Since the beginning of this year, my country's economic operation has generally achieved a stable start. However, under the influence of unexpected factors such as the spread of domestic epidemics and the spillover of risks from international geopolitical conflicts, the complexity, severity and uncertainty of the economic development environment have increased.In this context, the RMB exchange rate (if not specified, the RMB exchange rate referred to in this article is the bilateral exchange rate of RMB against the US dollar) has increased two-way fluctuations, and the market has fluctuated widely since mid-March, especially since the end of April.Why has the RMB exchange rate retraced so quickly recently?How do you view this wave of RMB exchange rate adjustment?How will the RMB exchange rate trend in the future?How should we respond?
The recent pullback is an expected market correction
This round of RMB exchange rate appreciation started in early June 2020 has entered its third year this year.In November last year, the Eighth Working Conference of the National Foreign Exchange Market Self-Regulation Mechanism pointed out that two-way fluctuations are the norm, a reasonable balance is the goal, and the degree of deviation is proportional to the force of correction.There is no currency that only falls but does not rise, or only rises and does not fall. If it rises more, it will fall, and if it falls more, it will rise.Therefore, the correction of the RMB exchange rate since mid-March this year is a correction of market forces.
The RMB exchange rate fluctuated higher in the second half of 2020, mainly due to the resonance of internal and external favorable factors such as good epidemic prevention and control, rapid economic recovery, large trade surplus, wide interest rate gap between China and the United States, and weak dollar trend. 10%.Last year, unfavorable factors such as the slowdown of economic recovery, financial market turmoil, the rebound of the US dollar index, and the convergence of interest rates between China and the United States gradually became apparent.Since the beginning of this year, the aforementioned benefits have been further weakened or even reversed in stages.
At the beginning of this year, the RMB exchange rate continued its previous strength, and even after the outbreak of the international geopolitical conflict at the end of February, it also stepped out of the independent market of "strong US dollar and stronger RMB".By the beginning of March, the high point since May 2018 was refreshed.The renminbi was once labeled as a "safe-haven currency".However, in the first two months, both in terms of exchange rate growth and supply and demand, the volume and price momentum of RMB appreciation has weakened.
In mid-March, especially since the end of April, the RMB exchange rate has fallen sharply, from 6.30 to around 6.80 (the trading price fell below 6.80 in mid-May), which is the result of the combined effect of multiple factors.
First, the Fed tightened expectations, the US dollar index rose rapidly, the US bond yields soared, and the Sino-US interest rate spread quickly converged or even inverted.The impact of Fed tightening on the RMB exchange rate can be roughly divided into four stages or four scenarios.China has now passed the first stage smoothly - the Fed has reduced its bond purchases, and the continued strength of the renminbi is only a slowdown in appreciation, but it is necessary to pay close attention to the impact in the later stage, and be alert to the possibility that the spillover effect of further tightening by the Fed may be non-linear.The recent sharp drop in the RMB exchange rate corresponds to the second stage or the second scenario, that is, the Federal Reserve's greater monetary tightening, the intensified economic and financial shocks, and the two-way fluctuation of the RMB exchange rate.Especially in the week from April 18 to 22, Fed officials made hawkish remarks, supporting the dollar index to stand above 100.The logic of "strong dollar, weak renminbi" finally came into play.
The second is the spillover of international geopolitical risks, triggering foreign capital to reduce their holdings of RMB assets.Bond Connect data shows that from February to April, foreign capital continued to reduce its holdings of RMB bonds more and more.Due to external instability factors and the rebound of the domestic epidemic since mid-March, the RMB exchange rate has been rapidly adjusted, and by March 15, all the gains in the past year have been wiped out in one fell swoop.In the second half of March, the RMB exchange rate fluctuated repeatedly around the level at the end of last year, until a new round of sharp adjustment was triggered at the end of April.
Third, the spread of the domestic epidemic and the increase in uncertainties about economic recovery and foreign trade prospects have intensified market sentiment fluctuations.On April 20, the RMB exchange rate fell below 6.40.
In the first five months of this year, the central parity rate of the RMB exchange rate fell by 4.3%, a maximum drop of 7.2% from the year's high.During the same period, the RMB exchange rate index based on the China Foreign Exchange Trade System fell by 2.3%, which was smaller than the decline in bilateral exchange rates during the same period.The USD/RMB exchange rate appreciated 4.5%, which was also smaller than the 6.0% gain in the US dollar index over the same period.This shows that the RMB exchange rate has generally remained basically stable, and the weakening of the RMB exchange rate is partly because the current dollar is too strong.
