(Economic Observation) Why can China's central bank's first foreign exchange "reserve cut" stabilize the exchange rate?

  China News Agency, Beijing, April 26 (Reporter Xia Bin) After nearly a week of continuous decline, the RMB exchange rate has finally stabilized.

The People's Bank of China announced on the 25th that it has decided to cut the foreign exchange deposit reserve ratio of financial institutions by 1 percentage point.

As soon as the news of the "reduction of the foreign exchange rate" came out, the RMB exchange rate stopped falling and stabilized. The offshore RMB was pulled back immediately after falling below the integer point of 6.6 and re-runs in the 6.5 range.

  In the foreign exchange market on the 26th, the onshore renminbi rose by more than 300 basis points after the opening of the market. Although it was adjusted slightly later, it still maintained its upward trend as of 19:00 that day, while the offshore renminbi reached a maximum of 6.5405, and the highest intraday increase was over 500 basis points.

  Adjusting the foreign exchange deposit reserve ratio of financial institutions has always been regarded as a tool for the central bank to deal with exchange rate fluctuations, but this is the first time that the foreign exchange deposit reserve ratio has been lowered.

As a counter-cyclical control tool, the central bank raised the foreign exchange deposit reserve ratio twice in June and December last year, raising the reserve ratio from the previous 5% to 9%.

But unlike the current situation, last year's adjustment was more aimed at controlling the excessive appreciation of the renminbi.

  At present, with the changes in the market situation, the RMB has entered the adjustment stage from the appreciation stage, and the operation of lowering the foreign exchange deposit reserve ratio is within expectations.

  Wu Dan, a researcher at the Bank of China Research Institute, said that the RMB exchange rate has experienced a rapid depreciation trend recently. In this context, the central bank lowered the foreign exchange deposit reserve ratio and released some US dollar liquidity, which can to a certain extent achieve the expected unilateral depreciation of the RMB exchange rate. Purpose.

  Xie Yunliang, chief macro analyst at Cinda Securities, pointed out that the central bank's move has released a clear signal of exchange rate stabilization.

The mechanism of this adjustment tool is that lowering the foreign exchange deposit reserve ratio will release a part of foreign exchange liquidity, increase the supply of US dollars in the foreign exchange market, and improve the willingness and ability of financial institutions to sell foreign exchange, thereby alleviating the pressure of RMB depreciation.

  U Thant said, on the one hand, the central bank's move will release tens of billions of dollars in dollar liquidity and cool down the demand for dollar exchange.

By the end of March 2022, the balance of foreign exchange deposits of financial institutions was US$1.050 trillion, and a reduction of the foreign exchange deposit reserve ratio of financial institutions by one percentage point could release US$10.5 billion in liquidity.

  On the other hand, the current round of RMB exchange rate depreciation is driven by offshore and onshore, and is greatly affected by foreign investment sentiment. In this round, the central bank lowered the foreign exchange deposit reserve ratio by 1%, and supported the decline in the RMB exchange rate, which has a greater impact on the correction of foreign capital. irrational market expectations play an important role.

  How will the RMB exchange rate go in the future?

Xie Yunliang said that in analyzing exchange rate issues, both market forces and the attitude of the central bank must be considered.

As the ultimate participant in the foreign exchange market, the central bank has a crucial influence on the exchange rate trend.

  "There are many tools for the central bank to stabilize the exchange rate." Xie Yunliang said for example, including but not limited to activating counter-cyclical factors, adjusting the foreign exchange deposit reserve ratio, adjusting the risk reserve for forward foreign exchange sales, tightening offshore RMB liquidity, and strengthening capital account controls Wait.

  He believes that in the short term, 6.6 may be a resistance level for the RMB exchange rate.

In 2021, the central parity rate of the RMB will appreciate by 2.34%, which is a reasonable result under the strong performance of exports.

Under the situation of increasing downward pressure on exports this year, if the RMB exchange rate can depreciate by 2% to 3%, the RMB exchange rate against the US dollar will depreciate from 6.37 yuan at the end of 2021 to about 6.6 yuan.

In this way, it will not violate the major tone of the exchange rate "maintaining basic stability at a reasonable and balanced level", but also enhance export competitiveness to a certain extent.

  "Considering that the long-term advantages of China's economy have not changed, and that the central bank's extremely strong ability to regulate, we have reason to believe that it is difficult for the RMB exchange rate to depreciate out of control." Xie Yunliang said.

  "The central bank's macro-prudential policy adjustment can still be done in the future." Wu Dan mentioned that referring to Mundell's impossible triangle theory, China prefers to maintain an independent monetary policy and a stable foreign exchange market, and the risk of exchange rate overshoot is relatively controllable, so it can be Rationally look at the depreciation pressure of the RMB exchange rate, and the two-way fluctuation trend will remain.