The central bank shot again!
What is the intention to regulate exchange rate expectations?
Since June, the renminbi has appreciated by a large margin, and the market has gradually formed expectations of unilateral appreciation of the renminbi, which has triggered certain speculative behaviors, aggravated the decline in the renminbi spot exchange rate, and also planted hidden dangers for the sharp rise of the forward exchange rate.
Recently, the People's Bank of China adjusted its foreign exchange management policy based on the policy goal of maintaining the basic stability of the RMB exchange rate at an equilibrium level, and issued a clear expected management signal.
Under the guidance of the new development concept, my country has strengthened innovation-driven and digital economy development, and industrial transformation and upgrading and high-quality development have enhanced the competitiveness of international trade.
Since April, my country's import and export trade has grown steadily. The foreign trade import and export increased by 0.7% in the first three quarters, achieving positive growth for the first time this year.
Not only that, the total value of imports and exports, total export value, and total import value in the third quarter also hit three historical highs.
This has laid a solid foundation for the long-term strength of the RMB.
In recent years, developed countries have implemented a quantitative easing monetary policy, while my country has implemented a normal monetary policy. Such monetary policy differentiation has resulted in China's 10-year Treasury bond interest rate being 2.5 to 3 percentage points higher than the US Treasury bond interest rate during the same period.
Higher yields and good economic development prospects give the RMB a safe haven status and increase the attractiveness of RMB assets.
As a result, international investors have increased their allocation of RMB assets.
my country adheres to multilateralism, the financial market has further opened up, the mechanisms and channels for stock exchanges have become more complete, more and more international capital has flowed into the A-share market, and the capital account surplus has expanded, keeping the scale of my country’s foreign exchange reserves at a high of $3142.6 billion.
If the balance of payments "trade + capital flow" double surplus situation continues, the renminbi will be under great appreciation pressure driven by market forces.
It can be seen that the current oversupply in the foreign exchange market, how to maintain the stability of the RMB exchange rate at an equilibrium level, and how to achieve two-way fluctuations are undoubtedly a major challenge.
Although my country's current account surplus accounts for less than 3% of GDP, and the international balance of payments is within the internationally recognized equilibrium level, the RMB exchange rate is reasonable at this stage, and there is no problem of high or low interest rates. According to the theory of interest rate parity, the RMB forward exchange rate is bound to rise.
Once there are repeated epidemics, geopolitical conflicts or "black swan" events, which prompt a large-scale outflow of international capital, the risk of RMB depreciation will be great. In order to hedge potential exchange rate risks, import and export companies and international investors urgently need to use foreign exchange derivatives Implement risk management.
This time the central bank introduced a new policy to reduce the reserve ratio for forward foreign exchange sales from 20% to zero, which will have three positive effects.
First, it meets the foreign exchange risk management needs of market entities, reduces transaction costs, and helps domestic companies, individuals, and institutional investors lock in exchange rate risks and reduce exchange rate loss risks; second, further expand financial opening and increase the convenience of forward transactions , Demonstrating China’s determination to promote the development of the forward market and the derivatives market, and implement the "Comprehensive Deepening of the Service Trade Innovation and Development Pilot Program" through institutional reforms; the third is to build an exchange rate linkage between the spot market and the forward market Mechanism to further enhance the central bank’s ability to guide and manage exchange rate expectations.
As the U.S. election approaches, the foreign exchange market will have greater uncertainty in the fourth quarter. The relevant parties need to prepare in advance for abnormal international capital flows to impact the foreign exchange market, the currency market and the bond market, and establish a more effective RMB exchange rate expectation management mechanism. Coordinate macroeconomic policies and maintain the credibility of a managed floating exchange rate system.
First, adhere to the market-oriented orientation and give play to the decisive role of the market in the formation of the RMB exchange rate.
The quotation banks independently quoted prices in accordance with the open and transparent “closing price + a basket of currency exchange rate changes + counter-cyclical factor” RMB exchange rate mid-rate formula to consolidate the two-way volatility and more flexible RMB exchange rate mechanism.
Second, innovate and enrich the policy toolbox. When encountering major shocks such as political events, non-traditional risks, and macro-policy spillovers, leading to severe market irrational sentiments and exchange rates seriously deviating from the equilibrium level, regulators can use flexible and diverse monetary policies, Exchange rate policies and macro-prudential policies form a joint force between policies, adopting internationally accepted market methods and measures to affect foreign exchange transaction costs and guide market behavior.
Third, adjust the pattern of trade and capital flow in a timely manner, accelerate the construction of a new development pattern with domestic and international double cycles as the main body, and try to avoid the "trade + capital" double surplus situation of international payments, and strive to form a balance of payments The stable pattern of "one forward and one reverse" provides a stabilizer for the RMB exchange rate and better utilizes the baton role of the RMB exchange rate in optimizing the allocation of domestic and foreign resources and elements.
Source: Economic Daily (author Tu Yonghong, deputy director of the Institute of International Monetary Studies, Renmin University of China, professor of the School of Finance)