It is advisable to take a normal view of the wide fluctuation of the RMB exchange rate
In recent years, the wide fluctuation of the RMB exchange rate has become the new normal.Since 2018, the renminbi has experienced two volatile market openings and closings. One is from early April to early November 2018, with a cumulative depreciation of 10%; the other is from early June 2020 to the end of 2020, with a cumulative appreciation of 9%.This shows that when the RMB exchange rate tends to be balanced and reasonable, it may show a trend of ups and downs.Since 2018, no matter whether the RMB exchange rate has risen or fallen, my country has not resorted to new capital foreign exchange control tools.The appreciation and depreciation of the renminbi means that the flexibility of the renminbi exchange rate will increase, which will help release market pressure in a timely manner and avoid the accumulation of expectations.The recent wave of RMB exchange rate adjustment has fallen by about 7% at most. Although the decline is not as good as the one in 2018, the rate of decline is faster than that at that time.However, under the current situation that the Sino-US interest rate spread is converging or even inverted, the willingness of enterprises and households to purchase foreign exchange is weaker around 6.70 than around 6.30.
The RMB exchange rate does not constitute a constraint on domestic monetary policy.The central bank has emphasized many times before that the monetary policy is based on me, that is, to grasp the strength and rhythm of the implementation of the prudent monetary policy mainly according to the domestic economic situation, while enhancing the flexibility of the RMB exchange rate, and giving play to the function of the exchange rate to adjust the macro economy and the automatic stabilizer of the balance of payments. .In layman's terms, monetary policy is internal and exchange rate policy is external.Maintaining a flexible exchange rate is more conducive to absorbing internal and external shocks, enhancing the autonomy of monetary policy, and boosting the confidence of domestic and foreign investors.Since the second half of last year, monetary policy has been committed to stabilizing domestic growth, and has cut RRR and interest rates several times.Before March this year, no matter whether the RRR cut or the interest rate cut, it did not affect the continued strength of the RMB against the US dollar.Even when the renminbi fell sharply recently, after the announcement that the 5-year LPR interest rate was cut by 15 basis points in early trading on May 20, the three major A-share indexes rose by more than 1% that day, and the inflow of northbound funds exceeded 10 billion yuan. The closing price rebounded 1.4% from the previous day.It can be seen that the orderly adjustment of the RMB exchange rate will not affect the strength and rhythm of the domestic monetary policy.On June 2, the central bank said at a press conference that in the face of unexpected changes in the domestic and foreign environment, my country's foreign exchange market has generally remained stable and has shown strong resilience.In the next step, monetary policy should rely on forward efforts and appropriate strengthening, and continue to increase the implementation of prudent monetary policy.
人民币急跌不等于外汇必然供不应求。今年2月份人民币升值，当月银行远期(含期权)结售汇为逆差65亿美元;3、4月份，人民币加速贬值，结售汇却分别顺差252亿、170亿美元。这表明，汇率由市场决定不等于由供求决定，人民币贬值不等于外汇必然供不应求。同时，不同于市场所担心的贬值恐慌，3、4月份，剔除远期履约的银行代客收汇结汇率分别环比跳升12.6和4.9个百分点，高于同期银行代客付汇购汇率分别环比上升5.6和1.9个百分点的水平。这表明，尽管人民币连续走低，但市场结汇意愿上升大于购汇动机的增强，企业“逢高结汇”的判断依然成立，市场主体依然保持了理性。这应该是面对近期人民币汇率剧烈波动，央行仅在4月25日下调金融机构外汇存款准备金率1个百分点，释放汇率维稳信号之后未再出其他实质性措施的重要原因。迄今为止，外汇市场初步经受了人民币汇率急跌的考验。此时，若央行“出大招”，反而可能干扰市场运作、动摇市场信心，是“帮倒忙”。
The market worries of "capital outflow and exchange rate depreciation" have not materialized.Since February this year, foreign capital has reduced its holdings of RMB bonds and stocks.There have been concerns in the market that under such circumstances, the weakening of the RMB may form a vicious circle of "reduction of foreign capital holdings - depreciation of the exchange rate".But the facts speak louder than words. Since February, foreign capital has reduced its holdings of RMB bonds for three consecutive months, with a cumulative scale of 301.4 billion yuan.This not only reflects the converging or even inverted China-US interest rate differentials and the spillover of geopolitical risks, but also reflects the asset rebalancing effect caused by the adjustment of the global bond market.In the first four months of this year, the yields of U.S. bonds soared and the yields of China bonds declined. The global bond index fell