On April 25, in order to improve the ability of financial institutions to use foreign exchange funds, 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, from the current 9% to 8%.
After the news came to fruition, the offshore renminbi rose by more than 200 basis points, above the 6.58 mark; the spot exchange rate of the renminbi against the US dollar, which once fell below the 6.57 mark on April 25, recovered the 6.57 and 6.56 marks one after another, rising to 6.55.
Foreign exchange deposit reserve refers to the deposit that a financial institution deposits a certain percentage of its foreign exchange deposits with the People's Bank of China in accordance with regulations.
The foreign exchange deposit reserve ratio refers to the ratio of foreign exchange deposit reserves deposited by financial institutions with the central bank to the foreign exchange deposits they absorb.
Lowering the foreign exchange deposit reserve ratio of financial institutions can increase the supply of funds for foreign exchange loans of financial institutions.
In the context of the recent fluctuations in the RMB exchange rate, the central bank's move will help to release a "stable" signal.
"The central bank's pre-adjustment and fine-tuning in advance will help stabilize market expectations." Zhou Maohua, a macro researcher at the Financial Market Department of China Everbright Bank, said that the global foreign exchange market has been volatile recently due to multiple external factors.
For several consecutive days, the fluctuation of the RMB exchange rate has increased.
In this context, the central bank appropriately adjusts the foreign exchange deposit reserve facility according to the market situation, which can not only increase the supply of foreign exchange, adjust the supply and demand of foreign exchange to promote market balance, but also release the signal of "stabilization" of the foreign exchange market and avoid market overshoot.
Chang Ran, a senior researcher at Zhixin Investment Research Institute, analyzed that appropriate reverse adjustment in response to the current oversupply of RMB in the foreign exchange market will help reduce the depreciation trend of the RMB in recent days and help maintain the basic stability of the RMB exchange rate. .
According to Chang Ran's calculations, at the end of March 2022, the balance of foreign exchange deposits was US$1.050 trillion. The reduction of the foreign exchange deposit reserve ratio this time from 9% to 8% means that about US$10.5 billion of foreign exchange liquidity will be released to the market.
Since last year, the central bank has repeatedly used the foreign exchange deposit reserve ratio tool to guide market expectations, and the policy effect has been remarkable.
In 2021, in response to the strong appreciation of the RMB throughout the year, the central bank raised the foreign exchange deposit reserve ratio twice in June and December, each time by 2 percentage points.
After the central bank made two moves, the strong trend of the RMB exchange rate has slowed down.
This time is no exception. After the news came to fruition, the market quickly responded to the policy adjustment, and both the onshore and offshore RMB exchange rates rose.
Chang Ran believes that this move is also a clear policy signal to participants who unilaterally bet on the devaluation of the renminbi, indicating that the monetary authorities will take corresponding measures to keep the renminbi exchange rate basically stable.
Regarding the next trend of the RMB exchange rate, Zhou Maohua believes that in the medium and long term, my country's financial services market has huge potential, and the pattern of RMB assets attracting foreign capital has not changed.
From the trend, the short-term fluctuation of the RMB exchange rate will not change the stable operation pattern, and the RMB is expected to fluctuate strongly in both directions near a reasonable and balanced level.
Wang Chunying, deputy director of the State Administration of Foreign Exchange and spokesperson, said that the RMB exchange rate will fluctuate in both directions in the future, and will remain basically stable at a reasonable and balanced level.
China's economy is resilient, its long-term positive development trend remains unchanged, its balance of payments structure is stable, its current account maintains a reasonable surplus, and its renminbi assets have long-term investment value, all of which will provide support for the basic stability of the renminbi exchange rate.
In the next step, China will continue to implement a prudent monetary policy and enhance the flexibility of the RMB exchange rate.
The foreign exchange bureau will also pay close attention to the situation in the foreign exchange market, strengthen macro-prudential management of cross-border capital flows, guide the orderly flow of cross-border capital, properly handle the balance between internal and external equilibrium, and maintain the RMB exchange rate basically stable at a reasonable and balanced level.
Chen Guojing