Event: on April 25, 2022, 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 was reduced from the current 9% to 8%.
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Release the pressure of foreign exchange depreciation and hedge the liquidity of RMB. According to the regulations on the administration of foreign exchange reserve of financial institutions, the foreign exchange reserve is the reserve that commercial banks pay in US dollars or denominated in Hong Kong dollars to the foreign exchange reserve deposit account opened by the central bank in domestic Chinese funded commercial banks according to the scale of foreign currency deposits at the liability side and the proportion of reserve ratio. The main purpose of foreign exchange reserve reduction is to enhance the capacity of foreign exchange financial institutions. The lower the reserve ratio, the more foreign currencies that can circulate in the market as a whole, the weaker the foreign exchange rate and the stronger the RMB exchange rate. This time, the central bank lowered the foreign exchange reserve ratio by 1 percentage point, which can effectively release the foreign exchange supply, improve the foreign exchange liquidity of the market and hedge the recent unilateral downward pressure of the RMB. At present, the balance of foreign exchange deposits of China's financial institutions is about US $1.05 trillion. Reducing the foreign exchange reserve rate by 1% will release about US $10.5 billion in foreign exchange. In addition, reducing the foreign exchange reserve ratio will help to relax the liquidity constraints of foreign exchange loans of commercial banks, so as to encourage banks to increase foreign exchange loans, increase the foreign exchange supply of physical departments and hedge the pressure of RMB exchange rate depreciation.
For the first time, the foreign exchange reserve ratio was lowered, and the signal of stabilizing the exchange rate policy was obvious. In recent years, the central bank has adjusted the foreign exchange reserve ratio four times, including an increase of 1 percentage point in September 2006, 1 percentage point in May 2007, 2 percentage points in June 2021 and 2 percentage points in December 2021. This is the first time to reduce the foreign exchange reserve rate, and the signal of stabilizing the exchange rate is significant. Since the RMB exchange rate was not market-oriented before the "811" exchange rate reform in 2015 and the volatility was small, we focused on the impact on the exchange rate after the two increases in 2021. Specifically, after the announcement of the first increase in the foreign exchange reserve ratio in May 21, it had little impact on the RMB exchange rate in the short term, but the RMB depreciated more one month later, and the US dollar rose 1.4% against the RMB one month. In addition to the impact of the central bank's policies, the sharp depreciation of the RMB in that month was mainly due to the improvement of the epidemic in the United States, the continuous strengthening of the US dollar index and the narrowing of the Sino US trade deficit. After the announcement of raising the foreign exchange reserve ratio again in December 21, the short-term impact on the RMB exchange rate was more obvious. The exchange rate of the US dollar against the RMB rose by 0.32% the next day and 0.34% within one week, but there was no significant impact after one month. Combined with this announcement, after the reduction of the foreign exchange reserve ratio, the exchange rate of the US dollar against the RMB fell and the RMB appreciated in the short term; We believe that reducing the foreign exchange reserve ratio will help alleviate the trend of RMB devaluation in the short term, but the exchange rate trend is still dominated by the internal and external environment in the long term. The policy helps to control the rhythm, but it is difficult to change the direction.
The pressure of short-term RMB devaluation will continue. At present, the US tightening policy is upgraded. At present, the market is expected to raise interest rates by 50bp and shrink the table at the meeting in May; The upside down trend of China US interest rate spread since April 11 has led to a large amount of Chinese capital flowing to the United States for arbitrage, selling RMB to buy US dollars, and devaluing the RMB sharply. In the follow-up, under the background of accelerated tightening of US dollar liquidity in the next month, the US dollar index continues to rise or is a high probability event. At the same time, due to the continuous net outflow of foreign capital and the tightening of China's foreign currency liquidity, the liquidity released by the RRR reduction is expected to be difficult to maintain loose foreign currency liquidity. It is expected that the pressure of RMB devaluation will continue in the short term.