by 7.5%, and the CSI All Bond Index rose by 1.3%. Forced to take action to reduce holdings of RMB bonds.In contrast, stocks, as a typical risk asset, have seen improvement in cross-border capital flows since April.In March, the cumulative net sales under the Mainland Stock Connect program were 45.1 billion yuan; in April and May, the cumulative net purchases were 6.3 billion yuan and 16.9 billion yuan amid the sharp fall in the RMB.The stock price, the land-stock connection and the exchange rate are all transparent. The RMB exchange rate was stable in the first quarter of this year, the stock market still fell, and foreign capital continued to flow out.If the concerns or worries of foreign capital are not resolved, even if the exchange rate stabilizes, foreign capital will not come back in the short term after cashing out at a high level.Moreover, the rise and fall of the exchange rate is a "double-edged sword", and there is no "dichotomy" of good appreciation and bad depreciation.Foreign investors are naturally faced with exchange rate fluctuations, and they are more worried about the "non-tradable" risk that may be caused by exchange rate rigidity.A flexible exchange rate can help release pressure in a timely manner and reduce dependence on capital foreign exchange management tools.Obviously, the exchange rate level of 6.70 relative to 6.30 will help to accelerate the adjustment of the stock foreign capital and attract the inflow of incremental foreign capital.
There are foundations and conditions to maintain basic stability
China has "five layers of protection" against the shock of cross-border capital flows.The first layer of protection is that China has a large trade surplus and direct investment is a net inflow, which is different from countries with trade deficits that rely heavily on foreign capital inflows.The second layer of protection is the increase in private foreign exchange asset holdings, which enhances the "reservoir" function of secondary foreign exchange reserves.The third layer of protection is macro-prudential measures, such as counter-cyclical factors, foreign exchange risk reserve ratios, foreign exchange deposit reserve ratios of financial institutions, and macro-prudential coefficients for cross-border investment and financing.The fourth and fifth protections are capital foreign exchange management and foreign exchange reserve intervention, respectively.
During this round of RMB exchange rate adjustment, four levels of protection have been triggered.The first is the first layer of protection with a large surplus in the basic balance of payments.Since foreign capitals reduced their holdings of RMB assets in February, there has been a continuous net outflow of foreign-related receipts and payments under the securities investment project of banks on behalf of clients, with a cumulative net outflow of US$96.6 billion by April.During the same period, the accumulative net inflow of foreign-related receipts and payments under the item of goods trade by banks on behalf of customers was US$119.4 billion, and the two items were well hedged. In the end, foreign-related receipts and payments by banks on behalf of customers recorded a surplus of US$20.1 billion.
Followed by the second layer of protection with more private foreign exchange reserves.The deficit in foreign exchange settlement and sales by banks in February, and the increase in the central bank's foreign exchange holdings, may indicate that banks used their own foreign exchange positions to make up for the gap between the supply and demand of foreign exchange in the market.In March and April, the domestic foreign exchange deposits of non-financial enterprises decreased by US$34.4 billion in total, indicating that enterprises have used their own foreign exchange to pay or settle foreign exchange more in the sharp fall of the RMB since mid-March, which has played a role in the adjustment of private foreign exchange assets. The role of a secondary "reservoir" in the balance of foreign exchange supply and demand.
Once again, the central bank's "RRR cut" opened the third layer of protection.On April 25, the central bank announced to cut the foreign exchange deposit reserve ratio of financial institutions by 1 percentage point. In theory, this move will help improve domestic foreign exchange liquidity, expand domestic and foreign currency interest rate differentials, and ease the pressure on RMB depreciation.However, since the implementation of the RRR cut measures on May 15, the RMB and USD forward swap ideas have not risen but fallen, indicating that the real impact of the foreign exchange RRR cut is limited. concerns.
