Since the outbreak, the Federal Reserve has launched monetary easing, which is rare in history, and the global dollar liquidity is extremely abundant. Over the past two years, the rapid export growth has supported China's economic growth. Moreover, the continuous trade surplus has also brought a huge amount of US dollars and foreign exchange into China's financial market.
During the anti epidemic period of the past two years, we have witnessed China's stable growth, vigorous exports and continuous appreciation of the RMB at the economic level. However, when we focus on the financial level, the other side of the RMB exchange rate - carry trade comes into our view.
Only after the central bank announced the rapid depreciation of the RMB exchange rate yesterday, can we understand why the RMB exchange rate has been devalued so quickly. Only after a week, can we deeply understand why the RMB exchange rate has been devalued so quickly. Only by fully understanding the carry trade mechanism can we judge the subsequent trend of RMB exchange rate.
The US dollar RMB carry trade is essentially a currency mismatch transaction.
The US dollar RMB carry trade involves multiple steps and institutions. Through these details, in a typical US dollar RMB arbitrage transaction, the arbitrage institution essentially integrates US dollar liquidity on the liability side and allocates RMB denominated assets on the asset side. Through asset liability behavior, arbitrage institutions can enjoy the benefits brought by currency mismatch. US dollar RMB arbitrage institutions can be financial institutions, such as domestic and foreign commercial banks and funds outside China; It can also be non-financial institutions, such as multinational enterprises, financial companies, or even import and export traders. As long as the institution can integrate US dollars into the liability side and configure RMB assets on the asset side, the carry interest transaction can be completed. RMB denominated assets can be RMB deposits, Chinese government bonds, Bank Of China Limited(601988) certificates of deposit, or even stocks. US dollar liabilities can be obtained in domestic US dollar market or overseas US dollar market. There are also various ways to obtain dollar liabilities, including repurchase, inter-bank lending, credit and so on.
The micro mechanism and breeding ground of US dollar RMB carry trade.
Since the carry trade is essentially a currency mismatch operation, there are naturally three major benefits. First, the interest margin, that is, the remaining part of the income from RMB assets is higher than the cost of USD liabilities. Second, exchange gains from the appreciation of the RMB exchange rate. When the carry trade can also be supplemented by leverage, the income can be put to the extreme. This is also the third largest source of income of carry trade.
The thicker the "interest spread" of carry trade, the stronger the micro trading motivation and the larger the macro scale of carry trade. Taking the US dollar RMB carry trade as an example, the higher the return on RMB assets and the lower the cost of US dollar liabilities, the thicker the interest spread of the currency to carry interest. Similarly, when the RMB continues to appreciate against the US dollar, the stronger the motivation of US dollar RMB carry trade. In 2020, the monetary policies of various countries created a good environment for the US dollar RMB carry trade. Over the past period of time, China's RMB exchange rate has continued to appreciate, and the scale of US dollar RMB carry trade has been expanding. We believe that there is a certain scale of carry trade in both onshore and offshore markets.
The US dollar RMB carry trade will undoubtedly amplify the fluctuation of the RMB exchange rate.
At present, when the RMB exchange rate begins to depreciate, the income space of carry trade will be greatly compressed. In this case, a considerable part of the carry trade is bound to start closing positions. In the process of closing positions in carry interest trading, the decline of RMB asset price, the rapid depreciation of RMB exchange rate and the compression of carry interest trading space occur at the same time, forming an endogenous spiral cycle of mutual reinforcement.
On the policy choice of the central bank in dealing with internal and external equilibrium from the reduction of foreign exchange deposit reserves.
First, directly release foreign exchange liquidity, alleviate the liquidity tension of carry trade closing positions, and alleviate the pressure of exchange rate depreciation.
Second, prevent the disorderly and rapid devaluation of the RMB exchange rate, avoid the formation of consistent expectations of the devaluation of the RMB exchange rate, and block financial risks.
Risk warning: the duration of the epidemic exceeded expectations; The central bank's exchange rate policy exceeded expectations; Exports worsened more than expected
