In the face of U.S. dollar index continuing to hit new highs in recent days, the RMB has performed more stably than other non-U.S. currencies. Recently, the trading price of RMB against the US dollar (CNY) has been fluctuating in both directions around 6.7.
The latest foreign exchange market data will be released in late July. China Business News reporters learned from the balance of payments analysis team of the State Administration of Foreign Exchange that preliminary statistics show that bank foreign exchange settlement and sales and non-bank sector cross-border receipts and payments remained balanced in June. .
In fact, since this year, the foreign exchange market has encountered many international and domestic challenges. Among them, the most concerning thing to the market is that foreign capital continues to reduce its holdings of RMB bonds . Overall, although affected by changes in the external environment, some channels of foreign investment have undergone periodic adjustments, this has not changed the overall balanced pattern of my country's cross-border funds.
BOC Securities Global Chief Economist Guan Tao believes that the increased flexibility of the RMB exchange rate has played a "shock absorber" role in absorbing internal and external shocks and promoted the balance of cross-border capital flows.
The above-mentioned analysis team stated that the recovery of domestic economic fundamentals will help lay a solid foundation for the stability of the foreign exchange market, and that the sound structure of my country's international balance of payments will help strengthen the "firewall" against short-term capital flows. A high level of opening up of the financial market will help enhance the confidence of foreign investors in holding RMB assets in the medium and long term, and the increased depth and maturity of the foreign exchange market will help make market behavior more rational and orderly.
The RMB exchange rate remains stable
Boosted by expectations of the Federal Reserve raising interest rates, the U.S. dollar index has hit record highs in recent days. It rose 1.2% this week to 108.29, the highest level in nearly 20 years. Affected by this, non-U.S. currencies such as the euro, Japanese yen, pound, and Australian dollar continued to depreciate to lows during the year. Among them, the euro even fell to a 20-year low, approaching parity with the U.S. dollar.
In contrast, the RMB exchange rate is much stronger. Recently, the trading price of RMB against the US dollar (CNY) has been fluctuating in both directions around 6.7. In fact, since 2022, the overall situation of my country's foreign exchange market has been generally stable, showing resilience in the face of complex and changing international and domestic situations.
Judging from the exchange rate level, as of July 12, this year, the U.S. dollar index has risen sharply by 13%, the euro, Japanese yen, and pound have depreciated by 11.9%, 16.1%, and 12.6% respectively, while CNY has only depreciated by 5.4%. CFETS RMB exchange rate index increased slightly by 1.6% and remained basically stable. At the same time, since the second quarter, the CNY has fluctuated in both directions after first depreciating and then rising. The average daily volatility has reached a record high, and its flexibility has been significantly enhanced.
From the perspective of cross-border capital flows, data from the State Administration of Foreign Exchange show that in the first five months of this year, banks foreign exchange settlement and sales still maintained a surplus of 79.2 billion US dollars, especially the net inflow of cross-border funds from non-banking sectors such as enterprises and individuals was 86.2 billion US dollars. US dollars, especially in April and May, the average monthly net inflow through this channel exceeded US$10 billion.
Among them, cross-border funds related to trade, investment and other real economies have steadily flowed in, playing a role in stabilizing the fundamentals of the foreign exchange market. At present, my country's import and export of goods maintain a growth trend. Against this background, the net inflow of cross-border funds under trade in goods from January to May was US$214.4 billion, a year-on-year increase of 66%. At the same time, foreign direct investment maintains a booming development trend. According to statistics from the Ministry of Commerce, the net inflow of foreign capital in the non-financial sector from January to May was US$87.8 billion, a year-on-year increase of 23%, demonstrating the attractiveness of domestic economic development prospects and market potential to medium- and long-term capital.
"Although affected by changes in the external environment, some channels of foreign investment have undergone periodic adjustments, it has not changed the overall balanced pattern of my country's cross-border funds. This fully reflects the advantages of my country as a large open economy in responding to external shocks." National Foreign Exchange The relevant person in charge of the international balance of payments analysis team of the Administration Bureau told China Business News.
The impact of short-term fluctuations is limited
However, while trade, investment and other cross-border funds related to the real economy have been steadily flowing in, since February this year, there have been adjustments to foreign capital positions in China's bond and stock markets, which once attracted market attention. .
As my country's bond market continues to open up to the outside world, foreign investors' enthusiasm for increasing their holdings of RMB bonds has continued to rise in recent years. According to Central Clearing Company data, as of the end of January 2022, foreign investors had increased their holdings of RMB bonds for 38 consecutive months.After entering February 2022, foreign capital switched to net selling of RMB bonds for four consecutive months, with a cumulative net selling of more than 400 billion yuan.
Guan Tao analyzed that foreign capital has continued to reduce its holdings of domestic RMB bond assets, mainly due to the divergence of economic cycles and monetary policies between China and the United States, the rapid convergence or even inversion of interest rate differentials between China and the United States, and the increased attractiveness of U.S. debt. In his view, this round of foreign capital's position adjustment in RMB bonds is a "physical examination" of China's financial opening-up achievements in recent years, and the position adjustment will have limited financial impact on China. Guan Tao said that first of all, from the perspective of the bond market, the main types of foreign capital reduction this time are treasury bonds, policy bank bonds and interbank certificates of deposit, but the relevant sub-markets have maintained smooth operation.