Finally, "expansion inflow" opens the fourth layer of protection.Faced with the pressure of capital outflow and exchange rate depreciation, capital foreign exchange management is nothing more than "expanding inflows and limiting outflows".On May 27, the central bank, the China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly issued a document to simultaneously promote the opening of the interbank and exchange bond markets to the outside world, further facilitate foreign institutional investors to invest in the Chinese bond market, and unify the cross-border management of funds.On May 31, the foreign exchange bureau issued a document deciding to carry out a pilot project of cross-border financing facilitation for high-tech and "specialized, special and new" enterprises in some regions, expanding the pilot branch from 9 to 17, and enterprises within the original 9 branches can Self-borrowing foreign debts within the equivalent of 10 million US dollars, and enterprises under the jurisdiction of the newly added 8 branches can borrow independently within the equivalent of 5 million US dollars.
On the basis of the aforementioned "five-layer protection", coupled with the improvement of private currency mismatches and the increase in the degree of marketization of exchange rates in recent years, market players have increased adaptability and tolerance to the rise and fall of the RMB exchange rate and two-way fluctuations. The conditions are to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.At the same time, adhere to the principle of neutrality in exchange rate policies, that is, non-intervention is the principle and intervention is the exception, and the management and regulation of exchange rate expectations will be strengthened in a timely and appropriate manner to prevent excessive or abnormal fluctuations in the foreign exchange market.
Focus on three important factors in the second half of the year
The exchange rate is a relative price, and it is the parity relationship between the two currencies. Therefore, when judging the trend of the RMB exchange rate, it is necessary to pay attention to the marginal development and changes of the economic and financial situation in China and overseas, especially in the United States and Europe.In the second half of the year, we should pay attention to the dynamic development and evolution of the following three influencing factors.
One is economic recovery.From a domestic point of view, with the gradual control of local epidemics, the orderly promotion of resumption of work and production, and the gradual implementation of a package of support policies, if the economy stabilizes and rebounds, it will form a positive support for the RMB exchange rate again.In fact, Shanghai's announcement on May 17 that the social sector was basically cleared and the asymmetric reduction of LPR interest rates on May 20 both contributed to the rebound of the RMB exchange rate that day.This proves that as long as the spread of the epidemic is effectively controlled, and macro policies are put in place ahead of time and intensified in a timely manner, the prospects for economic recovery will be bright, market confidence will be restored, foreign capital may return at any time, and the RMB exchange rate will be supported again.
Internationally, geopolitical conflicts and a collective shift in monetary policy in advanced economies have weakened the prospects for global economic recovery.The International Monetary Fund said in its latest forecast that geopolitical conflicts have dragged down the global economic recovery and lowered its forecast for world economic growth this year by 0.8 percentage points, among which the U.S. economic growth rate was lowered by 0.3 percentage points to 3.7%, and the euro zone was lowered by 1.1 percentage points to 2.8%.Recently, many market institutions expect the Fed to raise interest rates and shrink its balance sheet, which will accelerate the slowdown of the US economic growth. Even Fed Chairman Powell no longer promises that monetary tightening can ensure a soft landing of the US economy. US Treasury Secretary Yellen also said that a soft landing is both necessary. Skill is more luck.In addition, as inflation continues to rise, the European Central Bank is expected to end asset purchases and start the interest rate hike cycle in the third quarter, superimposing the impact of geopolitical conflicts, aggravating market concerns about stagflation in the euro zone in the second half of the year.The slowdown in the global economic recovery will help ease the relative pressure of China's economic downturn, but it may accelerate the arrival of the inflection point of China's high foreign demand boom. The impact on the RMB exchange rate is intertwined.
The second is the US dollar index.This is a dominant indicator that affects the change of the RMB exchange rate.In the second half of this year, the factors affecting the trend of the US dollar index are intertwined.From the perspective of negative factors, the European Central Bank has clarified the signal of monetary policy tightening. In the same period, the Bank of England and the Bank of Canada are expected to continue raising interest rates, and the pace may be slightly different, which will suppress the upward trend of the US dollar to a certain extent.This is an important reason why the US dollar index has risen and fallen since May, and the RMB has stopped falling and rebounded.
From the perspective of bullish factors, if the inflation pressure in the United States slows down more than expected, the Fed is forced to accelerate the pace of monetary tightening and maintain the leading edge of monetary policy among developed economies. It is possible that the interest rate differential factor will continue to drive the dollar to strengthen.Or the Fed's unexpected tightening exacerbates economic and financial turmoil, and risk aversion may push the dollar up again.According to the current RMB exchange rate central parity quotation mechanism determined by two factors, if these two situations occur, it will be negative for the RMB.
