Since late April, the RMB exchange rate has adjusted rapidly, but the overall operation of the foreign exchange market is stable, the domestic foreign exchange still maintains the pattern of oversupply, and the market players have strong adaptability to exchange rate fluctuations.
Since late April, the tightening expectation of the Federal Reserve has been significantly strengthened, superimposed on the IMF's reduction of China's economic growth forecast, and the RMB exchange rate has been adjusted rapidly. Compared with the three rounds of RMB devaluation in history, the current round of RMB devaluation has significantly accelerated, which helps to release pressure and avoid expected accumulation. In that month, the bilateral exchange rate of RMB against the US dollar and the three major exchange rate indexes were corrected, which helped to reduce the financial impact of enterprises and improve export competitiveness.
In April, the RMB exchange rate fell sharply, but the domestic foreign exchange continued to maintain the pattern of oversupply, and the willingness of market participants to settle foreign exchange was significantly enhanced, which was consistent with our previous judgment that the sharp decline of RMB might trigger the market participants to "settle foreign exchange at high prices". Since May, the RMB exchange rate has continued to decline, but it may still not cause market panic. This shows that market players can better adapt to exchange rate fluctuations and should treat the rise and fall of exchange rate with an ordinary mind.
In April, the surplus of goods trade receipts and payments and the surplus of foreign exchange settlement and sales narrowed. However, due to the slowdown of foreign capital's reduction of RMB assets, the deficit of foreign receipt and payment of securities investment decreased, and the settlement and sales of Foreign Exchange changed from deficit to small surplus. China has "five protections" against capital flows and the impact of RMB exchange rate fluctuations. The reduction of foreign capital's holdings of securities assets only touched the first level of protection, and the central bank lowered the foreign exchange deposit reserve ratio to open the third level of protection. The signal effect of foreign exchange reserve requirement reduction is greater than the real impact.
In April, the rapid depreciation of RMB triggered market players to increase hedging against depreciation risks. Due to the increase in the contracted amount of long-term foreign exchange purchase, the cumulative unexpired amount of long-term foreign exchange purchase by the bank on behalf of customers has changed from the net settlement of foreign exchange in the previous month to the net purchase of foreign exchange. However, enterprises have increased the use of foreign exchange option trading to hedge exchange rate risk, the pressure of early foreign exchange purchase under foreign exchange derivatives has been effectively hedged, and the relevant foreign exchange supply and demand is basically balanced.
In April, the stock market and bond market still maintained a net outflow of foreign capital, but the scale was narrowed. Even during the sharp decline of onshore RMB driven by offshore RMB from April 19 to the end of the month, the daily average net inflow of land stock connect still increased. This shows that the previous market fears that capital outflow and RMB devaluation may form a vicious circle are not tenable.
At the early stage of the current round of sharp decline in the RMB, we have suggested that as long as the spread of the epidemic is effectively controlled, or the epidemic prevention measures are more accurate and scientific, coupled with the forward and timely strengthening of macro policies, the prospect of economic recovery is clear, market confidence is restored, foreign capital may return at any time, and the RMB exchange rate will be supported again. On May 17, Shanghai announced that it would clear all aspects of society. On the same day, the closing price of the domestic RMB exchange rate rebounded by the correction of the US dollar index. The land stock link recorded a net inflow of 6 billion yuan, and the domestic foreign exchange gap narrowed significantly.
Risk tip: the development of geopolitical situation exceeded expectations, and the monetary tightening of major overseas central banks exceeded expectations.