Secondly, from the foreign exchange market, from February to May 2022, foreign-related receipts and payments under securities investment continued to accumulate a total net outflow of US$118.2 billion, compared with a net inflow of US$36.6 billion in the same period last year, but trade in goods and direct investment during the same period The total net inflow under this item was US$188.7 billion, a year-on-year increase of 68.3%, allowing banks to still record a total surplus of US$27.8 billion in foreign-related receipts and payments on behalf of customers.
Again, from the perspective of the stock market, there is no contagion effect from foreign capital's reduction in RMB bond assets, even though stock assets have more risky asset characteristics.
The resilience of the foreign exchange market has increased
In response to the above situation, China's financial market is still calm. Guan Tao believes that this is due to the increased flexibility of the RMB exchange rate, which has played a "shock absorber" role in absorbing internal and external shocks and promoted cross-border capital flows to become more balanced.
He analyzed that in May, the net outflow of Stock Connect and the net reduction of (Northbound) Bond Connect totaled 132.4 billion yuan, a month-on-month increase of 19.4%. However, because the monthly average closing price of the RMB exchange rate fell 4.2% month-on-month, the securities investment items for that month were on behalf of customers. The deficit in foreign-related receipts and payments decreased by 5.9% month-on-month. Obviously, if the RMB exchange rate is around 6.3 instead of 6.7 at this time, it is expected that the foreign exchange impact caused by the reduction of foreign capital's holdings of RMB assets will be much greater than it is now.
Recent research by the above-mentioned foreign exchange bureau’s balance of payments analysis team shows that my country’s sound balance of payments structure helps strengthen the “firewall” against short-term capital flows.
On the one hand, my country's current account maintains a reasonable-sized surplus. The surplus in the first quarter was US$88.9 billion, a year-on-year increase of 25%. Preliminary estimates indicate that the surplus in the second quarter will still maintain a certain size. In addition, my country's industrial and supply chains are stable and it is the only country in the world that has all industrial categories recognized by the United Nations. In recent years, the transformation and upgrading of the manufacturing industry has been steadily advancing, which will support the maintenance of surplus in trade in goods and help consolidate a reasonable and balanced current account. Base.
On the other hand, the domestic business environment continues to be optimized, the consumer market has huge potential, high-end manufacturing and emerging service industries are becoming more attractive to foreign investment, and cross-border funds related to direct investment in China will continue to flow steadily. In addition, in recent years, my country's foreign debt structure has been optimized. The proportion of traditional financing foreign debt at the end of 2021 dropped significantly by more than 20 percentage points compared with the end of 2014. In the future, the pressure to de-leverage foreign debt will be reduced. Coupled with the fact that the scale of my country's foreign exchange reserves remains basically stable, the foundation for the balance between supply and demand in the foreign exchange market is even more solid. The
analysis team believes that the high-level opening up of the financial market will help enhance the confidence of foreign investors in holding RMB assets in the medium and long term. my country continues to promote high-level opening up of the financial market and continuously consolidates the legalization and internationalization of the bond market, which will create a stable investment environment for international investors. At the same time, the internationalization of the RMB is advancing steadily. In May this year, the International Monetary Fund (IMF) increased the weight of the RMB in the Special Drawing Rights basket to 12.28%. my country's bonds are gradually being included in the FTSE Russell Bond Index. In the future Funds allocated to diversify national reserves and track indexes will still flow into my country's bond market.
In addition, my country implements a sound monetary policy , the RMB exchange rate is relatively stable, and RMB assets can provide international investors with good diversified investment value. At present, my country's stock and bond market ranks second in the world in terms of scale, but the proportion of foreign capital is only about 3% to 5%, which is at a relatively low level. There is still much room for improvement in the future.
In fact, taking 10-year treasury bonds as an example, although the interest rate gap between China and the United States is currently around 2%, Chinese bonds still retain relative attractiveness.This year through June 15, the Bloomberg Global Composite Index recorded a return of -14.98%, while the Bloomberg China Composite Index returned 1.79%. In the longer term, as China's bond market further opens up, RMB bonds will still be attractive to foreign investment.
Deutsche Bank predicts that RMB bonds will account for international reserves will increase to 5% in the next five years, which will attract US$350 billion in medium and long-term funds to enter our country's bond market.
The A-share market has also undergone positive changes. The MSCI China index has rebounded 25% from its mid-March low, indicating that market sentiment has improved. From February to April this year, northbound investors once net sold A shares . But since May, there has been a net inflow of funds heading north again. Landlord Ming, China head of UBS Global Financial Markets, believes that the A-share market seems to have bottomed out, and overseas funds will return to the Chinese market in the second half of 2022.
The above-mentioned analysis team believes that in recent years, my country’s foreign exchange market has continued to develop and progress, its resilience has been significantly enhanced, and it has the foundation and conditions to withstand the risk of external shocks. More importantly, my country has the unique economic aggregate and market size advantages of a large open economy, which helps consolidate the foundation for the long-term basic stability of the foreign exchange market.