The third is the epidemic situation.This year marks the third year of the global pandemic of the new crown pneumonia epidemic.No matter what kind of epidemic prevention strategy is adopted, as long as the epidemic situation is still evolving, it will continue to affect the normalization of economic and social activities.Take the United States as an example. In the first quarter, the US GDP grew at a negative annual rate of 1.4%, which was significantly lower than expected.An analysis by the U.S. Bureau of Economic Analysis pointed out that the increase in new crown cases has hindered the economic operation, and the reduction in government aid will have a certain impact on GDP in the first quarter.Recently, a new variant of the Omicron strain has spread rapidly in the United States.Other countries, including emerging economies, may also have the possibility of repeated epidemics in the future, and it cannot be ruled out that new orders will return to China.
Actively respond to future exchange rate fluctuations
As mentioned above, my country has the foundation and conditions to keep the RMB exchange rate basically stable at a balanced and reasonable level.But exchange rate stability is not the same as fixed exchange rate.On the contrary, since the RMB exchange rate tends to be at a balanced and reasonable level, it is prone to fluctuating fluctuations due to fluctuations in fundamentals or sentiment.Whether in the short term or in the medium and long term, the uncertainty of the exchange rate is inevitable, and two-way fluctuations are the norm.In response to the wide fluctuations in the exchange rate in the future, all parties should actively formulate response plans.
All regions and departments should increase macro-policy hedging efforts to ensure that the economy operates within a reasonable range.The economy is stable and the finance is stable, and the currency is strong when the economy is strong.On the basis of adhering to the efficient coordination of epidemic prevention and control work and economic and social development, we will focus on stabilizing growth, advance macro policies, and intensify efforts in a timely manner.These will help stabilize market expectations and enhance the confidence of domestic and foreign investors, thereby fundamentally providing support for the stability of the RMB exchange rate and avoiding disorderly fluctuations.
At the same time, it is necessary to continuously provide policy facilitation for corporate exchange rate hedging.A few days ago, the foreign exchange bureau issued a special document to guide financial institutions to continue to strengthen the ability to serve the real economy exchange rate risk management, enrich foreign exchange market products for customers, support China Foreign Exchange Trade Center and Shanghai Clearing House to improve the level of foreign exchange market services, and expand cooperation in handling RMB against foreign exchange. Derivatives business scope.Afterwards, the Ministry of Commerce, the People's Bank of China, and the State Administration of Foreign Exchange jointly issued a document, emphasizing the importance of fully understanding the importance of exchange rate risk management, focusing on "urgency and hope" and introducing targeted measures; strengthening publicity and training to help enterprises establish the concept of "risk neutrality" in exchange rates. ; Improve exchange rate hedging products and services to further enhance the convenience of RMB cross-border settlement; establish a "government-bank-enterprise" docking mechanism to accurately serve small, medium and micro foreign trade and economic enterprises; give play to the guiding role of financial funds to reduce the overall cost of enterprises.
In the final analysis, exchange rate risk management is still mainly a matter for market players.The recent volatile trend of the RMB exchange rate from strong to weak is another vivid risk education.Enterprises should further strengthen the awareness of "risk neutrality", establish strict financial discipline, adhere to the exchange rate risk management principle centered on "value preservation" rather than "value increase", avoid unilateral bets on exchange rate appreciation and depreciation, and actively make good use of various Use similar risk hedging tools to manage risks.Of course, enterprises can also use the means of receiving and paying foreign exchange to naturally hedge their exchange rate risks.Or on the basis of accelerating the transformation of foreign trade development mode and enhancing trade pricing power, using cross-border RMB pricing and settlement to reduce currency mismatches and reduce exchange rate risk exposure.
Profile of Guan Tao
Ph.D. in Economics Global Chief Economist and Managing Director of Bank of China Securities;
In 2022, he was invited to participate in the Prime Minister’s Economic Situation Experts and Entrepreneurs Symposium;
Doctoral Supervisor of Economics of Wuhan University, Chair Professor Dong Furen;
Deputy Chairman of the Chief Economist Committee of the Securities Association of China;
Member of the 1st China Foreign Exchange Market Steering Committee;
Consultant of the 1st China Insurance Asset Management Association Industry Development Research Professional Committee.
(Editor in charge: Ma Xin)
