signal is more meaningful than the actual effect. On April 26, both onshore and offshore RMB exchange rates stopped falling and rebounded. The policy statement of the central bank strengthened market confidence.
In the process of the exchange rate returning to equilibrium, the central bank has sufficient policy tools to prevent the risk caused by the rapid depreciation of the exchange rate. 1) The foreign exchange deposit reserve ratio can be further lowered to release the liquidity of the US dollar; 2) Raise the foreign exchange risk reserve ratio for advance sales of foreign exchange and increase the cost of enterprises' advance purchase of foreign exchange; 3) The "counter cyclical factor" is used in the RMB central parity pricing mechanism to appropriately hedge the pro cyclical sentiment in the direction of depreciation; 4) Increase the issuance scale of central bank bills in the offshore market and tighten the RMB liquidity in the offshore market; 5) Strengthen the supervision of cross-border capital flows; 6) Use foreign exchange reserves to properly intervene in the market.
However, the top priority is to coordinate the prevention and control of the epidemic, ensure the smooth logistics, ensure the stability of the industrial chain and supply chain in key areas, and stabilize production and export. At the same time, policies have been pushed forward, fiscal and monetary policies have been more active, real estate regulation has been further relaxed, and efforts have been made to achieve the annual economic growth target of 5.5%. As long as China's economy develops steadily and healthily, the RMB exchange rate will naturally remain basically stable at a reasonable and balanced level.
Risk tip: the rebound of the epidemic exceeded expectations, and the tightening of monetary policy of the Federal Reserve exceeded expectations
